With AIG “Bailout,” Did the US become a Planned Economy to Fight Off Takeover by One?
In two posts concluding, ” the government might find a victory [in AIG’s lawsuit] to be more costly than it anticipated,” Yves Smith digs out key details from AIG’s claims that in September 2008, the US illegally took it over.
I think Smith is intrigued by the additional evidence provided by the AIG complaint that the government took several actions that ensured it could use AIG as a bailout vehicle, including (in her second post), by not asking whether the counterparties would be willing to take a haircut.
Another stunning new allegation in the “Corrected Proposed Findings of Fact” document is that, in stark contrast with previous claims by the Fed, that only UBS was willing to take a haircut, it turns out the New York Fed only bothered talking to eight of the 16 counterparties (and then as we already know from the SIGTARP report on this issue, using a script that was delivered by junior staffers, as opposed to having Geithner or Paulson call and force them to take a haircut). Moreover, BlackRock, which was advising the Fed, believed that Bank of America and Goldman would be receptive to discounts.
But I’m particularly interested in what Treasury forestalled with its bailout: bailouts from sovereign wealth funds from Singapore, China, and some unnamed Middle Eastern funders. From the first post:
[The AIG complaint] argues that AIG was forced to take a bailout it didn’t need, that all that was required was a bridge loan until it could obtain private financing. That may sound like a howler. AIG was teetering on the verge of failure and needed to get a $14 billion bridge loan on September 16 (a Tuesday, the day after the Lehman bankruptcy) that in a few days rose to $37 billion simply to carry it through the weekend when the terms of the credit facility were finalized.
7.6 Defendant directly discouraged sovereign wealth funds from providing liquidity to AIG.
(a) Sovereign wealth funds, including the Government of Singapore Investment Corporation (GIC) and the Chinese Investment Corporation (CIC) expressed interest in investing in AIG (Studzinski Dep. 39:4-40:18, 133:11-19).
(b) Defendant discouraged the CIC and representatives of the Chinese Government from assisting AIG. At 12:25 p.m. on September 16, 2008, Taiya Smith, Paulson’s deputy chief of staff and executive secretary, informed Paulson’s chief of staff and Treasury Under Secretary for International Affairs David McCormick that the CIC was “prepared to make a big investment in AIG, but would need Hank to call [Chinese Vice Premier] Wang Qishan” (PTX 89 at 1; see also PTX 423 at 15-18). The Chinese “were actually willing to put up a little bit more than the total amount of money required for AIG” (PTX 423 at 16).
(c) On September 16, 2008, McCormick spoke to Paulson about the Chinese interest in investing AIG (PTX 423 at 16-17). McCormick then told Smith that Treasury “did not want the Chinese coming in at this point in time on AIG” (PTX 423 at 17).
(d) Later that day, Smith met with Chinese Government officials in California during Joint Commission on Commerce and Trade in Yorba Linda, California (PTX 423 at 16). During that meeting, “all [the Chinese officials] wanted to talk about was AIG” (PTX 423 at 17). Smith spent one or two hours explaining what was happening with AIG (PTX 423 at 18). She conveyed the message that Treasury did not want the Chinese to invest in AIG (PTX 423 at 17).
(e) On September 17, 2008, United States Senator Hillary Clinton called Paulson “on behalf of Mickey Kantor, who had served as Commerce secretary in the Clinton administration and now represented a group of Middle Eastern investors. These investors, Hillary said, wanted to buy AIG. ‘Maybe the government doesn’t have to do anything,’ she said” (PTX 706 at 279). Paulson told Senator Clinton, “this was impossible unless the investors had a big balance sheet and the wherewithal to guarantee all of AIG’s liabilities” (PTX 706 at 279). (numbered text page 17, PDF page 21)
The fact that the Singapore and Chinese sovereign wealth funds both were willing to invest in AIG, and that a separate group of Middle Eastern investors was also pressing to buy in, strongly undercuts the official story that the only way out for AIG was into the Fed’s arms. Yes, we don’t know exactly how much they were willing to put in and whether that would have been enough to make up the $85 billion size of the initial credit line.
But the Chinese statement was a clear general indication that “we’re willing and able to go big”.
In this telling, the US government bailed out AIG to prevent China (and Singapore and some of our “allies” in the Middle East) from bailing it out.
As Smith points out, there may well be good national security
Now one can argue there were reasons to turn down these offers. Having the Chinese, or consortium dominated by foreigners, could prove to be ugly. The US, after all, had just put Fannie and Freddie in conservatorship in large measure to reassure the Chinese and Japanese, who were large investors in Freddie and Fannie guaranteed paper, that they would not suffer losses. What if the Chinese government rescued AIG and the black hole turned out to be bigger than anyone though it was?
There is also the not-trivial issue that AIG is widely believed to provide legitimate-looking jobs to CIA assets all over the world. Would letting foreigners obtain control put that sort of information at risk?
While Smith believes these issues could have been addressed by having a consortium of foreigners take over AIG, I suspect Treasury would still regard it as having China take over our critical infrastructure. While I don’t get the finance bit like Smith does, it seems like having the monopoly insurer of excessive “capitalist” gambling in Chinese hands would have been the equivalent of letting them hold one of Wall Streets’ nuts for safe keeping.
Plus, I’ve long argued that the government had to bail out GM (though not Chrysler) for similar reasons. Had GM gone bankrupt, China would have bought up key parts of it, obtaining the key part of American’s manufacturing driver that China hasn’t already stolen by spying on DOD.
In both bailouts, I’d argue, the US had to intervene to prevent our biggest rival from basically taking large bites out of the critical heart to our economy, all operating under sound capitalist principles.
To stave that off, it appears — particularly if AIG’s claims have any basis in fact, which they appear to — the US embraced a command economy.
None of that’s a surprise. We’ve always forsworn capitalism when national interests dictated.
But given the ideology involved — given that this involved holding off a purported command economy threatening to gut our country using the tools of capitalism — it does seem worth noting.
This is one of the reasons I’m so intrigued by the apparent TREASUREMAPPING of JP Morgan Chase. Someone — it may be the Russians, but this kind of thing is easy to project — is treating JPMC as the ripe critical underbelly that it obviously is. The AIG bailout shows just how vulnerable we really are to such acts.
Well, it’s not like there weren’t ample warnings that this sort of thing would happen. Going all the way back to the 80s, when destruction of the US’ manufacturing base in favor of the “Service Economy” (with the collateral benefit of bludgeoning the Democrats’ union base) was au courant, people warned time and again that this was no way to run a country and that bad things – like this – would happen down the road. Of course, the “serious people”, more concerned with fulfilling their quarterly bonus criteria than running sound businesses, dismissed the critics as shrill, unknowledgeable ninnies who obviously shouldn’t be listened to because they weren’t in the positions of power.
A fortiori, the various free trade agreements over the years.
It is, of course, deeply ironic that the Rethuglicans and their free market economic mantras were the same folks (remember, this was before the election when Bushie still held office) who turned the Global Capitalist Paradise of the USof’murca into another communist, cronyist shithole. And less than 8 years after it had been running record surpluses and paying down the fucking debt (owed, largely, to China and various Sovereign Wealth Funds) in huge chunks.
Shows the damage a stupid president with boneheaded politics can do.
But, still, the mess continues and we seek more and more free trade agreements and impose them on other countries more or less against the wills of their various populaces. And cobbling together more wars rather then more jobs. And the Serious People go on with the same refrain of how those pointing out the fallacies underlying what they are doing have absolutely no clue and therefore should not be heard. Again.
Shows the damage a smart president with boneheaded politics can do.
I guess the one other thing all this shows is just how thoroughly the United States and, in particular, its elites, have been when it comes to acting sensibly and in the interests of the nation they purport to govern. It’s not unlike the utter failures of the Public School Boys who ran Britain in the interwar years, when they all had the Best credentials and Best connections and deluded themselves into thinking they could weasel-word their way around someone who didn’t give a shit for Western civilization and was willing to go all the way to prove it.
As seems to be the case, now.
My penultimate paragraph should read:
I guess the one other thing all this shows is just how thoroughly the United States and, in particular, its elites, have been defeated when it comes to acting sensibly and in the interests of the nation they purport to govern. It’s not unlike the utter failures of the Public School Boys who ran Britain in the interwar years, when they all had the Best credentials and Best connections and deluded themselves into thinking they could weasel-word their way around someone who didn’t give a shit for Western civilization and was willing to go all the way to prove it.
It’s NOT “AIG’s lawsuit”. It’s NOT “AIG’s complaint’.
It is a shareholder lawsuit, by Hank Greenberg, the former CEO of AIG under who CDS became SOP.
As far as I know, AIG’s board, who approved the bailout, chose not to participate in the lawsuit.
Suggest you read the two articles on Naked Capitalism and the supporting documents (Corrected Findings of Fact). Initially, the Board was told by outside counsel that bankruptcy was an option instead of a “bailout” arrangement. Five days later the Board was informed by the same counsel, Rodgin Cohen, that, in his opinion, if the Board chose bankruptcy the board members would not be covered under the directors and officers liability insurance. Incidentally, Cohen was lead outside counsel for Goldman Sachs at the time. The Board never had an opportunity to see the terms of the credit agreement, since it mysteriously disappeared. Furthermore, the Board was summarily sacked after the Feds took over. It’s a very ugly story and worth informing yourself by reading the documents. The lawsuit is going to be hugely expensive, and it’s likely that Greenberg is one of the few who can afford to bring this action.
China also gained rather a lot by GM’s decision to create in Shanghai a major automotive research center, part and parcel of why GM won the franchise to make Buicks in Shanghai. As with Japan a generation earlier, a lot of American tech went offshore because American managers didn’t value highly enough that technology or furriners’ ability to use it independently and successfully. Ditto with offshoring and outsourcing manufacturing, especially to China, as CFOs worked feverishly to divest people and assets as part of their financial imagineering drive to boost nominal “performance,” and their and their CEOs pay.
Never mind, we still have HP, or rather, the bits of HP that will be left over after it breaks itself up.
China has had a lot of help acquiring US technology, especially manufacturing know-how. Had GM divested its controlled German subsidiary, Opel, for example, as it proposed to do a few years ago as part of its bankruptcy strategy, even more technology would have left US control. Opel was then GM’s principal offshore research, design and manufacturing arm, not to mention its AAA farm team for training international managers. Divesting Opel would have meant giving that up, leaving GM principally with a non-controlling interest in GM China and its related technology center. On the eve of completing that divestiture, GM scuttled the sale, much to the chagrin of EU authorities and Opel’s managers and employees.
The US would benefit from considerably from deeming its technology and its manufacturing base, as well as its financial houses, as resources upon which America’s economic future lies. But it should get the word out to its top managers, too.
First rate analysis.
“This is one of the reasons I’m so intrigued by the apparent TREASUREMAPPING of JP Morgan Chase. Someone — it may be the Russians, but this kind of thing is easy to project — is treating JPMC as the ripe critical underbelly that it obviously is. The AIG bailout shows just how vulnerable we really are to such acts.”
Why are we assuming that the treasure mapping of JPMorgan was foreign. Given past behavior I see little reason to rule out the NSA just doing it because they can. They were all too happy to rip things out of Google’s datacenters that they probably could have obtained with warrants. Why should we believe that they would stop with JPMorgan especially as this gives JPMorgan some cover with their, understandably quite skittish foreign clients.
My belief is that the driver of all this was that it was the best way for Goldman not to have to take a haircut. There is no way China would have paid full freight.