Oddities of the Blackrock-AIG report

So far it appears the most noteworthy document of the 250,000 pages obtained by the House Committee on Government Oversight and Reform, which is holding a hearing on Wednesday on AIG’s government bailout, is a 44-page powerpoint presentation put together by bond firm Blackrock analyzing the insurer’s ability to negotiate haircuts on its largest CDS contracts. Blackrock made the presentation on November 5, 2008, to either AIG or the Federal Reserve Bank of New York, or more likely, since the bailout was in full swing by then, both. It was later decided that AIG should pay all of the counterparties 100 cents on the dollar, which since the government was making the payments ended up being essentially a backdoor bailout to Goldman Sachs and a number of European banks.

Many have drawn the conclusion that the Blackrock report suggests that AIG had to pay 100 cents on the dollar. Not sure I agree. Nonetheless, that conclusion has led a number of people to wonder what else AIG, the Federal Reserve, and Tim Geithner might be hiding. So I have spent the morning going through the confidential Blackrock-AIG report and here are some oddities it includes. You can decide if hiding this stuff was worth the lengths the Fed went to try to keep it hidden:

Merrill Lynch was the only one of AIG’s largest CDS counterparties that Blackrock thought the insurer had no chance of negotiating with. It’s not clear if the other five would have taken a haircut. But Blackrock said there was at least a chance they would take less than 100 cents on the dollar. Of course, once they found out that AIG was going to pay Merrill in full they may have called off their deals or sued.
Goldman had insured more junky bonds with AIG than the rest of the counterparties. A quarter of Goldman’s CDS contracts with AIG were insuring bonds that had a BBB or worse rating. The average counterparty CDS portfolio had just 18% of similarly rated junky bonds. (My editor points out that’s probably why Goldman was willing to deal.)
Goldman was the only counterparty not in possession of the bonds it was insuring against. All the other banks that bought protection from AIG seem to have done so to hedge against the risk of bonds they held, or controled, going bad. Not the case for Goldman. They didn’t own the bonds they were insuring against. That means one of two things: A) Goldman had sold bond protection to someone else, and was buying protection from AIG against the risk that the protection it sold would go bad. or B) (and this is the much simpler explanation) Goldman was speculating the US housing bubble was going bust.
92% of the CDS insurance that Deutsche Bank bought was on Commercial Mortgage Backed Securities. That’s much higher than the rest of the group. As a whole, only 18% of the insurance AIG sold to all the counterparties was on CMBS. It’s strange that Deutsche didn’t have more insurance against residential mortgages considering one of its mortgage bond traders Greg Lippman was one of Wall Street’s most vocal housing bear. It’s possible Lippman and Deutsche was early on commercial mortgage backeds as well.
Merrill Lynch was under no pressure to unload its CDS contracts or the junky bonds they protected against. That means at least by November 5, which was about a month or a half after Bank of America, the worse of Merrill’s credit crunch was over, or at least that’s what superiors at BofA thought at the time.
Nearly half of Merrill’s CDS protection it bought from AIG was against residential subprime mortgages. That compares to 36% for the rest of the group.

Stocks Rally Further in Run-up to EU Summit

MOSCOW — Global stocks enjoyed one of their best days in weeks on Tuesday ahead of a summit of European leaders that’s expected to be dominated by calls to boost economic growth.

Europe remains the focus of attention across all financial markets in the run-up to the June 17 Greek election that could go a long way to determining the country’s membership of the euro as well as the future of the single currency zone.

waltwriston

Total blackout! Read where the SEC was giving some type of national security assurance? Look at the statements of AIG and they really weren’t insolvent, but one has to cover the banksters arse!

What was and is more applauding is that the bankers’ got to “reset” their options. Capitalism would punish the Captains of Capital if they were personally burned in their options w/out resets. IMO w/out that there’s no real loss to the top bailing out in their golden parachutes. Without personal discipline from the market onto the bankers statements (plus off balance sheet). They must have to suffer a personal loss to correct their mistakes, and that is market discipline!

Your’s

Walter Wriston
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bryanfromhouston

As one of the commenters from the WSJ article said:
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the 100% payout was the right thing to do. The fundamental underlying principle is a contract is a contract, and must be honored. The certainty of this is what enables the financial system to function properly. Default is factored into that. If the 1000s of firms in the financial system no longer knew whether a contract would pay out, beyond the proscribed conditions it would have scrambled all of their calculations, resulting in extreme uncertainty. Firms near the edge would no longer even know their own point of solvency, never mind another firm with which they were invested. As a result they would not know how to calculate the value of there assets. With all the firms reeling already, introducing lots more uncertainty would likely result in many more down grades, that then produce more failures of solvency. The entire reason for propping up AIG in the first place was to prevent a cascading failure of financial institution after financial institution.
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If the cascading failure was not prevented, instead of having your 401k or other investments drop 30-40%. It drops 90-95%, unemployment instead of hitting 10%, goes to 25 or 30%. The annual Budget deficit goes from $1.4T to $3.5T. There is no Stock market recovery starting in March 2009 gaining back 50% of what was lost.
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With $3.5T a year in annual deficits, how many years would it take for the US government to begin to default on its debt, resulting in a final collapse of the entire economy? Who would have the money to lend? The fact is the Fed would have to print money and inflation would hit triple digits. If that happened we would face an economic Armageddon.”
waltwriston

As to the above your whole statement (or that of the WSJ) is why the financial sector if rife with “systemic risk,” like dominos ready to fall at the slightest sneeze (or even a perceived sneeze).;
2discern

The story of the decade is the largest SEC lawsuit that no media will cover. $3.8 trillion against the SEC for selling phantom shares. see-http://www.worldreports.org/news/265_service_of_cmkmcmkx_3.87_trillion_suit_vs._sec

The corruption in DC and Wall ST. is so rampant and the integrity of a financial system is fallen. Without just weights and measures no system of enterprise can sustain longevity.