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Sun Mar 17, 2013, 02:07 AM

The AIG Bailout, Part 1.

I am currently reading Neal Barofsky's "Bailout" which recounts his tenure as the Inspector General overseeing TARP. The chapter on the AIG bailout is very enlightening, so I thought I would extract and share some of the highlights.

Barofsky breaks the AIG bailout into two parts. The first part was a $85 billion loan from the New York Fed in exchange for 80% of the stock of AIG. Barofsky continues the story:

A second part of the November deal covered the ongoing payouts required each time AIG was downgraded or the prices of the CDOs covered by AIG's credit default swap contracts plunged lower. Geithner and his team decided to terminate $62.1 billion of AIG's contracts with the banks. The deal had two parts. First, the counterparty banks were paid the approximate market value of the CDOs covered by the credit default swap contracts, about $27.1 billion in cash, which was provided almost entirely by the New York Fed in return for the CDOs themselves. For the second part of the deal, AIG and the New York Fed agreed that the banks could keep all of the previously posted collateral, approximately $35 billion, in return for the banks agreeing to rip up the credit default contracts. As a result, the bleeding of cash was staunched and the taxpayers became the proud owners of a mass of ill-conceived CDOs. For the banks, between the cash that they received from the Fed and the collateral they had previously received from AIG, they had essentially been paid 100 cents on the dollar for $62 billion in CDOs that were actually worth far less than that.

The deal was a gross distortion of the normal functions of the market. In a bailout-free world, instead of being saved by the government, AIG would have been unable to make its cash collateral payments to the banks and gone into bankruptcy. As a result, the banks would have been left with the CDOs and stuck with their continued declines in value. Those losses would have punished the banks for what had been bad and risky bets- i.e., assuming that AIG would be able to meet all its obligations. In market parlance, each of the banks would have borne the "counterparty risk" of doing business with AIG and suffered the consequences of betting on the wrong counterparty. Instead they were paid out in full.

In that respect, Geithner's opening of the spigot of taxpayer cash for AIG was more of a bailout of the banks than it was of AIG itself. The government thereby sent Wall Street a very dangerous message: counterparties who do business with financial institutions whose collapse could have devastating consequences for the entire financial system needn't do due diligence or worry about their counterparty risk. Instead they can rely on the government to bail them out.

That is the crux of the too-big-to-fail problem. The failure of giant financial institutions that are so big and have built up so many obligations to one another could cause a domino effect that could take down other major players and eventually the entire financial system. If the government had not stopped in to save AIG, major banks in the United States and Europe would have potentially suffered tens of billions of dollars in losses at a time when neither they nor the system could withstand such a further shock. The government felt it had no choice, and perhaps that was correct, but as long as there are financial institutions of such size and with so many interconnections, future massive crises- and bailouts- are all but inevitable.

Barofsky contrasts the favored treatment of the banks that dealt with AIG with a more typical scenario that played out earlier in 2008 with the bond insurer Ambac and in which counterparties recieved between 28 and 60 cents on the dollar. The problem with too-big-too-fail institutions is that the American people are taken financial hostage. We are involuntary counterparties to Wall Street's transactions, liable for losses without the offsetting benefit of participation in profits.

AIG Bailout, Part 2: http://www.democraticunderground.com/111632332
AIG Bailout, Part 3: http://www.democraticunderground.com/111632331

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Response to hay rick (Original post)

Sun Mar 17, 2013, 03:18 AM

1. Bookmarking series of 3 threads to read later.

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Response to hay rick (Original post)

Sun Mar 17, 2013, 10:29 AM

2. Amen

 

It was stupid, unethical, immoral, ineffective, and if there's ever any desire to prosecute ( ) illegal.

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Response to hay rick (Original post)

Sun Mar 17, 2013, 10:58 AM

3. thank you for posting this..Barofsky proved to me that geithner is responsible for my financial woes

as well as millions of us. I watched countless interviews with him when his book first came out. I knew it . I knew that homeowners could not work thru the ridiculous maze of hamp. I knew it and yet couldn't prove it. Then here comes the SIG Tarp who oversaw that money that was designated to help homeowners and explains clearly how it was not even attempted..and thwarted at every turn. Geithner needs to go to jail. He influenced Obama. He is responsible for so much misery..I hope he burns in hell.

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Response to xiamiam (Reply #3)

Sun Mar 17, 2013, 12:40 PM

4. Geithner: HAMP was a means of "foaming the runway" for the banks.

Barofsky delivers everything you need to know about HAMP in 45 seconds: http://dailybail.com/home/barofsky-geithner-admitted-to-us-privately-that-obamas-housi.html

For Geithner, HAMP's "clients" were the banks, not the homeowners.

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Response to hay rick (Reply #4)

Sun Mar 17, 2013, 10:11 PM

5. in 2008 i was just returning to work after a 2 yr major illness..i owned 5 properties

20 years of loans with the same bank, major equity built up from turning dumps into lovingly cared for charming homes...and my sole retirement money was in the houses..20 years of hard hard work for me...all rented..i had the best medical insurance at the time..still, recovery took over a year longer than anticipated and i dipped into my equilty..back to work, commission only in real estate..bam, in a minute compared to the rest of my life, house values in some places here were halved, no one was buying anything, and banks did not give a crap. I had already been set back by the illness and then the collapse..all of a sudden, i couldn't get money..wamu shut off my home equity line for no good reason..along with millions of others.. 4 of my properties were with chase..and i know every single tactic, every single thing they did, when it was instituted, when they changed, how they have helped ( only in 2012) and how they didn't help before then and now...i was terrorized by them ..at one point i thought about writing a note and blowing my brains out in their parking lot..yes, it got that bad..i know every bs thing they do..i lost my home to foreclosure, i sold one short sale, i moved into my oldest home which was a rental and fought like hell to keep it, and i have one other which i'm fighting like hell to keep ane dealing with the same crap..I was interested in what Barofsky had to say because I lived thru it..first hand...customer service reps treating you like dog turds.lost papers..he said and then he lied about it..unbelievable stupid stuff.

I used direct quotes from Barofsky when I sent my applications for an independent review before the deadline in December.. That was the deal that the banks made with the state attorney generals in order to minimize their liabillity to the people they screwed over. .I suggested that anyone reading my request for compensation read Barofskys book. You had to prove you were financially harmed. Such a joke. 20 plus years of never a late payment with the same bank for all my properties, perfect credit, secure lifestyle,...to rolling pennies to eat over the last 5 years.

Thank God he wrote that book. We needed him to do just that. He exposed Geithner for his role in it and I know Geithner ruined a lot of lives. He's put a major stumbling book in the evoloution of his soul. Pitiful morally bankrupt excuse of a man.

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Response to hay rick (Original post)

Mon Mar 18, 2013, 02:26 AM

6. So the reason we had to bail out this ongoing criminal enterprise is that they would

 


have lost a great deal of money? This came straight from the mouth of Bernanke, the person who said we had to bail out his friends.

This, btw, is not over. We have taken on huge debt, kicked over 5 million people out of their homes, watched millions of people be added to the food stamp rolls, given people like Mi$4 RobMe some of the best years they have ever had, paid hundreds of millions in bonuses to bankers while they throw McDonalds applications down on marchers and pay police to beat and terrorize them, and as of last month we still have 26 million people saying they need jobs while we only have about 3.4 million job openings...

...and because a group of bankers who are currently profiting from this said we would face doom, certain doom, we took on a bunch more debt to fix their debt problem?

No wonder they think everyone else is stupid.



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