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March 16, 2009

Public Spirited

September, 2008:

Two weeks ago, the nation’s most powerful regulators and bankers huddled in the Lower Manhattan fortress that is the Federal Reserve Bank of New York, desperately trying to stave off disaster.

As the group, led by Treasury Secretary Henry M. Paulson Jr., pondered the collapse of one of America’s oldest investment banks, Lehman Brothers, a more dangerous threat emerged: American International Group, the world’s largest insurer, was teetering. A.I.G. needed billions of dollars to right itself and had suddenly begged for help.

One of the Wall Street chief executives participating in the meeting was Lloyd C. Blankfein of Goldman Sachs, Mr. Paulson’s former firm. Mr. Blankfein had particular reason for concern.

Although it was not widely known, Goldman, a Wall Street stalwart that had seemed immune to its rivals’ woes, was A.I.G.’s largest trading partner, according to six people close to the insurer who requested anonymity because of confidentiality agreements...

A Goldman spokesman said in an interview that the firm was never imperiled by A.I.G.’s troubles and that Mr. Blankfein participated in the Fed discussions to safeguard the entire financial system, not his firm’s own interests.


The disclosure by AIG on Sunday is likely to trigger further criticism of why Goldman, with its many government links, and the European banks were funnelled such huge sums of U.S. taxpayer money after making bad bets on various securities, as well as strengthening the case of those who believe the whole bailout was botched...

Through three separate types of transactions, Goldman received an aggregate $12.9 billion.

"I have robbed this bank not out of self-interest, but rather to safeguard the entire financial system."

—Jonathan Schwarz

Posted at March 16, 2009 02:54 PM

Good!!! Let Europe bail them out.

Posted by: Mike Meyer at March 16, 2009 05:40 PM

2008 Cycle - Democrats - $4,341,723

Now from where do you think the bailout will come?

Posted by: AlanSmithee at March 16, 2009 06:04 PM

So AIG must be saved to prevent Goldman-Sachs collapse?

Well, why didn't they just say so?


Posted by: woody at March 16, 2009 06:21 PM

It ticks me off that this excellent Gretchen Morgenson story ran on a Saturday, back during the period when it could have made a difference politically, yet was largely ignored. Then Joe Nocera essentially re-reported it recently, to much more acclaim. Trillion-dollar horses, barn doors, etc.

Posted by: Nell at March 16, 2009 08:37 PM

Greider in The Nation, on what needs to be done to make the Federal Reserve work right.

He has very good points and is pretty much correct, but I don't think I will ever trust a bureaucracy to manage the money supply. Someone would have to come up with a very Constitution-esque (ie SIMPLE to understand) system of checks & balances. Even then... I mean look at how well we follow Ol' Raggy, and it was written for farmers.

Posted by: tim at March 16, 2009 09:02 PM

tim: Voter Initiative On The BUDGET AND TAXES. In that YOU THE TAXPAYER have total control over how much of YOUR MONEY comes out of YOUR POCKET to support YOUR GOVERNMENT, and that YOU THE TAXPAYER have a final say-so Yes or NO, a Go or No Go vote on any and all BUDGETS THOSE TAXES contribute toward.

Posted by: Mike Meyer at March 16, 2009 10:04 PM

Mike: I propose to rush with my electric blue unicorn Sapper along the most expeditious route to the local house of government and whilst clutching my monocle (the other eye covered by patch) and as a representative of the MOST SOVEREIGN CORPORATION OF THE PEOPLE demand to speak to the vile heathen treasurer. The bastard ridiculously clinging to the evil fractional reserve system like Scrooge McDuck and his blasted lucky dime. I shall then with the cool detachment of an assassin proceed to illuminate him as to the depraved depths of his charlatanry, whilst concurrently shepherding the wretched soul from the impulse of self murder that is certain to follow.

Ho Sapper! Off at once!

Posted by: tim at March 17, 2009 12:20 AM

tim: Go for it.

Posted by: Mike Meyer at March 17, 2009 12:53 AM

Off with their wallets!

Posted by: Jesus B Ochoa at March 17, 2009 09:51 AM

I will never pay back my student loans.

Posted by: Solar Hero at March 17, 2009 11:31 AM

AIG IS a JUDGE&JURY problem. BANKruptcy Court works for insurance companies, too.

Posted by: Mike Meyer at March 17, 2009 03:11 PM

Does anyone dare to wonder whether AIG's "tanking" is a long-con?

I spent a decade as an insurance lawyer in the NYC area, working for --among other clients-- AIG and its many subsidiaries. My particular expertise was and is in the realm of insurance company regulation, and insurance company corporate transactions -- acquisitions and sales of subsidiaries, mutualization/demutualization, corporate reorganization. In my travels I learned that AIG became the world's leading insurance conglomerate through the ruthless business model crafted by its father, Maurice "Hank" Greenberg. The model was to be extremely conservative on all of the financial aspects of the insurance company's operation. Specifically, to be tight-fisted on claims payment, to be over-cautious on the investments side, and to be very careful on the reinsurance of the company's accepted risks.

The news that AIG was tanked by unforeseen volatility in credit default swaps causes me to laugh louder than I have in a long time. Why? CDSs are highly volatile, unpredictable vehicles and their volatility is both their primary character, and why they were created. No competent business person dealing regularly in CDSs would be likely to fail to appreciate their volatility. Hank Greenberg wouldn't fail to appreciate it. The typical AIG employee wouldn't fail to appreciate it.

CDS risks on the insurance side would be laid off on reinsurers, as part of the AIG company at issue's reinsurance portfolio.

CDS risks on the investment side would be countered with hedges of a very conservative nature, in an amount equal to utter failure of the CDS investments.

Those are the principles on which AIG grew, and on which it operstes.

How, then, can I believe that AIG was tanked by CDS volatility?

I can't.

No informed insurance industry expert should believe it.

Unless he/she is paid nicely to believe it.

What does AIG have that the Fed Govt would want? Well, Hank Greenberg's background is CIA work (OSS, actually... CIA's forerunner). And, writing business coverage for many international businesses gives the AIG underwriting divisions a whole lot of valuable information on any business entity -- information that would be highly valuable to that business's competitors.

AIG and the CIA have been intertwined for decades.

So with all that... you tell me. How was AIG undone by CDS risks? Was that actually what happened?

Posted by: micah pyre at March 17, 2009 03:55 PM

Related thought:

In the 80s Prudential invested in a lot of high-risk high-dollar commercial real estate transactions along the Atlantic seaboard. When these investments started going sour, Pru went to the NJ insurance regulators and started a discussion on whether NJ state money could be made available for the losses Pru suffered on high-risk real estate investments. After some back-and-forth the regulators were able to convince Pru that the losses were easily anticipated, that Pru knew they were high-risk, and to say it's in the "public interest" to help Pru recover is nonsense.

AIG is regulated in NY, and the regulators there are not patsies. They might be a bit intimidated by Hank Greenberg's legend and the size of AIG, and the Mayor of NYC and the Governor of NY might be inclined to try to help AIG remain in NY for the tax base and employment it offers. That much is true. But it also was true for Pru in NJ.

Do what you will with these thoughts.

Posted by: micah pyre at March 17, 2009 04:21 PM

I will never pay back my student loans.
Posted by Solar Hero at March 17, 2009 11:31 AM

Good luck...I dunno if they still do it this way, but when i fell behind in my repayments (this was many years ago, 20-30, at least), they attached my tax refunds for a couple of years, until I got back in the good graces.

Posted by: woody at March 17, 2009 05:16 PM