Monday, March 30, 2009

AIG Money Laundering Made Banks Profitable in Q1?

AIG is the scandal that never dies. There was the first bailout for $85 billion. The second bailout for $65 billion. The third bailout for $30 billion. The $165 million in bonuses to the employees in the Financial Products division responsible for bankrupting the company. And, of course, the revelation that AIG has been the conduit for a backdoor bailout of its creditors, particularly Goldman Sachs. However, the latest report concerning AIG is even more outrageous. AIG has not been simply paying its creditors back in full - it has essentially overpaid them on purpose. This is looting.

Remember when Citigroup CEO Vikram Pandit proclaimed his bank had been profitable through the first two months of 2009 in an "internal" memo released to the press? Bank of America CEO Ken Lewis and JP Morgan CEO Jamie Dimon followed suit the next day, claiming that they too had been profitable through February. While some dismissed these pronouncements as misleading at best, the beleaguered markets took off, rebounding from twelve year lows at any hint of good news. This rally has continued for nearly three weeks now, despite Jamie Dimon and other bank CEOs admitting that March has been "a little tough" - read: they are losing money hand over fist again.

What changed between February and March? According to an email financial blogger Zero Hedge received from a trader at a major bank, the explanation is that in the first two months of the year, AIG unwound trades on extremely favorable terms for the banks. In other words, AIG deliberately overpaid on what it owed. According to the trader
During Jan/Feb AIG would call up and just ask for complete unwind prices from the credit desk in the relevant jurisdiction. These were not single deal unwinds as are typically more price transparent - these were whole portfolio unwinds. The size of these unwinds were enormous, the quotes I have heard were "we have never done as big or as profitable trades - ever"....

I can only guess/extrapolate what sort of PnL this put into the major global banks (both correlation and single names desks) during this period. Allowing for significant reserve release and trade PnL, I think for the big correlation players this could have easily been US$1-2bn per bank in this period."
That AIG's counterparties have been made whole at taxpayers' expense was scandalous enough. After all, companies took a risk when they entered into CDS contracts with AIG that AIG would not be able to make good on the payments. Why should taxpayers foot the entire bill for Wall Street's mistakes? (That's a rhetorical question - the obvious answer is that the financial sector controls the levers of power inside the Beltway). But words fail when AIG more or less launders money directly onto bank balance sheets. As Zero Hedge summarizes
AIG, knowing it would need to ask for much more capital from the Treasury imminently, decided to throw in the towel, and gifted major bank counter-parties with trades which were egregiously profitable to the banks, and even more egregiously money losing to the U.S. taxpayers, who had to dump more and more cash into AIG, without having the U.S. Treasury Secretary Tim Geithner disclose the real extent of this, for lack of a better word, fraudulent scam....

What this all means is that the statements by major banks, i.e. JPM, Citi, and BofA, regarding abnormal profitability in January and February were true, however these profits were a) one-time in nature due to wholesale unwinds of AIG portfolios, b) entirely at the expense of AIG, and thus taxpayers, c) executed with Tim Geithner's (and thus the administration's) full knowledge and intent, d) were basically a transfer of money from taxpayers to banks (in yet another form) using AIG as an intermediary.
Our democratic system is in jeopardy. Sadly, this is not hyperbole. The pernicious influence of Wall Street - which has spent some $5 billion over the last decade lobbying both parties for increased deregulation - has made the government responsive to the moneyed interests rather than to the people. As MIT professor and former IMF chief economist Simon Johnson argues, we risk turning into Argentina or Russia, in the sense that crony capitalists have captured the government, and are blocking reform after crashing the economy. Demanding transparency in the bailouts, and an honest accounting of where our money is going is the first step towards reclaiming our government. Absent such clarity - and replacing bank CEOs and boards - Congress should not authorize any further bailouts, because, clearly, Wall Streeters paying off their pals with public money cannot be acceptable. Hopefully, President Obama will realize that a little populist rage is warranted, and is actually not such a bad thing. His presidency may depend on it.

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