We've only just begun

April 2, 2009 10:54 AM

No, to us what the fraud Bernard Madoff is to individual investors, AIG is to the global financial community. [via]

"In both cases, AIG was engaged in transactions that were meant not to reduce risk, but to hide the true nature of the risk in these companies from investors, regulators and the consumers who rely on these institutions for services. Keep in mind that while the SEC did act to address these issues, the parties involved received light punishments when you consider that these are all felonies that arguably would call for criminal prosecution for fraud, securities fraud, conspiracy and racketeering, among other things. Indeed, this is one of those rare cases where we believe AIG itself, as a corporate person, should be subject to criminal prosecution and liquidation."
...
"As with the phony reinsurance contracts that AIG and other insurers wrote for decades, when AIG wrote hundreds of billions of dollars in CDS contracts, neither AIG nor the counterparties believed that the CDS would ever be paid. Indeed, one source with personal knowledge of the matter suggests that there may be emails and actual side letters between AIG and its counterparties that could prove conclusively that AIG never intended to pay out on any of its CDS contracts." "

posted by ryoshu (28 comments total)

This is the big one; it's worth a read, everyone.
posted by fatllama at 10:55 AM on April 2

AIG's tax shelter business is also being investigated
posted by caddis at 11:02 AM on April 2

And mark to market was just reinstated. The stock markets like it, but it allows banks to sit on their bad assets. That may have some advantages to unwind slowly, but it does prolong the pain, which is inevitable.

AIG really should be broken up by the government and management fired. I hope Geithner succeeds in his attempt to gain the authority to do just that.
posted by krinklyfig at 11:12 AM on April 2

No, to us what the fraud Bernard Madoff is to individual investors, AIG is to the global financial community.

This statement is too friendly to Madoff. His fund ensnared much more than just "individual investors"--his claimed fund balance of $64B would have easily made him to biggest hedge fund manager in the world, and he had plenty of institutional investors in the mix. But more importantly, the Madoff fraud is ushering in massive changes to the world of hedge funds, and especially funds-of-funds.

And while AIG may have acted in bad faith in its trading, at least they were making trades with real counterparties with real documentation. Madoff seems to have just made shit up in the most literal sense.
posted by mullacc at 11:19 AM on April 2 [1 favorite]

Wasn't the former CEO of AIG whining today that none of it was his fault, he left AIG in great shape, it is all the government's fault?
posted by QIbHom at 11:21 AM on April 2

A scorpion and a frog meet on the bank of a stream and the
scorpion asks the frog to carry him across on its back. The
frog asks, "How do I know you won't sting me?" The scorpion
says, "Because if I do, I will die too."

The frog is satisfied, and they set out, but in midstream,
the scorpion stings the frog. The frog feels the onset of
paralysis and starts to sink, knowing they both will drown,
but has just enough time to gasp "Why?"

Replies the scorpion: "Its my nature..."
posted by blue_beetle at 11:22 AM on April 2 [2 favorites]

"funds-of-funds": The only investment type good enough for the King of Kings.
posted by symbioid at 11:30 AM on April 2

Indeed, one source with personal knowledge of the matter suggests that there may be emails and actual side letters between AIG and its counterparties that could prove conclusively that AIG never intended to pay out on any of its CDS contracts

I'm a little frustrated with this. I read it earlier and I was struck by the "may" qualification in a lot of the reporting. I think this guy jumped the gun. Whether or not there are side letters is apparently something his sources don't know. I always get concerned becuase if such letters exist, the author may be tipping the wrong people off as to the focus of the investigation. I'd like to see stronger sourcing on this, as frankly, the post seems like speculation without a source knowing whether or not the side letters existed. The existence of the side letters basically voiding the intent of the face of the contracts is the key fact here and this guy doesn't have information to prove it yet.

If this is true, it would sure make things a lot easier because we could stop the European banks from calling in those notes. We wouldn't have to pay them and we wouldn't have to worry about AIG going bankrupt because they wouldn't have these liabilities on their balance sheets. Obviously this would fuck up the European banks with their regulators, but that's too bad. It would also put a huge hole in Merkel's insistence that the US was the only party really responsible for this. These contracts were international in scope.

On a side note, did anyone see how Obama making a deal with the Russians basically outflanked Merkel? That's playing the game well, folks.
posted by Ironmouth at 11:32 AM on April 2 [2 favorites]

The whole thing stinks.

The people who bought the CDSs knew that one day the market would turn and there would be no way to pay up on them, therefor they knew only one of two things would happen: the US government would nationalize the problem or the whole world economy would collapse.
posted by wcfields at 11:39 AM on April 2 [1 favorite]

The people who bought the CDSs knew that one day the market would turn and there would be no way to pay up on them, therefor they knew only one of two things would happen: the US government would nationalize the problem or the whole world economy would collapse.

I must disagree. These fools acted like everyone else in a bubble. They believed the hype. The regulations were weak and didn't control these contracts.
posted by Ironmouth at 11:53 AM on April 2

i don't understand how half of AIG isn't in prison, tbh.
posted by empath at 11:53 AM on April 2

The solution is obviously more bailout money.
posted by Vindaloo at 12:16 PM on April 2

This is a fairly poorly sourced article. The central claim is that the CDS deals were intentionally fraudulent transactions exempted with side letters, but there is absolutely nothing substantive to support this assertion. The closest he comes is "our sources" "suggest" that there "may have included side letters."

The side letter scam in insurance had a more obvious motive. In order to see the CDS deals in the same light, the banks would have to have known that the mortgage securities were likely to be worthless and be willing to pay a fee to AIG to provide balance sheet cover. The gaps in this analysis are large, since the worthless paper would do very little to disguise the loss once the mortgage backed securities market tanked and a savvy player who foresaw the disaster could have profited from that knowledge instead of applying a very thin disguise as suggested in this article. The whole point of the side letter scam is to conceal losses and restructure them over time. I'm not convinced that the innumerable customers of AIG already knew that these securities were worthless. They didn't seem worthless at the time they paid AIG. They should have just unloaded their mortgage paper like a house on fire if they could predict the future decline in their value -- not concoct an elaborate scheme to conceal the loss before the loss was evident to anyone else.

Much more likely is that AIG saw these transactions as free revenue and simply blindly ignored the risk downside or concluded correctly that someone else would foot the bill. Frankly, if this article was correct, it would be great news because the US share of the bank problem is much less than our share of the CDS debacle.
posted by Lame_username at 12:17 PM on April 2

Not to put too fine a point to it, but that FPP has one too many to's in it to suit me.
posted by Kirth Gerson at 12:18 PM on April 2

Just started reading it, but right off the bat there's a quote from a publication called Fraud Magazine.

I imagine they're not exactly the same sort of thing as, say, Cat Fancy.
posted by JHarris at 12:21 PM on April 2 [1 favorite]

Just started reading it, but right off the bat there's a quote from a publication called Fraud Magazine.

I imagine they're not exactly the same sort of thing as, say, Cat Fancy.

Yeah, it's pretty much the same thing:

Although the fight against fraud has gained momentum over the last decade, finding informative references on the topic is still difficult. That's why since 1987, the Association of Certified Fraud Examiners has published Fraud Magazine, a bimonthly magazine devoted to timely, insightful articles on white-collar crime and fraud examination techniques.

LOLfrauds?
posted by ryoshu at 12:32 PM on April 2

Decent enough article about one possible way there were crimes committed at AIG. But I'll agree with those saying it's extremely light on specifics and sources. "There may have been side letters" is really not much to go on, but it is good for learning about this type of fraud.

There are, in fact, investigations into AIG from both the Feds and New York AG's office. Both are in their early stages, but any investigator, I'm sure, would be thrilled to find a "side letter" of the sort described in the article. Particularly Cuomo, who's really been stoking the torches and pitchforks mentality of late.

Keep in mind that you can have a "criminal enterprise" within an otherwise legitimate organization. If people in the CDS division really were comitting intentional fraud, and meet a few other requirements (e.g. a hierarchy and 3 overt acts, which seem pretty easy), we could be talking about federal RICO charges or the New York State equivalent. serious charges, particularly the NYS ones which would send them to State prison, not Club Fed.

I put my money on greed, stupidity, and poor oversight, as I usually do, but a man can hope.

and because I just have to nitpick, from the article: "First, they are a criminal act, a fraud that usually carries the full weight of an "A" felony in many jurisdictions."

The only "A" felonies in New York, at least, are murders. Most white collar crimes catch a "B," which can still mean dozens of years in prison.
posted by ScotchRox at 1:03 PM on April 2

Robert Reich had a good idea on how to solve the problem (note the date posted)

In effect, the plan redirects the bailout money to these honest executives and traders who fess up and take responsibility. It's a win-win-win. They get to clear their consciences, which is a first step to clearing up their balance sheets. At the same time, they get big tax breaks which will cause them to spend more, and thereby stimulate the economy. And the plan won't cost taxpayers a dime more than we're already spending on the bailout, since the bailout money will go to these honest executives and traders.

And mark to market was just reinstated. The stock markets like it, but it allows banks to sit on their bad assets. That may have some advantages to unwind slowly, but it does prolong the pain, which is inevitable.

I thought it was the other way around, Mark to Market meant pricing assets based on what they would sell for today, where as mark to model is pricing them based on what wish estimate they'd be worth if held to maturity.

AIG really should be broken up by the government and management fired. I hope Geithner succeeds in his attempt to gain the authority to do just that.

Unlike the other TARP recipients, AIG is owned by the government (79%) so there's no reason why we couldn't do that now, even if we were acting simply as majority shareholders. The extra authority is to come in and break up banks that have less ownership by the federal government like Citibank, Goldman, etc.
posted by delmoi at 1:56 PM on April 2

delmoi: Isn't the majority of our ownership stake in AIG in the form of non-voting preferred shares? If so, then while we may own 80% of AIG, we may not own more than 50% of the voting shares, meaning that in effect, we don't have any actual control over how AIG does business.
posted by saulgoodman at 2:05 PM on April 2

Besides, under corporate law, it's still the executive management that controls the day-to-day operations of a company, not the majority shareholders, as I understand it. At most, the shareholders get to vote on who sits on the board, whether to issue dividends, etc. Major operational decisions are still left to the executives in charge, regardless of who owns most of the stock.
posted by saulgoodman at 2:08 PM on April 2

Besides, under corporate law, it's still the executive management that controls the day-to-day operations of a company, not the majority shareholders, as I understand it. At most, the shareholders get to vote on who sits on the board, whether to issue dividends, etc. Major operational decisions are still left to the executives in charge, regardless of who owns most of the stock.

That is true. At a board meeting they could vote them out. However, there are other methods they could use to move the current leadership out.
posted by Ironmouth at 3:46 PM on April 2

On a side note, did anyone see how Obama making a deal with the Russians basically outflanked Merkel? That's playing the game well, folks.

Not to derail, but what do you mean? I read some of the descriptions of their meeting, but nothing related to Merkel.
posted by Pantengliopoli at 3:54 PM on April 2

Not to derail, but what do you mean? I read some of the descriptions of their meeting, but nothing related to Merkel.

She's been the center of European resistance to Obama's policy. Making noise for weeks. Meanwhile, Russia's been thowing its weight around Central Europe, and cut off Europe's gas supply in a dispute with Ukraine. Germany isn't happy with Russia. Obama played her and agreed to a deal with the Russians. He's gonna bargain away a missile defense that doesn't work anyway and get deep cuts in nuclear weapons.
posted by Ironmouth at 5:50 PM on April 2

Wasn't the former CEO of AIG whining today that none of it was his fault, he left AIG in great shape, it is all the government's fault?

I'd love to hear Mr. Greenburg's argument as to how AIG would have been JUST FINE if the government had totally left it alone. Given the unoriginality trying to blame it all on the government, I'm sure it wouldn't be as creative as the accounting which caused the 2005 scandal for which he stepped down from the company and for which he's still facing civil charges in New York, but you never know, maybe I'd learn something.

Or, maybe he'd finally say enough to get himself sent to prison or trigger a good ol' fashioned lynching.
posted by weston at 5:57 PM on April 2

Former World Bank economist and Nobel Prize winner Joseph Stiglitz talks to SPIEGEL about the danger of a new Great Depression, a way to reform the American bailout system and struggling nations' urgent need for help.
posted by Rumple at 10:47 PM on April 2

Related, Obama offers some tough advice to the bankers we all love so much (from Politico):

“These are complicated companies,” one CEO said. Offered another: “We’re competing for talent on an international market.”

But President Barack Obama wasn’t in a mood to hear them out. He stopped the conversation and offered a blunt reminder of the public’s reaction to such explanations. “Be careful how you make those statements, gentlemen. The public isn’t buying that.”

“My administration,” the president added, “is the only thing between you and the pitchforks.”
posted by saulgoodman at 12:25 PM on April 3

It's a secret message to us from Barack! Break out the torches!
posted by Kirth Gerson at 1:24 PM on April 3

Will Hope for Work
posted by Rumple at 7:04 PM on April 3