The Wall Street Journal has a major story tonight, presumably slated for page one of tomorrow’s paper, showing that Goldman Sachs (an Audit funder) had a “a bigger role than has been publicly disclosed in fueling the mortgage bets that nearly felled” AIG. To say the least:
Goldman originated or bought protection from AIG on about $33 billion of the $80 billion of U.S. mortgage assets that AIG insured during the housing boom.
The picture filled in here shows Goldman as essential to AIG’s catastrophic bets. AIG was the linchpin to the credit crisis because it took so much of the credit risk off the banks’ books, which turbocharged bad lending. But Goldman was the key conduit between AIG and the toxic waste that all but brought it down. Look at this:
In Goldman’s biggest deal, it acted as a middleman between AIG and banks, taking on the risk of as much as $14 billion of mortgage-related investments. Then Goldman insured that risk with one trading partner—AIG, according to the Journal’s analysis and people familiar with the trades.
The trades yielded Goldman less than $50 million in profits, which were mostly booked from 2004 to 2006, according to a person familiar with the matter. But they piled risks onto AIG’s books, which later came to haunt the insurer and Goldman. The trades also gave Goldman a unique window into AIG’s exposure to losses on securities linked to mortgages.
You can bet there’s more to come on this. It’s excellent work by the Journal.
— Speaking of, check out the Journal’s leder on Bernie Madoff: The Prison Years.
Reporter Dionne Searcey finds him socializing with Colombo crime-family boss Carmine Persico and the spy Jonathan Pollard, plays bocce ball, and is a prison dishwasher making somewhere between 12 cents and $1.15 an hour. Oh yeah, and there’s this beaut:
The 71-year-old Mr. Madoff also is salvaging something that disappeared in the outside world the moment his fraud was exposed: respect. “To every con artist, he is the godfather, the don,” says an inmate interviewed earlier this week.
And this:
Some of Mr. Madoff’s fellow inmates suspect he has money hidden somewhere and try to cozy up to him in hopes of learning its location.
Awesome.
— The Financial Times’s Krishna Guha has 14 reasons why the U.S. should impose a windfall tax on bankers—and they’re pretty good. Here are three:
2. This anger is justified because the bonuses are based in large part on windfall profits. These profits derive from taxpayer-backed interventions that stabilised the financial system, paving the way for a recovery in financial markets and collapse of risk spreads.
3. All banks benefited from this bailout - not just the ones that took or still have Tarp funds. Even the strong gained hugely from Fed liquidity and government actions to ensure none of their weaker counterparties failed (including but by no means limited to the AIG case).
4. In an ideal world, these interventions would have been structured up front in a way that ensured the value created did not leak out to banks and bankers. But they were not.
My personal theory, which this might debunk, is that AIG's credit culture took a nosedive after Spitzer ousted Greenberg, There is no doubt that if Greenberg had been paying attention the debacle would not have happened. However the management at AIG was notoriously thin, and that was Greenberg’s fault.
Can we take a moment to look at Elliot Spitzer’s involvement? He was, by any measure, an unmitigated disaster for AIG shareholders. His actions were equivalent to firing the captain of the Titanic mid-voyage for wearing the wrong color uniform. The charges he brought were settled years later for peanuts, while AIG went rudderless. And all of this was to satiate Spitzer’s ego and get him some publicity for the governorship.
What a waste!
Spitzers’ actions are a textbook case in disastrous government intervention. Worth reflecting on, as Congress prepares to take a quantum leap in regulatory oversight.
#1 Posted by JLD, CJR on Mon 14 Dec 2009 at 08:38 AM
JLD, I'll help debunk that theory, too. Greenberg was responsible for a great deal of what happened at AIG. He created AIGFP, hired Joe Cassano, and didn't stop them from insuring every toxic asset that came there way. They would finally stop--a few months after Greenberg was forced out.
See this post for more.
#2 Posted by Ryan Chittum, CJR on Mon 14 Dec 2009 at 09:37 AM
Yeah, it's Spitzer's fault for persecuting all those poor bankers trying to make an honest buck.
It's a bit more complicated than that. Read here:
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http://www.vanityfair.com/politics/features/2009/08/aig200908?currentPage=all
At the end of 2001 its second C.E.O., Tom Savage, retired, and his former deputy, Joe Cassano, was elevated. Savage is a trained mathematician who understood the models used by A.I.G. traders to price the risk they were running—and thus ensure that they were fairly paid for it. He enjoyed debates about both the models and the merits of A.I.G. F.P.’s various trades. Cassano knew a lot less math and had much less interest in debate...
“The culture changed,” says a third. “The fear level was so high that when we had these morning meetings you presented what you did not to upset him. And if you were critical of the organization, all hell would break loose.” Says a fourth, “Joe always said, ‘This is my company. You work for my company.’ He’d see you with a bottle of water. He’d come over and say, ‘That’s my water.’ Lunch was free, but Joe always made you feel he had bought it.” And a fifth: “Under Joe the debate and discussion that was common under Tom [Savage] ceased. I would say what I’m saying to you. But with Joe over my shoulder as the audience.” A sixth: “The way you dealt with Joe was to start everything by saying, ‘You’re right, Joe.’”
According to traders, Cassano was one of those people whose insecurities manifested themselves in a need for obedience and total control...
Every one of the people I spoke with admitted that the reason they hadn’t taken a swing at Joe Cassano, before walking out the door, was that the money was simply too good. A man who valued loyalty and obedience above all other traits had not any tools to command them except money. Money worked, but only up to a point. If you were going to be on the other side of a trade from Goldman Sachs, you had better know what, exactly, Goldman Sachs was up to. A.I.G. F.P. could attract extremely bright people, whose success depended on precision of both calculation and judgment. It was now run, roughly, by a man who didn’t fully understand all the calculations and whose judgment was clouded by his insecurity. The few people willing to question that judgment wound up quitting the firm. Left behind were people who more or less accommodated Cassano. “If someone is a complete asshole,” one of them puts it to me, “you seek his approval in a way you don’t if he’s a nice guy.”
All of which raises an obvious question: Who put a man like Joe Cassano in charge of such an enterprise as A.I.G. F.P.? The simple answer is Hank Greenberg, the C.E.O. of A.I.G.; the more complicated one is A.I.G. F.P.’s board, consisting of many smart people, including Harvard economist Martin Feldstein. “Tom Savage proposed Joe to replace him,” says Greenberg, “and we had no reason to think he wasn’t able to do the job.”
A.I.G. F.P.’s employees for their part suspect that the only reason Greenberg promoted Cassano was that he saw in him a pale imitation of his own tyrannical self and felt he could control him. “So long as Greenberg was there, it worked,” says one trader, “because he watched everything Joe did. After the Nikkei collapsed [in the 1990s], a trader in Japan lost 20 million. Greenberg personally flew to Tokyo and took him into a room and grilled him until he was satisfied.” In March 2005, however, Eliot Spitzer forced Greenberg to resign. And, as one trader puts it, “the new guys running A.I.G. had no idea.” They thought the money machine ran on its own, and Cassano did nothing to discourage the view. By 2005, A.I.G. F.P. was indeed, in effect, his company...
What no one realized was that it was too late. A.I.G. F.P.’s willingness to assume t
#3 Posted by Thimbles, CJR on Mon 14 Dec 2009 at 10:23 AM
Exactly, Thimbles. Thanks for that link.
#4 Posted by Ryan Chittum, CJR on Mon 14 Dec 2009 at 10:31 AM
No problem. I gave you one link, you've given me a dozen or so over the years. I'm happy to call it even. :D
#5 Posted by Thimbles, CJR on Mon 14 Dec 2009 at 12:29 PM