The IG report came out and (at least for types like me) is nigh impenetrable. Enter James Kwak over at Baseline Scenario. He's done the dirty work and written a seriously crunchy post on what happened and why we should give a damn.
Here an especially chewy bit:
...first AIG contributed $5 billion to Maiden Lane III and the New York Fed gave it a $24.3 billion loan. Then Maiden Lane III gave all $26.8 billion to the banks in exchange for the CDOs. (The banks accepted $26.8 billion because they already held $35.0 billion in collateral; together that makes $61.8 billion — as I said, I can’t get $300 million to reconcile.) Then Maiden Lane III gave $2.5 billion right back to AIG (this is the amount by which AIG had overcollateralized). As part of the deal, the banks agreed to tear up the original CDS on the CDOs, so AIG couldn’t lose any more on the CDS (which, remember, are separate from the CDOs).
The controversy is not over paying $29.3 (or $29.6) billion for the CDOs, since that was the market price. The controversy is over whether AIG should have agreed to settle the CDS at 100 cents on the dollar (meaning that the banks get the difference between the face value of the CDOs and their current market value). Bloomberg reported a while back that prior to the government bailout, AIG had been trying to negotiate a settlement at 60-70 cents on the dollar, but that that portion of the term sheet was crossed out in the final agreement. The implication is that paying the swaps off in full was a back-door, off-the-books way of funneling cash to banks that we didn’t want to fail.
So that's the setup. The Fed steers major cash into Maiden Lane, which offers insanely good terms to A.I.G.'s creditors.
This scenario would be made considerably worse if these were "naked swaps" (i.e. not swaps designed to insure the creditor's investment - but a bet that somebody else's investment was about to tank).
Did banks have their bets paid in full by taxpayers?
Let's ask our illustrious Treasury Secretary, Tim Geithner:
"I will not answer that question."Now, that's according to an interview with Rep. Peter DeFazio - and the NY fed is disputing this - but don't you think we should have a firm answer on this question?
Somebody knows the answer for real and should be able to prove it.
Did we cover their bets?
2 comments:
Isn't is funny that some people who had money in regulated banks lost a portion because it wasn't fully insured by the FDIC, but totally unregulated insurance CDS's, not insured by any federal entity, were covered in full by the very same government. So not only did those people lose money that was in the bank, but they will also have to cover part of the AIG bill, like the rest of us.
Now that you put it that way...
ARRRRGH!!!!!
Post a Comment