Audit Notes: Schedule AIG, Leveraging Pensions, Bank Labor v. Capital

The mysterious AIG Schedule A, which the Federal Reserve concealed from the public (read our account here of how reporter Matthew Goldstein’s FOIA request for the document spurred further secrecy by the government), is out there now.

Here’s the early take of Reuters’s Goldstein, who apparently was the first reporter to ask for the document more than a year ago:

The new information also reveals that of the 178 tranches of CDOs that AIG insured, some 14% were on deals issued after 2005. That’s critical because in December 2007, former AIG Financial Products head Joseph Cassano had said AIG largely got out of the CDS business by the end of 2005.

The newly disclosed information also reveals that Goldman not only bought a lot of CDS from AIG to protect itself; the Wall Street firm also originated a good number of the CDOs that were in SocGen’s portfolio.

And Zero Hedge has more, noting that not one of Goldman Sachs’ deals is rated A or higher:

Yet the critical question is: since there is not one security rated A, and in fact the median rating is a high C, and since we know that Soc Gen had parked its securities with the Fed in November 2008, just what standards does the Federal Reserve have when accepting securities in the discount window to lend against? And the implication is that Bernanke will allow any toxic crap to be eligible collateral, likely at par.

The Wall Street Journal is good to keep an eye on public-pension funds getting into the leverage business.

A little leverage might not be a bad thing. But this will cause a crisis for pensioners or states somewhere down the line if low limits aren’t set. This is a slippery slope.

While public pensions for years have had indirect exposure to borrowed money through property or buyout funds, most have steered clear of borrowing money in their own portfolios.

That public pension funds would contemplate the use of borrowed money so soon after a credit crisis stoked by financial leverage is already setting off alarms for some in the industry.

The WSJ reports that the State of Wisconsin Investment Board is going to leverage low-risk investments like government bonds, while reducing its stock holdings. But bond yields are low right now, as the Journal does well to point out:

Moreover, he questions the timing of leveraging bonds when many economists are forecasting a pickup in inflation and an increase in interest rates as the economy recovers. That would cause bond prices to fall, and leverage could magnify those declines.

Keep an eye on this.

— Eric Dash has a smart story in The New York Times looking at what all those bonuses have done to shareholders profits’ at their banks.

Citigroup paid its employees so much in 2009 — $24.9 billion — that the company more than wiped out every penny of profit. After paying its employees and returning billions of bailout dollars, Citigroup posted a $1.6 billion annual loss…

Bank of America, meantime, is spending 88 cents of every dollar it made in 2009 to compensate its workers. At Morgan Stanley, that figure is 94 cents.

Now far be it for us to suggest labor is ever getting too much of a share of income compared to capital. But I don’t think I have to point out the ironies implicit in these folks, the same ones who constantly tell other companies to cut labor costs (via M&A, analyst reports, etc.) to goose shareholder returns, are paying themselves huge amounts of money at the expense of their own shareholders—not to mention their lending or capital reserves.

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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at Follow him on Twitter at @ryanchittum.