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Who Are The AIG Counterparties? Here Are Some...
Over at TPM, Josh has been doggedly highlighting the refusal of both AIG and the federal government to reveal the identity of AIG's counter-parties in its disastrous credit default swaps. And several lawmakers have in recent days pressed Tim Geithner and Ben Bernanke on the issue.
The question matters, of course, because AIG needed to make its most recent multi-billion dollar trip back to the public trough (that's over $160 billion in all for AIG, if you're counting) in order to pay back its creditors on those disastrous swaps -- and thereby, we're told, prevent a wider financial collapse. So identifying who those swaps were made with will tell us, in effect, who this latest portion of our money is ultimately going to.
It's worth noting, then, that, thanks to some great reporting from the Wall Street Journal and the New York Times, we do in fact have some preliminary information about who AIG's partners were on the swaps.
This Journal story from October 2008 names the following nine American and foreign banks as having bought swaps from AIG: Goldman Sachs; Merrill Lynch; UBS of Switzerland; Credit Agricole SA of France; Deutsche Bank of Germany; Barclays, and Royal Bank of Scotland Group, of Britain; and CIBC, and Bank of Montreal, of Canada.
Merrill is described by the Journal as a "big client" of the AIG unit that did the swaps.
By the end of 2007, with the value of the underlying assets plummeting, many of these banks had asked for collateral on the swaps, according to the Journal.
For instance, the paper reports that Goldman held swaps that insured about $20 billion of securities. In August 2007, Goldman demanded $1.5 billion in collateral from AIG. It ultimately got $450 million, then another $1.5 billion last October. At that point, says the Journal:
Goldman hedged its exposure by making a bearish bet on AIG, buying credit-default swaps on AIG's own debt.
That picture of Goldman's exposure jibes with a New York Times story from September 2008 about the credit default swaps, which reported that Goldman was AIG's "largest trading partner," and likewise gave a figure of $20 billion for Goldman's exposure to AIG.
The Times also implicates another domestic firm: JP Morgan (now JP Morgan Chase). In fact, it recounts that it was derivatives traders from that company that a decade ago, first brought to AIG's London-based financial products unit, run by Joseph Cassano, the ill-fated idea of doing credit default swaps.
It reports:
Ten years ago, a "watershed" moment changed the profile of the derivatives that Mr. Cassano traded, according to a transcript of comments he made at an industry event last year. Derivatives specialists from J. P. Morgan, a leading bank that had many dealings with Mr. Cassano's unit, came calling with a novel idea.Morgan proposed the following: A.I.G. should try writing insurance on packages of debt known as "collateralized debt obligations." C.D.O.'s. were pools of loans sliced into tranches and sold to investors based on the credit quality of the underlying securities.
It's not 100 percent clear, then, that JP Morgan Chase is a current counter-party of AIG on the swaps -- but it certainly wouldn't be surprising.
That same Times story offers another hint, albeit a vague one, about the identity of the counter-parties.
While clients and counterparties remain closely guarded secrets in the derivatives trade, Mr. Cassano talked publicly about how proud he was of his customer list.At the 2007 conference he noted that his company worked with a "global swath" of top-notch entities that included "banks and investment banks, pension funds, endowments, foundations, insurance companies, hedge funds, money managers, high-net-worth individuals, municipalities and sovereigns and supranationals."
What to make of all this? Well, here's one thing. As Josh has noted, the usual argument given against disclosing the identities of the counter-parties is that it would reduce public confidence in the banks that were named, with potentially disastrous consequences for their positions. But there's little evidence we're aware of that any of the banks named above suffered such an effect when, for instance, the Journal and the Times published their stories -- whose accuracy have not been questioned.
In fact, Geithner and Bernanke haven't deigned to explain their position in even this much detail -- so it's difficult to know whether there are factors we're not considering. But in the absence of a fuller explanation, we'll keep pressing...
Josh
Zachary
Well that explains it. Goldman Sachs again. Interesting how the goldman sachs people in government pushed for this. Maybe its time for goldman to go the way of the dinosaur. They were knee deep in the problems leading up to the last great depression. Bad karma.
March 5, 2009 5:09 PM | Reply | Permalink
The reason we can't know who the counter-parties are is that this answer will naturally lead to the next question of why the taxpayers need to make good on these bad speculative bets that AIG sold. Especially if the counterparties are foreign banks, sovereign funds, high net worth individuals, etc. Which my guess is that they are.
It's easier if the public isn't given any details - just keep saying how its too complicated and that this is the best way to get onto economic recovery. The reality is that it isn't really that complicated at all.
Would they at least answer whether the CDS counter-parties AIG is paying are actual bond owners who bought CDS "insurance" on their bonds - or just speculators who were betting that the bonds would fail? In the latter case - I don't understand why those CDS can't just be declared null (AIG returns the premium paid by the speculator) and instantly de-leverages itself from the majority of its CDS obligations.
The speculator loses nothing but his big fat payday and AIG only loses the premiums it received for the CDS. They surely have enough capital to cover returning the premiums.
March 5, 2009 7:03 PM | Reply | Permalink
You're close, but I think a specific element shared by many of counter parties provides the real reason Bernanke and Geithner dare not speak their names.
UBS of Switzerland
Credit Agricole SA of France
Deutsche Bank of Germany
Barclays, and Royal Bank of Scotland Group, of Britain
CIBC, of Canada
Bank of Montreal, of Canada
The US government has enough problems without reminding the public that we've just spent 100 billion or more to prop up Foreign Banks.
Mind you, this situation isn't all bad. The US needs some serious leverage to make sure all the Industrialized nations are on board with the upcoming global regulatory framework of the shadow financial markets.
Everyone knows we need drastic regulations on the shadow financial system. One would think such regulations would have passed in a knee jerk many months ago. There's a reason the shadow financial system is still almost totally unregulated. If the US were to go it alone, it could (probably would) result in a banking (and corporate) exodus from the US. If we are going to drastically regulate hedge funds, derivatives, tax havens and the rest, we need all the world's large industrialized nations to buy into the restrictions.
AIG gives us such leverage because our government could force the insurer into technical bankruptcy at a moment's notice. By law, bankruptcy would immediately and (almost) entirely invalidate all of the counter parties contracts and claims. The counter parties would be lucky to get pennies on the dollar, if that. The US government could even decide who to pay and who not to pay.
With the largest banks in most of the industrialized nations owed huge sums by AIG, Fanny, Freddy, and the rest, it gives our government a massive leverage in achieving worldwide financial regulations. It may even give us leverage in completely unrelated and far flung ambitions.
March 5, 2009 9:22 PM | Reply | Permalink
yes! re any speculators (call them "gamblers" like John Paulson), cancel the contracts outright and refund part of the premium.
The time has long passed since the Fed's assessment re Bear Stearns of panic and Treasury's assessment re AIG of armagedon can still apply. It's long past time for losses to be taken.
March 5, 2009 11:13 PM | Reply | Permalink
Why do I keep getting a vision-thing of a möbius strip every time they talk about giving money to AIG and who the counterparties are?
March 5, 2009 7:23 PM | Reply | Permalink
And those swaps were backed by what? The full faith and credit of Citigroup?
March 5, 2009 8:18 PM | Reply | Permalink
Yes, and who wrote those swaps? Did any pay off? If so, when?
The article is poorly written. It's talking about 2007, then it mentions "last October" which suggests that GS got swaps on AIG **after** Sept. 2008.
March 5, 2009 11:16 PM | Reply | Permalink
the usual argument given against disclosing the identities of the counter-parties is that it would reduce public confidence in the banks that were named, with potentially disastrous consequences for their positions.
Not only no evidence but it doesn't make sense on its face. We all know that public disclosure of the counterparties will make it politically more difficult for the taxpayer to support honoring AIG's contracts. My big guess is that the counterparties are European banks and the bonds being insured are for Eastern Europe and some former Soviet republics, as I argued in the two TPMDC threads this week on the question.
If that scenario is the correct then a good case could be made for the US govt in honoring those contracts, but the public would still not go along. Hence the need to keep the public in the dark.
March 5, 2009 8:59 PM | Reply | Permalink
Oh what tangled web we weave when we practice to deceive. Like the names mentioned in this piece should come as any surprise? The Fed as well as our government are scared shitless should AIG fail because while all the pigs were at the trough, they were selling future generations into financial slavery.
A very well connected Wall Street source called after the market closed and told me the following:
*Merrill Lynch put out a sell recommendation on JP Morgan Chase this morning with no explanation.
*Word is beginning to circulate that JP Morgan has become a systemic risk problem. That same word is they don’t know how to fix the problem. On that score heralded CEO James Dimon, who was aware of the gold price suppression while CEO at another bank (not Citi), said the other day that the Bear Stearns takeover had become more difficult than he thought it would be.
*The reason is something brought your way a couple of weeks ago here: Their hundreds of trillions derivatives book. It has begun to blow up according to my source.
*The problem includes gold, silver, the interest rates and currencies, according to my source.
*The totality of the problem DWARFS the Madoff $50 billion nightmare … supposedly makes it look like a walk in the park.
*Deutsche Bank, a defendant in Reg Howe’s lawsuit against The Gold Cartel (as was JP Morgan and Chase Bank) is also having trouble with their derivatives book.
JP Morgan closed down $2.34 to $16.80.
Morgan is the Fed's bank. The Fed is already stretched to the limit. This is a daisy chain mess and it's only just beginning.
The lack of trust in the financial world over counterparty risk is "accelerating." This is forcing "remaining contracts" of all kinds, especially in the Over The Counter markets, to be "settled."
What is stressed to me is that it is a "currency" problem … so I did my best to nail that down. It has to do with the dollar, US interest rates, AND gold and silver, which represent a SUBSTANTIAL part of the JP Morgan derivatives book … and it is TRILLIONS and TRILLIONS … the magnitude of the problem is that large.
JP Morgan, the Fed’s bank supposedly can’t handle it, so the US Government is stepping in … and the only way the Fed can handle the GROWING problem, is to PRINT money. BUT, they can’t PRINT the money fast enough.
The Madoff mess, and $50 billion catastrophic loss, could not come at a worse time for the US Government and JP Morgan. Our government knows they CANNOT let Morgan fail and they are going all out to prevent that from happening. However, the Madoff scandal, and loss of capital, has those fearful of counterparty risk problems accelerating their exit from dealings with Morgan and other US institutions, in which they have dollar based, counterparty contracts. It is so bad that word to me is that the US cannot "waste time" on the relatively insignificant Madoff "disintermediation" nightmare, the JP Morgan problem is so MONSTROUS … because disintermediation is spreading like a horrible, malignant cancer and the numbers are mounting daily.
So, what are we left with? Bernanke’s helicopter drill is NOW in effect. The problem is Bernanke needs B-47’s. What will be critical for JP Morgan to stay afloat is for the Fed to be able to print money fast enough to meet the demand of those closing out contracts with Morgan.
The bottom line: HYPERINFLATION is upon us, or the eve of hyperinflation is. This is why gold and silver are on the rise again and the dollar is falling. Couple this fact with the Chinese that are diversifying out of T-bills and into the metals.
As far as I know, no one else out there is delving into the JP Morgan mess. The insiders are trying to keep this horror show as quiet as possible. Now you win the lollipop if you can name the insurance company that underwrote the insurance on those derivitives. YES IT WAS AIG, the insurnace company that is too big to fail.
***
March 5, 2009 11:01 PM | Reply | Permalink
"Goldman hedged its exposure by making a bearish bet on AIG, buying credit-default swaps on AIG's own debt."
Maybe someone can correct me on this, but does this mean that Goldman is profiting twice? Once because the government is paying off the AIG originated credit-default swaps, and then a second time because AIG's debt has dropped in value, thus allowing them to collect on their credit-default swaps on AIG's debt? Does the government bailout allow them to profit off both sides of this hedge?
March 5, 2009 11:13 PM | Reply | Permalink
Excellent points.
March 5, 2009 11:23 PM | Reply | Permalink
yep da71 I think you got it right. But the problem is bigger than that.
March 5, 2009 11:34 PM | Reply | Permalink
I agree, I just thought it was an interesting side point.
March 6, 2009 12:16 AM | Reply | Permalink
Gee, these big lenders coudl make money by betting things failed, and then things failed.
Who saw that coming?!?!?
March 6, 2009 2:58 AM | Reply | Permalink
Let's hope we're not bailing out UBS as an AIG counterparty while they're refusing to reveal the names of the 50,000 American tax dodgers with offshore accounts at UBS.
March 6, 2009 9:03 AM | Reply | Permalink
Some of the current conversation in comments is not totally news. Bloomberg reported in November on the market in credit recovery swaps, which traded on the debt of about 70 companies at that time.
Get this: Because these swaps are known as 'recovery locks', the buyers of the credit recovery swaps are the sellers of the credit default swaps.
Citi, Goldman Sachs and JP Morgan Chase were among the banks offering the credit recovery swaps. GM, Tribune Co. and MGM Mirage were three of the approx. 70 companies that the vulture banks were circling.
AIG is trading at .36 today. Their 52 week high was $49.50, while in March 2004 they were over $70.00.
AIG is probably (or was) an entire financial market in recovery swaps itself.
March 6, 2009 12:15 PM | Reply | Permalink
At some point it will be important to track down all these idiots and possible criminals and expose them. However, now is not the time. We really require some stability in this economic environment.
March 6, 2009 12:26 PM | Reply | Permalink
Goldman Sachs....now why would Secretary Henry Paulson give up his millions (plus) position as CEO of Goldman Sachs to become the lowly paid government servant of G.W. Bush...? For the same (insidiously greedy) reason Cheney gave up his position at Halliburton, to "serve the American people"? Yeah right, LOL!. This whole thing was a "set up" from the get-go..(steal every penny of the peoples money, by any means, as fast as possible) Rush Limbaugh is right about one thing.."Roosevelt is DEAD..his policies live on, but "we" are doing something about that!" (Accomplishing the destruction of the "new Deal" by completely dismantling it, bringing on a second depression, deregulate, capitulate and protect the Robber Barons and then turn them loose on the taxpayers, by disguising them as "free (from government oversight), deregulated markets") Rush just signed a contract worth 400 million, Hannity 200 million, of course they want to protect it and not pay taxes on it..its the old "fuck you guys..I got mine, now, get out of my face" crowd...
March 6, 2009 1:07 PM | Reply | Permalink
OK, so maybe I'm just paranoid but for several months now I have kept wondering why it is that, up to this point in time, only Lehman Bros. has been allowed to go under. Did they not make enough donations to the political parties or what?
I just can't figure why our government is putting so much effort, money and spin in to keeping the entire rest of this house of cards afloat?
I'm hoping one of you regular posters can explain this to this simple workingstiff
March 6, 2009 1:29 PM | Reply | Permalink
"But there's little evidence we're aware of that any of the banks named above suffered such an effect when, for instance, the Journal and the Times published their stories -- whose accuracy have not been questioned."
The accuracy of those articles -- especially the NYT piece -- has absolutely been questioned. Practically no one believes the numbers in the NYT article on AIG, because the NYT clearly doesn't understand the difference between having $20 billion in ABS insured by AIG and having $20 billion of exposure to AIG.
It's never been a secret that Goldman had $20 billion of CDS protection on multisector ABS from AIG; but that tells you nothing about Goldman's exposure to AIG, because it doesn't take into account Goldman's hedges. It's inconceivable that Goldman left $20 billion of exposure to one counterparty completely unhedged -- it's just not within the realm of possibility. Major CDS dealers generally run matched books -- each position is hedged so that the entire CDS book nets out to zero, or something close to zero. So the question of Goldman's exposure to AIG comes down to the quality of Goldman's hedges, which no one outside of Goldman's credit trading desk knows for sure.
The NYT clearly doesn't understand this, and so it naively reported that Goldman had $20 billion of exposure to AIG, which everyone just laughed at. So it's not the least bit surprising that the NYT's article had no effect on Goldman (or any other AIG counterparty), and it's certainly not evidence that the Fed and Treasury's argument about preserving confidence in affected banks is somehow wrong. Their argument may indeed be wrong, but not because a laughably inaccurate NYT article failed to move markets.
March 7, 2009 1:25 AM | Reply | Permalink