The Real AIG Scandal, Continued!
The transfer of $12.9 billion from AIG to Goldman looks fishier and fishier.
By Eliot Spitzer
Posted Sunday, March 22, 2009, at 9:42 AM ET
The AIG scandal is getting ever-more disturbing. Goldman Sachs' public conference call explaining its trading relationship and exposure with AIG established, once again, that Goldman knows how to protect itself. According to Goldman, even if AIG had failed, Goldman's losses would have been minimal.
How did Goldman protect itself? Sensing AIG's weakening capital position through 2006 and 2007, Goldman demanded more collateral from AIG and covered outstanding risk with instruments from other firms.
But this raises two critical questions. The first is why $12.9 billion of taxpayer money went from AIG to Goldman. What risk—systemic or otherwise—was being covered? If Goldman wasn't going to suffer severe losses, why are taxpayers paying them off at 100 cents on the dollar? As I wrote earlier in the week, the real AIG scandal is that the company's trading partners are getting fully paid rather than taking a haircut.
Goldman's answer is that it was merely taking a commercial position—trying to avoid any losses at all on its AIG positions. I suppose we can hardly expect Goldman to reject government assistance in the form of pure cash that seems to have had no strings attached.
But what were the government officials possibly thinking? The only rationale for what we should call the "hidden conduit bailout" to AIG's trading partners is that the cascading effect of AIG's inability to pay would have been devastating. But Goldman has now said very clearly there would have been no cascade. Not even a ripple.
Is the same true of AIG's other counterparties, including several foreign banks? What examination of the impact of an AIG failure did federal officials undertake before deciding to spend countless billions bailing out AIG and its trading partners?
The government decision to bail out AIG was made after the private parties, supposedly at risk, had declined to structure a private series of investments that might have avoided the need for use of public money. Perhaps they knew the impact of an AIG default would be small, or perhaps they knew that the federal officials in the room would blink and ante up. In a post-Lehman moment when panic, not reason, was dominating the discussion, perhaps they figured they could walk away with extra billions—and, indeed, they did.
This issue cries out for immediate government inquiry. Maybe one or two of the more than two dozen government entities now beating their chests about bonuses can redirect their energies to this much larger issue confronting us: Who signed off on this $80 billion bailout—now approaching $200 billion—and why?
The second question, of course, is why Goldman was wise to AIG's declining position two years ago but nobody else appears to have known. There is always the operating premise that Goldman is better than the rest in the field, but where were the federal agencies that should have been taking a look at AIG's leverage situation and general financial health?
And were AIG's public statements accurate in revealing a decline? Or did Goldman, with its multiple trading relationships with AIG, get an early warning? This series of questions also demands immediate inquiry and resolution.
What continues to be fundamentally disappointing is that the "too big to fail" institutions continue to absorb enormous sums of taxpayer support without either demonstrating the genuine need for such support or altering their behavior after receiving it.
After getting $12.9 billion in what now seems to be a mere gift, has Goldman begun to lend in a way that will restore the credit markets? Were they asked to do so?
It is time the government realizes it has two simple options: tightly regulate entities that are too big to fail or break them up so they aren't.
Eliot Spitzer is the former governor of the state of New York.
Article URL: http://www.slate.com/id/2214407/
Wednesday, March 25, 2009
Tuesday, March 24, 2009
Toxic Assholes in Washington
The Toxic Assets We Elected
By George F. Will, Washington Post
Tuesday, March 24, 2009; A13
With the braying of 328 yahoos -- members of the House of Representatives who voted for retroactive and punitive use of the tax code to confiscate the legal earnings of a small, unpopular group -- still reverberating, the Obama administration yesterday invited private-sector investors to become business partners with the capricious and increasingly anti-constitutional government. This latest plan to unfreeze the financial system came almost half a year after Congress shoveled $700 billion into the Troubled Assets Relief Program, $325 billion of which has been spent without purchasing any toxic assets.
TARP funds have, however, semi-purchased, among many other things, two automobile companies (and, last week, some of their parts suppliers), which must amaze Sweden. That unlikely tutor of America regarding capitalist common sense has said, through a Cabinet minister, that the ailing Saab automobile company is on its own: "The Swedish state is not prepared to own car factories."
Another embarrassing auditor of American misgovernment is China, whose premier has rightly noted the unsustainable trajectory of America's high-consumption, low-savings economy. He has also decorously but clearly expressed sensible fears that his country's $1 trillion-plus of dollar-denominated assets might be devalued by America choosing, as banana republics have done, to use inflation for partial repudiation of improvidently incurred debts.
From Mexico, America is receiving needed instruction about fundamental rights and the rule of law. A leading Democrat trying to abolish the right of workers to secret ballots in unionization elections is California's Rep. George Miller who, with 15 other Democrats, in 2001 admonished Mexico: "The secret ballot is absolutely necessary in order to ensure that workers are not intimidated into voting for a union they might not otherwise choose." Last year, Mexico's highest court unanimously affirmed for Mexicans the right that Democrats want to strip from Americans.
Congress, with the approval of a president who has waxed censorious about his predecessor's imperious unilateralism in dealing with other nations, has shredded the North American Free Trade Agreement. Congress used the omnibus spending bill to abolish a program that was created as part of a protracted U.S. stall regarding compliance with its obligation to allow Mexican long-haul trucks on U.S. roads. The program, testing the safety of Mexican trucking, became an embarrassment because it found Mexican trucking at least as safe as U.S. trucking. Mexico has resorted to protectionism -- tariffs on many U.S. goods -- in retaliation for Democrats' protection of the Teamsters union.
NAFTA, like all treaties, is the "supreme law of the land." So says the Constitution. It is, however, a cobweb constraint on a Congress that, ignoring the document's unambiguous stipulations that the House shall be composed of members chosen "by the people of the several states," is voting to pretend that the District of Columbia is a state. Hence it supposedly can have a Democratic member of the House and, down the descending road, two Democratic senators. Congress rationalizes this anti-constitutional willfulness by citing the Constitution's language that each house shall be the judge of the "qualifications" of its members and that Congress can "exercise exclusive legislation" over the District. What, then, prevents Congress from giving House and Senate seats to Yellowstone National Park, over which Congress exercises exclusive legislation? Only Congress's capacity for embarrassment. So, not much.
The Federal Reserve, by long practice rather than law, has been insulated from politics in performing its fundamental function of preserving the currency as a store of value -- preventing inflation. Now, however, by undertaking hitherto uncontemplated functions, it has become an appendage of the executive branch. The coming costs, in political manipulation of the money supply, of this forfeiture of independence could be steep.
Jefferson warned that "great innovations should not be forced on slender majorities." But Democrats, who trace their party's pedigree to Jefferson, are contemplating using "reconciliation" -- a legislative maneuver abused by both parties to severely truncate debate and limit the minority's right to resist -- to impose vast and controversial changes on the 17 percent of the economy that is health care. When the Congressional Budget Office announced that the president's budget underestimates by $2.3 trillion the likely deficits over the next decade, his budget director, Peter Orszag, said: All long-range budget forecasts are notoriously unreliable -- so rely on ours.
This is but a partial list of recent lawlessness, situational constitutionalism and institutional derangement. Such political malfeasance is pertinent to the financial meltdown as the administration, desperately seeking confidence, tries to stabilize the economy by vastly enlarging government's role in it.
By George F. Will, Washington Post
Tuesday, March 24, 2009; A13
With the braying of 328 yahoos -- members of the House of Representatives who voted for retroactive and punitive use of the tax code to confiscate the legal earnings of a small, unpopular group -- still reverberating, the Obama administration yesterday invited private-sector investors to become business partners with the capricious and increasingly anti-constitutional government. This latest plan to unfreeze the financial system came almost half a year after Congress shoveled $700 billion into the Troubled Assets Relief Program, $325 billion of which has been spent without purchasing any toxic assets.
TARP funds have, however, semi-purchased, among many other things, two automobile companies (and, last week, some of their parts suppliers), which must amaze Sweden. That unlikely tutor of America regarding capitalist common sense has said, through a Cabinet minister, that the ailing Saab automobile company is on its own: "The Swedish state is not prepared to own car factories."
Another embarrassing auditor of American misgovernment is China, whose premier has rightly noted the unsustainable trajectory of America's high-consumption, low-savings economy. He has also decorously but clearly expressed sensible fears that his country's $1 trillion-plus of dollar-denominated assets might be devalued by America choosing, as banana republics have done, to use inflation for partial repudiation of improvidently incurred debts.
From Mexico, America is receiving needed instruction about fundamental rights and the rule of law. A leading Democrat trying to abolish the right of workers to secret ballots in unionization elections is California's Rep. George Miller who, with 15 other Democrats, in 2001 admonished Mexico: "The secret ballot is absolutely necessary in order to ensure that workers are not intimidated into voting for a union they might not otherwise choose." Last year, Mexico's highest court unanimously affirmed for Mexicans the right that Democrats want to strip from Americans.
Congress, with the approval of a president who has waxed censorious about his predecessor's imperious unilateralism in dealing with other nations, has shredded the North American Free Trade Agreement. Congress used the omnibus spending bill to abolish a program that was created as part of a protracted U.S. stall regarding compliance with its obligation to allow Mexican long-haul trucks on U.S. roads. The program, testing the safety of Mexican trucking, became an embarrassment because it found Mexican trucking at least as safe as U.S. trucking. Mexico has resorted to protectionism -- tariffs on many U.S. goods -- in retaliation for Democrats' protection of the Teamsters union.
NAFTA, like all treaties, is the "supreme law of the land." So says the Constitution. It is, however, a cobweb constraint on a Congress that, ignoring the document's unambiguous stipulations that the House shall be composed of members chosen "by the people of the several states," is voting to pretend that the District of Columbia is a state. Hence it supposedly can have a Democratic member of the House and, down the descending road, two Democratic senators. Congress rationalizes this anti-constitutional willfulness by citing the Constitution's language that each house shall be the judge of the "qualifications" of its members and that Congress can "exercise exclusive legislation" over the District. What, then, prevents Congress from giving House and Senate seats to Yellowstone National Park, over which Congress exercises exclusive legislation? Only Congress's capacity for embarrassment. So, not much.
The Federal Reserve, by long practice rather than law, has been insulated from politics in performing its fundamental function of preserving the currency as a store of value -- preventing inflation. Now, however, by undertaking hitherto uncontemplated functions, it has become an appendage of the executive branch. The coming costs, in political manipulation of the money supply, of this forfeiture of independence could be steep.
Jefferson warned that "great innovations should not be forced on slender majorities." But Democrats, who trace their party's pedigree to Jefferson, are contemplating using "reconciliation" -- a legislative maneuver abused by both parties to severely truncate debate and limit the minority's right to resist -- to impose vast and controversial changes on the 17 percent of the economy that is health care. When the Congressional Budget Office announced that the president's budget underestimates by $2.3 trillion the likely deficits over the next decade, his budget director, Peter Orszag, said: All long-range budget forecasts are notoriously unreliable -- so rely on ours.
This is but a partial list of recent lawlessness, situational constitutionalism and institutional derangement. Such political malfeasance is pertinent to the financial meltdown as the administration, desperately seeking confidence, tries to stabilize the economy by vastly enlarging government's role in it.
I Want To Buy Troubled Assets
Why can't individual investors get the sweetheart deal Geithner's plan is offering to hedge funds?
By Daniel Gross, Posted Tuesday, March 24, 2009, at 2:44 PM ET
Tim Geithner's plan to remove toxic assets from the books of crippled financial institutions is receiving mixed reviews. Nobel Prize-winning economist Joseph Stiglitz said the plan "amounts to robbery of the American people. I don't think it's going to work because I think there'll be a lot of anger about putting the losses so much on the shoulder of the American taxpayer." (Wouldn't you like to see the cage match between outside Democratic genius economist skeptics such as Stiglitz and Paul Krugman and inside Democratic genius economist promoters such as Larry Summers?)
The Geithner plan is designed to benefit professional investors: It provides them with lots of easy credit, limits their losses, and allows them to reap a disproportionate chunk of the benefits if the investments pan out. This will be a boon to outfits such as the Blackstone Group and big hedge funds. But it will not be much of a boon to you, and I don't mean that in the sense that taxpayers are assuming too much liability. I mean that you, and I, and other small-account holders have no easy way to participate in the plan, and that's a shame.
The design of the Geithner plan reinforces the notion that there are two sets of rules in the market, one for the really big players (matching investments, generous loans) and another for small investors and homeowners (expensive bailouts and foreclosure).
If we taxpayers are going to be financing something close to guaranteed returns for hedge funds and private-equity firms, why can't we get in on the sweet deal that's being offered to Wall Street? Why can't we buy the distressed assets the same way hedge funds will? If we think creatively, we can find a way to enable this.
As Matt Yglesias points out, at least part of the Geithner plan envisions the participation of mom-and-pop investors. The fact sheet says that for the "legacy loan" program, the less-leveraged component aimed at encouraging investors to buy loans from banks, "the participation of individual investors, pension plans, insurance companies and other long-term investors is particularly encouraged." But the "legacy securities" program, the more-leveraged version aimed at encouraging investors to buy mortgage-backed securities and other instruments from banks, does not mention allowing individual investors to participate.
Given the size of the assets involved and the structure of the investment-management industry, it's likely that only wealthy institutions and institutions that serve only wealthy individuals—hedge funds, private-equity firms, etc.—will be bidding on these distressed assets. Individual investors generally don't have the tools to analyze the securities and assets for sale. Banks such as Citi will be eager to sell off their junky assets in chunks of $50 million, not in chunks of $5,000. Bailouts and the unwinding of bubbles are necessarily wholesale operations, not retail ones.
But it wouldn't be hard to arrange for small-fry investors to participate in the bailout. The government could partner with investment-management firms—especially well-regarded investment-management firms such as Vanguard and TIAA-CREF—to create mutual-fundlike vehicles in which individuals could invest as little as a few hundred dollars in the effort to stabilize the banking system. The feds could even offer such an investment as a check-off on tax returns. Or we could present it as an allocation choice for federal employees' retirement accounts. Legacy loans and legacy assets could be offered as an option for state-sponsored 529 college savings programs, in which investors typically commit to lengthy holding periods. Or they could be made part of the universal savings accounts that Obama supports.
And if the private-equity or hedge-fund industry had an ounce of PR savvy—a really big if—it would help individuals make similar investments while waiving the management and incentive fees.
Yes, there's risk involved. And there is something circular about this arrangement. We'd be lending money to ourselves to buy stuff that the government would probably end up owning anyway if we didn't buy it. But I'd rather lend my tax dollars to help you, dear reader, profit from the financial disaster than lend them to Blackstone Group CEO Stephen Schwartzman to help him profit from it.
Daniel Gross is the Moneybox columnist for Slate and the business columnist for Newsweek. You can e-mail him at moneybox@slate.com. His latest book, Dumb Money: How Our Greatest Financial Minds Bankrupted the Nation, has just been published as an e-book
Article URL: http://www.slate.com/id/2214509/
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