Posts

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.

[snip]

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?

[snip]

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.

Geithner’s Duplicitous Efforts to Reinforce the Oligarchy

Bloomberg’s blockbuster story–showing that the Fed was dumping $7.77 trillion into the same banks that Treasury was claiming were solvent to qualify them for TARP–shows a number of different things. It focuses on the $13 billion in profits the banks made off of massive secret loans from the Fed.

The 190 firms for which data were available would have produced income of $13 billion, assuming all of the bailout funds were invested at the margins reported, the data show.

More importantly, IMO, the Bloomberg piece also shows how Ben Bernanke, TurboTax Timmeh Geithner, and Hank Paulson used secrecy to get DC’s bureaucracy–both Congress and Executive Branch officials–to push through his preferred plan to prop up the TBTF banks.

They did this in two ways: first, by keeping details of the Fed’s massive lending secret from the people implementing TARP.

The Fed initially released lending data in aggregate form only. Information on which banks borrowed, when, how much and at what interest rate was kept from public view.

The secrecy extended even to members of President George W. Bush’s administration who managed TARP. Top aides to Paulson weren’t privy to Fed lending details during the creation of the program that provided crisis funding to more than 700 banks, say two former senior Treasury officials who requested anonymity because they weren’t authorized to speak.

This meant the Fed could hide the fact that the six biggest banks were basically insolvent, and should have been wound down rather than propped up with a strings-free TARP.

The Treasury Department relied on the recommendations of the Fed to decide which banks were healthy enough to get TARP money and how much, the former officials say. Read more

The Crooks Trying to Bail-Out Alberto Gonzales

Let me start by stating that the words “legal” and “trust” don’t belong on a letterhead with Alberto Gonzales’ name blazoned at the top.

But that’s not the most interesting part of the letter soliciting donations for a legal defense fund for AGAG (linked by Main Justice). It’s the number of signers who were deeply embroiled in Bush Administration corruption. Starting, appropriately enough, with Bush himself.

President and Mrs. Bush have already made substantial gifts to the Judge’s legal expense fund.

But then there are people like Gale Norton, who resigned just as Gonzales’ DOJ began investigating an oil-trading scandal and who later was investigated for a slimy deal with her future employer, Shell Oil. Or Alphonso Jackson, who was also investigated by DOJ for cronyism in HUD contracts. Or Margaret Spellings, who declined to crack down on the pay-to-play scandal in the student loan business. Or Hank Paulson, who was buddying up to Goldman Sachs even as he was crafting out a bailout for them. I’d raise Condi and Rummy and torture; but then, Gonzales was involved as deeply as they were in torture.

Then again, the number of corrupt people soliciting money to pay off Gonzales’ legal bills may just be a function of the corruption in the Bush Administration. Because almost all of Bush’s cabinet secretaries signed this letter. So much so, that the people who didn’t sign may be more interesting than anything else. There are a number minor players here: former Department of Energy Secretary Sam Bodman, former Department of Education Secretary Rod Paige, former Ag Secretary Ann Veneman.

But there are three notable omissions among the major Secretaries: John Ashcroft, Paul O’Neill, and Colin Powell.

Oh, and one more rather notable Bush Administration guy missing from the list of people trying to help Gonzales out of his legal defense hole–a guy known to be rather fond of legal defense funds, in fact, for the right people: Dick Cheney.

Why doesn’t Dick Cheney want to help Alberto Gonzales pay for protecting the Bush Administration?

TARP, the Consumer-Driven Version?

Larry Summers just wrote a letter to Congress explaining Obama’s rationale for asking for the remaining $350 billion in TARP funds. One of the things he says Obama will do differently is get credit to consumers and businesses more quickly.

We must also do everything in our power to ensure our efforts are more directly reaching Main Street. It is neither right nor sound economic policy to allow the small businesses that are responsible for more than two-thirds of job creation and entrepreneurs who have worked hard and played by the rules to be victims of the credit crisis that they were not responsible for creating. We will work in close cooperation with Congress, the Federal Reserve and other agencies to strengthen financial institutions and restart lending for small businesses, auto purchases, and municipalities.

Undoubtedly, Congress will complain about this second request, particularly given the way Hank Paulson completely mismanaged it. But there is already fairly good proof that getting credit to consumers and small businesses will have an immediate impact on the economy.

As I noted in my review of December auto sales, the GMAC-as-bank deal that BushCo negotiated in the last days of December had an immediate and significant impact on GM’s sales.

GM said its December sales were helped by a zero-interest financing offer that its GMAC finance unit was able to make during the last few days of the month after GMAC was granted status as a bank holding company by the Federal Reserve.

This allowed GMAC to access money from the federal government aimed at helping banks and Wall Street firms. GMAC had essentially run out of cash to make auto loans earlier in the fall.

Within days of negotiating this deal (which also undoubtedly freed up GMAC to make floor plan loans to dealers), it invigorated GM’s sales.

And I wonder whether the same move isn’t also having an impact on sales across the industry.

Early industry sales results for January indicate that industry conditions might be improving slightly, Ford Motor Co.’s group vice president for marketing and communications, Jim Farley, said during an interview at the Detroit auto show.

Farley described the increase as the first positive sales “blip” he has observed in months. However, he was hesitant to predict that the trend would even last through the end of the month. Read more

The Giant Pissing Contest over the Auto Bridge

mackinaw-bridge-cc.jpg

(Mackinaw Bridge photo from Three if by Bike

Ian and Jane described the solution Dems are crafting on the auto bailout: Roughly $15 billion from the DOE funds (originally intended to help automakers retool to make more efficient cars) would be repurposed into providing bridge loans for Chrysler and GM. After President Obama and the new Congress come in, that money will be replaced with TARP money, and a longer term plan will be developed to see the companies through this crisis.

Keep in mind though: this is just one battle in a giant pissing contest that is far from resolved. There have been three original positions in this pissing contest:

  • Pelosi, Dodd, and Frank (and, presumably, Obama): Give the aid from TARP; save the environment and the domestic auto industry
  • Bush, Paulson, and McConnell: Give the aid from the DOE funds after asking for the first born of every union worker
  • Shelby and Corker: Bust the union and to hell with Toyota’s domestic competition and the Democratic voters it employs

A couple of events set the background to hearings in the last two days. Hank Paulson has begun calling for the second half of the TARP funds, as he has blown through most of the first $350 billion. Yet Democrats want to force Paulson to start bailing out homeowners struggling to avoid foreclosure, rather than just bailing out Paulson’s friends on Wall Street.  And since Paulson wanted to avoid spending any TARP funds on the auto industry, he wanted to avoid discussing TARP before the auto crisis was resolved.

In fact, in a stunning bit of arrogance that no one besides Jane really reported, Dodd had asked Paulson and Bernanke to attend Thursday’s Senate hearing on the auto crisis–and they refused! These assholes, who are preparing to ask Dodd for another $350 billion of our money, refused to show up before Congress, presumably because they simply didn’t want to talk about using TARP funds for bridge loans to the auto industry (note: at the hearing GAO agreed with Dodd that the auto loan request would qualify under TARP guidelines). I suppose because they simply believe the auto industry doesn’t fall under their mandate to keep the economy healthy?!?!

And then, of course, yesterday’s jobs report came in, with the news that our economy is hemorrhaging jobs. Which is reportedly when Pelosi blinked, and agreed to use the DOE funds.

Read more

We’re Asking the Wrong Guys Trying to Solve the Economic Crisis

Hank Paulson and Ben Bernanke are the wrong guys to solve this financial crisis.

I’m not talking, here, about Paulson’s very obvious conflicts of interest, though those are troubling. Paulson, after all, was CEO of one of the companies that in 2004 got an exemption on leverage limits–one of the moves that led to this crisis. And Paulson’s proposed bailout would disproportionally benefit his former company.

But I’m increasingly troubled by the ways in which Paulson and Bernanke are functionally inadequate to solve this problem–at least by themselves. By having Paulson and Bernanke solve this problem themselves, we guarantee that we’ll primarily address this as a finance crisis, and not an underlying structural crises in our economy.

While both Paulson and Bernanke have responsibility for the overall economy of the country, that responsibility is focused closely on monetary policy of the US.

The Fed describes its role as follows:

  • Conducting the nation’s monetary policy by influencing money and credit conditions in the economy in pursuit of full employment and stable prices
  • Supervising and regulating banking institutions to ensure the safety and soundness of the nation’s banking and financial system and to protect the credit rights of consumers
  • Maintaining the stability of the financial system and containing systemic risk that may arise in financial markets
  • Providing certain financial services to the U.S. government, to the public, to financial institutions, and to foreign official institutions, including playing a major role in operating the nation’s payments systems

And Treasury describes its mission:

The Treasury Department is the executive agency responsible for promoting economic prosperity and ensuring the financial security of the United States. The Department is responsible for a wide range of activities such as advising the President on economic and financial issues, encouraging sustainable economic growth, and fostering improved governance in financial institutions. The Department of the Treasury operates and maintains systems that are critical to the nation’s financial infrastructure, such as the production of coin and currency, the disbursement of payments to the American public, revenue collection, and the borrowing of funds necessary to run the federal government. The Department works with other federal agencies, foreign governments, and international financial institutions to encourage global economic growth, raise standards of living, and to the extent possible, predict and prevent economic and financial crises.

The Fed talks about "full employment and stable prices." Treasury talks about "economic prosperity" and raising standards of living and "encouraging sustainable economic growth." Read more