Questions started an hour and 20 minutes into the hearing.
If you hold an AIG insurance policy you should not be worried about their ability to pay.
Scott Polakoff, Acting Director Office of Thrift Supervision said, OTS should have realized in 2004 that the housing market would get as bad as it has in the last two years and the affect on AIG. They didn't do it and they should have.
S&P's six tick upgrade is based on the bailout funds and the possibility of additional bailout funds, but not based on implicit government guarantee going forward.
Rep. Gary Ackerman (D-NY 5th, Bayside) used his time to find out if his understand of a credit default swap was accurate. I was worried that he sounded like an idiot at first, but he was somewhat better than that. He said CDSs were thought of as insurance but it wasn't really insurance because they didn't have the money to pay. "They called it credit default swaps because if they called it 'I can't believe it's not insurance' maybe nobody would buy it." He asked "How do we allow this to happen" He said congress makes the laws and has oversight but they rely on the regulators to come and say 'hey somethings going on here', how did this happen? The witnesses said that CDSs were well-respected instruments but that they needed to be regulated. Also that "the CFTC Commission came before congress a number of years ago asking that CDSs be regulated". Ackerman said that the NY state insurance supervisor said the same thing in Oct to a different committee. He then said, "Where's they guy on television that does the bells and whistles and gongs. We need all these things going off here otherwise there's nobody getting our attention."
So according to Rep. Ackerman, it's Jim Cramer's fault that his committee didn't pass laws to regulate the hot new financial instruments, invented in 1997, that had trillions of dollars in assets and that officials were asking them to regulate. Unbelievable.
6 comments:
Thanks for the updates. Very amusing stuff these congressional shows, but no real answers.
The republicans, if they wanted to go all populist now, should just demand full inquiries into the whole mess. It would be quite easy for them to take down Barney Frank, C. Dodd and others (Graham, Bush and company) and they would surely sweep back into power.
When the republicans will not even take the low hanging fruit, I know something is up. It's like there has been a murder and nobody wants to let the coroner open the dead body for a real forensic anaylsis cause the stench would be overwhelming.
My sense is that it would show that both parties were knee deep in "allowing" certain organizations to turn our banking and finance system into a giant casino. I think the politicians are terrified of the potential fallout if the whole truth comes out.
Just some musings.
I've heard some flames against my congressman, Mr. Frank, but not much details. He like others did want to make housing more affordable for the poor, but he also wanted more regulation on Fannie and Freddie. I think overall, through this, he's done a very good job at getting Congress to act when it needed to.
Yes there's plenty of blame to go around, everyone knows that. A real problem is that the regulatory system was established in the thirties and needs to be updated, with some centralized agencies so that things like CDSs don't fall through the cracks. These instruments were specifically created to get around regulation and it grew during a deregulatory cycle in the government.
Actually, I don't think there is plenty of blame to go around. That's my whole point. Wall Street got the government to change the laws it didn't like and those that it didn't get changed to it's satisfaction, it ignored.
I really don't blame anyone other than the people who, I'll say it again, enriched themselves, to the tune of Billions of Dollars, while operating Financial Casinos, that ultimately cost the rest of us Trillions of dollars when luck their luck ran out.
Wall Street Execs (and others)walked out of the casino with their pockets full and we now are paying off their final massive losing bets whgich they left on the table. Sounds very Ponzi-ish to me. Actually the difference between Madoff's Ponzi Scheme and the MBS/CDS crap is that Madoff was trading fantasy shares with a value of 0% face, and Wall Street has been trading Semi-Fantasy securities with a value of 30% face. Madoff may get 150 years in prison, OK I'll take 70% of that for the Wall Street Wizards.
It is simply greed gone mad and we are paying for it.
Regarding Barney, no, not the dog or the Dinosaur, I'm actually pretty satisfied with Congressman Frank's recent actions.
You mentioned instruments to get around regulation ....mmmm in my world regulations equal the law mmm getting around the law....mmmm.....sounds like possible fraud to me. People in my business have gone to jail for minor infractions of the regulations, where no harm ever occured, only the apparent effort to "get around the regulation" was needed for prosecution and conviction.
I think that Frank's intentions were good, but Wall Street simply seized on the opportunity present. Sorry....aren't most economic crimes simply crimes of opportunity. If a car thief steals my car because I park it near where he goes every day for his morning cup of coffee, am I to blame? By your logic, yes, I am at least partially to blame because I am presenting him with the opporunity. Would you steal a car if someone left the door unlocked and the keys inside?
If the answer is no, then you are not a thief.
If the answer is yes, then you are a thief.
It matters not how easy it was to commit the crime.
Yes, Glass-Steagall was repealed,
Yes, Low income mortages were encouraged by congress (but where does it say that they have to be reckless mortgages)
Yes, Greenspan kept interest rates too low.
Yes, Ratings agencies didn't do their jobs
Yes, the SEC is useless
Yes, on and on and on.
And who had a hand in making all of the above happen...Wall Street.
Again I ask, why are we not investigating and prosecuting the criminals.
Congressional Hearings.....modern day equivalent of Bread and Circuses.
Perhpas Andrew Cuomo, making full use of the Martin Act, can get somewhere and take some meaningful legal action.
I think you're spouting mostly strawmen and it's tiring.
Previously you said it would be easy to "to take down Barney Frank, C. Dodd and others (Graham, Bush and company)" That sounds like they're at fault and not just "wall street". Congress explicitly didn't regulate CDSs when people including regulators and Warren Buffet told them too. That sounds like I can blame them.
Yes, some people on wall street got rich. That's not illegal, in fact it's what capitalists like. They worked in markets and that's not illegal, we like markets. Saying they "operated Financial Casinos" is too non-specific. They actually traded stocks and derivatives and that's perfectly legal too.
Execs leaving and us bailing out the firm is not a ponzi scheme. There were profits earned and there were losses incurred. In as much as Wall Street was invested in real estate it had plenty of value until the real estate market crashed. Now they should have forseen that. It turns out AIG did in 2005 and stopped offering real estate backed CSDs at that time. The new mark-to-market rules also changed the playing field for how such assets are valued on the books and had significant effects in a rapidly declining market.
By getting around regulation I (think obviously) meant doing something that wasn't regulated. Maybe there was fraud, and I'm all for investigating, but I think most of the instruments traded were perfectly legal and valid. The one thing I don't follow is how some of these instruments got AAA ratings when they were backed by weak mortgages. I want to undestand that. And apparently AIG has had no defaults on their mortgage backed securities. so that wasn't their problem.
Your car theft analogy describing "my logic" is pure strawman. Theft is obviously illegal. I haven't heard of something described that "wall street" did that was theft (and weren't you talking about fraud before?). Again, profiting and making bad investment decisions and not preparing for the (inevitable) drop in the real estate market is not illegal. People who did that aren't criminals. If there was fraud in the ratings or the various contracts, then sure prosecute them. But you need specifics. You can't just say a failed industry is made up of criminals. The reason we needed to bail out the system was because everyone did this, and incestuously and we need this industry. If the fix wasn't so distasteful we wouldn't have such a hard time doing it.
The media and public went nuts this weekend about bonuses to AIG employees. It's a minor amount compared to other things and Liddy, once he spoke about it showed an understanding that it was distasteful but also pretty reasonable explanations why it was less risky for American's $80 billion bailout money. He certainly showed a much better grasp of the issues and a successful 6 month track record which none of the congressmen providing oversight did.
I will try not to vent and calmly respond to your points one paragraph at a time.
1. They are perhaps at fault for making lousy laws. Making lousy laws is not a criminal act in and of itself. My reference to "taking them down" meant taking them down politically not legally.
2. I will no longer use the term financial casino. AIG made insurance contracts, that well, they didn't want to call insurance contracts, on securities. I would like to know simply if they accurately and truthfully and in a manner consistent with fiduciary responsibility accounted for the value (or liability) of these instruments in their public disclosures, including their SEC filings and statements by senior executives to media.
3. A classic ponzi scheme is when new investors are used to pay-off existing investors, until there are no new investors. Madoff ran a very sophisticated version of one. Yes, the analogy was a stretch and a bad one and perhaps intellectually lacking. I would like to know why if AIG in 2005 saw the coming real-estate crash, they didn't unwind their insurance contracts between 2005 and 2008?
4. Apparently AIG's problem was that they wrote insurance on other's MBS/CDS holdings. My understanding of the ratings problem is that the ratings agencies are essentially paid by the wall street firms for each individual instrument (individual bond, CDS, MBS, etc) they rate. Piece work if you will. Apparently, the "wall street" companies paying for these services simply pitted the Agencies against each other, however, not for the best price, but for the best rating. If the ratings agencies didn't play, they didn't get their pay. This info was part of a story on CNBC.
I won't pretend that I understand accounting, but it is hard for me to understand that accounting rules are responsible for the meltdown. Yes, I suppose that if you just erase the liability side of the ledger everything looks great.
4. I don't know for sure that actual criminal activity took place. That is why I want a thorough investigation. Did any CEOs misrepresent the financial position of their companies in 2007 or 2008. I would like to know. DId the insiders know that the MBS/CDS instruments were losing value everday, but not accounting for this lost value in their financial statements. Ultimately, perhaps none of it is criminal in the strictest legal sense, but I want to know what they did to try to prevent it from happening again.
Perhaps no crimes related to torture were committed during the Bush years, because they had essentially rewritten the laws (to exclude the act) through executive authority or whatever crap Cheney called it. Does that make it less of a crime in your eyes.
Everyone did this is not a viable excuse. And not everyone was heavily involved in MBS/CDS. Apparently, some financial companies stayed the hell away from them.
5. You are correct failure in business is not a crime. However, making decisions which personally enrich certain individuals, while putting at risk the organization and the shareholders might be described as malfeasance, and I believe could be prosecutable.
The people who rise to the tops of these organizations are not stupid. Greedy, unethical, arrogant yes...stupid no. They knew full well that the mortgages that were at the core of all of these fancy instruments and insurance contracts were in many cases junk. But did this deter them in any way. Did they wind down their positions starting in 2003 , the year of Buffett's weapon's of mass financial destruction rant. No, they kept right on going until it blew up.
6. Karl Rove was on Hannity's show tonight with his little whiteboard showing the relative size of the bonuses versus the magnitude of the bailouts and the current deficit. This time I call out your strawman. It is not about the bonuses per se, it is about the idea of bonuses, being paid to the people who caused this whole mess, and the US Gov't sitting on its thumbs while millions more go to these clowns because Liddy said AIG was contractually obligated to pay the bonuses. Why do UAW workers have to renegotiate their contracts while AIG executives get to have theirs honored, when in both cases both companies needed Gov't money. Of course, GM needed what about 20 billion and AIG needed what 180 Billion.
Why is Liddy doing this for $1 per year. Oh yeah, I forgot I heard he had to resign from the Board of Directors of which company was that....oh right Goldman Sachs. Boy those Goldman guys are just everywhere cleaning this mess up. They are starting to remind me of Harvey Keitel's character in Pulp Fiction - Winston Wolf.
Below is a link to some musings about AIG and possible criminal behavior.
I apologize for being a cyberspace luddite. You wil need to copy ad paste into your browser window.
http://tpmmuckraker.talkingpointsmemo.com/2009/03/did_cassano_and_aig_commit_fraud.php#more
Thanks, this is much more intersting stuff.
1. Okay.
2. From what the OTS guy testified to yesterday, I think they did accurately report on the CDSs. He didn't say it explicitly so I may be assuming too much, but that didn't seem to be a problem at all. And AIG's problems were more related putting investments in real estate backed securities that lost value and they had cash calls. This was unrelated to insurance and wasn't regulated by the state regulators since it wasn't insurance.
3. I think they didn't see the crash being as hard as it was and it's hard to fault them for that, but they did stop creating new contracts. And again, apparently none of their CDSs had mortgage defaults so they weren't as bad as common media understanding makes them out.
4. As I understood from yesterday's hearings their insurance on MBS/CDS was only a part of AIG's problem. The crash of the real estate market meant their own holdings were devalued and they were short on cash on contracts they owed (not as insurance but as cash collateral which I understood to be more like bonds but they needed a few more minutes to explain it clearly). The integrity of ratings agencies is not unique to this. That was part of the problem with the recent accoutinging scandals and in software it's the same way for analyst reviews. And of course it seems journalists have been trading integrity for access. Still this needs to fixed and I wonder how ratings agencies are regulated and what laws they are subject too. If nothing, then they should be.
From the accounting course my dad made me take in college I learned that it's relatively easy until you start taking time into account. Time screws it up as it does physics. The value of something is what a willing buyer will pay a willing seller. If you don't intend to sell it, what's the value? If you intend to sell it in 5 years or 30, what will the value be? Why is one guess better than another? The mark-to-market rule issue is exactly this problem. I assume the rule change was added to give a more accurate picture of the value of assets, but in this situation, it's generating a lot of pure paper loses that are causing ripples because their implications for leverage figures that are regulated. From my extremely limited understanding I wonder if there will be new regulations that prevent assets used to back leverage from being invested in illiquid investments,
4 (2nd 4 :). I would like investigations into suspected criminal misrepresentations.
We have evidence that the US waterboarded people which is in violation of international law which Bush didn't have the ability to rewrite. To build on an analogy you used, stealing a car and calling it "taking" doesn't make it legal. Bush's signing statements are equally Orwellian, I will enforce this law that says people appointed to head FEMA must have emergency management experience except when it limits the pool of candidates is absurd. The point is to limit the pool of candidates to those that are actually qualified. How Congress didn't address this is beyond me, but again it fell between regulatory cracks, as the courts wouldn't have taken it because no one had standing on the issue. There's a bug in our system and it needs to be fixed.
I overstated that everyone did this, apparently Goldman avoided a lot of problem from this. But it was a systemic problem and the real problem unconvered is that so many companies had interrelated CDSs with each other and unwinding them was so difficult. That was the fear of a system breakdown if AIG failed. The fact that so many were involved in these suggests to me that they weren't illegal as too many legal departments had to have approved these.
5. I would be all for prosecuting malfeasance crimes.
Assuming by "these organziations" you mean the "greedy, unethical, and arrogant" ones I agree. Though I could believe that those who didn't understand math were fooled by things like this. That doesn't make them criminals, merely incompetant, though maybe (criminally) negligent.
6. The contractual obligation was just one of the factors. It was the conclusion of an internal legal review and from what I've seen is probably accurate that because of the way they were written and given CT law (which I guess is what is prevailing) AIG would be subject to 2x loses if they lost a suit. Apparently the larger factor was that these people were significantly more qualified to fix the mess they caused because these "books" required daily management and were very complex. This means, them fixing it significantly increases the chances of the taxpayers getting their $80 billion back and lessens the chances of AIG failing and making things worse. And they did stay for the terms of their contract and were fixing the problem. I don't know that Liddy's claims were accurate, but no one countered them. I agree it's distasteful, and I was very against these bonuses before I heard Liddy. But once I had actual facts on the specifics, I could see that it wasn't as clearcut as initial news headlines and soundbites made it out to be. Imagine that.
As to UAW contracts, I'd guess it's actually the same reason. It's less risky to them to renegotiate the contracts and get something rather than have the company go bankrupt and get nothing.
As far as I know Liddy is doing this for $1/year to help the world out of this mess. My understanding is that Liddy resigned from the board of Goldman Sachs just after he took the AIG CEO job. I haven't seen anything said he "had to resign" which implies some scandal. Do you have some specifics? Paulson asked Liddy to head AIG and 5 years earlier had selected Liddy for MS's board. It could be as innocent as past professional acquaintances. Is there some suspicion of something more? "Liddy has served on the boards of Northwestern University and the Museum of Science and Industry in Chicago. He is also a life trustee and former national chairman of the Boys and Girls Clubs of America." Is there something suspicious about that? I was not at all happy with Liddy's support of the AIG executive retreat in the fall but he seems to be making good progess in fixing the problems. One reason that many Goldman people are involved in fixing the mess is that they are more qualified to do so than others. Certainly the pool of qualified people is small.
The TPM article describing Cassano's possibly criminal actions within FP is a good one (as usual for them). He is certainly gone from AIG and my understanding is that his senior management is also gone. Let the investigations into them begin.
Post a Comment