Facebook
Twitter
I plan to be unavailable for a few hours, starting around 10 a.m. this morning. I want to hear the members of the New York Fed try and defend their actions regarding the AIG (NYSE: AIG) bailouts in front of Congress.
The New York Tines published some of the prepared testimony of the principal players. I try to keep a level head, but I’m reaching for my pitchfork and torch right now.
*****Recall that the New York Fed orchestrated what ultimately became an $85 billion bailout. A good portion of that cash was paid directly to other companies with which AIG had entered into the now famous credit default swaps. These were essentially insurance contracts on mortgage backed securities held by banks and underwritten by AIG.
A full $25 billion in AIG bailout money went to pay off Goldman Sachs (NYSE: GS). Here’s a section from the New York Times (Mr. Baxter s the general counsel for the NY Fed):
Mr. Baxter explained that the New York Fed felt compelled to pay out A.I.G.’s counterparties in full to unwind tens of billions of dollars in derivative contracts because "there was little time, and substantial execution risk and attendant harm of not getting the deal done by the deadline of Nov. 10." That was the date when A.I.G. was scheduled to report its earnings and could face downgrades from credit ratings agencies. A downgrade would have led to more collateral calls and even greater liquidity problems for A.I.G., Mr. Baxter said.
He added, "Even in a best-case scenario, we did not expect that the counterparties would offer anything more than a modest discount to par." Under the circumstances, he said, "the Federal Reserve had little or no bargaining power."
That statement was reinforced by Mr. Habayeb, the former A.I.G. chief financial officer, who said in his prepared remarks that prior to the bailout, "The counterparties were unwilling to accept less than par value."
Mr. Baxter said it would have been "an abuse of our authority" for the Fed to have threatened A.I.G.’s counterparties with its regulatory power to get discounts.
I almost don’t know where to begin. No bargaining power? How about telling AIG’s counterparties that the Fed didn’t have to pay bailout money in the first place?
And since when is paying off a failed company’s debt not an abuse of Fed authority, but negotiating with the recipients (like Goldman) about the amounts they’ll get clandestinely funneled into their coffers is?
There’s no doubt that Congress is going to try to score some big hits on these guys. I hope we get to see them squirm.
*****For the record, I have no problem with derivatives like credit default swaps. But they should be regulated. No company should be able take on more liability than they can cover. But that’s exactly what AIG did.
*****The Energy Information Agency releases the latest oil and gas inventory numbers today. Analysts are expecting a 2 million barrel build for oil and 1.7 million barrel build for gasoline. However, in a report released yesterday afternoon, the American Petroleum Institute said that oil supplies actually fell by 2 million barrels and gasoline supplies rose only 916,000 barrels.
Of course, that would be good news. Investors are desperate for signs that more than just corporate profitability is improving. And a draw on oil supplies would help. Oil prices are one of the best proxies for economic growth.
*****I just recommended a $3 U.S. based company that makes amorphous alloy core transformers for the Chinese market. The Chinese government has mandated that old silicon steel core transformers be replaced by more efficient transformers, like the amorphous alloy core product that this company produces.