by ilene - July 11th, 2010 8:13 pm
Courtesy of Tyler Durden of Zero Hedge
Submitted by David Fiderer
Deciphering Joe Cassno’s Lies Before The Financial Crisis Inquiry Commission
Joe Cassano is a very good liar, which is why it would be so hard to prosecute him for perjury. When testifying before The Financial Crisis Inquiry Commission, the former head of AIG Financial Products kept blending in half-truths with his audaciously dishonest claims, so that the overall effect was nonsensical. For instance, to justify his outrageous claim that, "the books were generally considered fully hedged," he explained that "we were using it basically in actuarial basis …[so] it’s not hedged in the conventional sense." (Translation: The book was never hedged in any sense. Nor was there any actuarial analysis, only a reliance on triple-A credit ratings.) These rhetorical tricks were designed to throw sand in everyone’s face. But his tactics seem to have worked. The staunchly unregenerate Cassano framed a media narrative that deflected away from his dishonesty and gross incompetence.
Here’s a reality check on some of his more ridiculous claims, in order of appearance:
1. Cassanos’s Claim: AIGFP never compromised its high underwriting standards.
The Truth: AIGFP had no underwriting standards pertaining to the most important risk, which affected AIG’s liquidity.
Commission Chairman Phil Angelides asked Cassano if he understood the subprime risks he insured. Cassano stonewalled with a lot of doubletalk:
Angelides: I want to talk to you about this, that these were represented as multisector CDOs. But if you look at — we did a sample of some of these in 2004, 2005, 2006, they were almost overwhelmingly residential-backed and very substantially subprime. For example, in the survey we did of some of these CDOs that you issued protection on, 84 percent were backed by RMBS residential mortgages in ’05, 89 percent in ’06. And just as an example, while you indicated you decided to stop writing on subprime instruments in January of ’06, for example, you backed an instrument called RFC III where that CDO was 93 percent subprime and seven percent HELOC home equity loans.
My question for you, Mr. Cassano, is was there — you said you did thorough due diligence. Were you aware of the quality of the mortgages? Do you do direct analysis of the loan data? Were you confident that you had a full understanding of the nature of what you were backing?
…

Tags: AIG, Brooksley Born, CDOs, Joe Cassano, Maiden Lane III, NY Fed
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by ilene - January 30th, 2010 12:58 pm
Guest Post: Sham Transactions That Led To AIG’s Downfall: The Ugly Truth Was Hiding In Plain Sight
Courtesy of Tyler Durden
Submitted by David Fiderer, posted originally at Huffington Post
Sham Transactions That Led To AIG’s Downfall: The Ugly Truth Was Hiding In Plain Sight
If you want to understand the deals that wiped out AIG, the best place to start is the website of the New York Fed. In the financial statement of Maiden Lane III, published last April, we see the gory details of the three largest CDO investments – Max 2008-1, Max 2007-1, and TRIAXX 2006-2A – acquired from AIG’s banks at par. Those deals, which totaled $10.7 billion, offer a template for evaluating the other sham transactions in the portfolio.
Initially, the business deal between AIG and the banks was that AIG sold credit default swap protection. Banks buy credit default swaps for two reasons: They want to slice and their dice credit risk, and/or they want to hide something. Here’s a simple, fairly innocuous, illustration: Suppose you’re a banker who tells his client, Procter & Gamble, "We want to expand the relationship and do more business with you." P&G then says, "Fine, lend us $100 million." Back at the office, your senior credit management says, "The maximum risk exposure we approve for P&G is $80 million." How do you keep in P&G’s good graces? You lend the company $100 million, and simultaneously offload $20 million in risk exposure by purchasing a credit default swap from another bank. P&G’s understanding is that you’ve lent them $100 million.
When Deutsche Bank bought a credit default swap from AIG in 2008, its primary motivation was not to slice up the credit risk, but to hide virtually all of it. Max 2008-1, a CDO that Deutsche arranged and closed on June 25, 2008, was huge. The total debt issue was $5.8 billion, of which 94%, or the entire $5.4 billion Class A-1 tranche, was covered by one credit default swap issued by AIG Financial Products. The Class A-1 tranche was considered "supersenior" because it was ahead of two other tranches, both originally rated Aaa, which totaled $200 million. (The remaining debt $200 million worth of debt was rated Aa, a and Baa at closing.)

Put another way, Deutsche Bank did not bring Max 2008-1 to "the marketplace," where investors might consider…

Tags: AIG, AIGFP, Banks, CDO, Deutsche Bank, Goldman Sachs, Maiden Lane III, sham transactions
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by ilene - November 22nd, 2009 1:55 pm
According to SIGTARP1, both the Federal Reserve and Treasury agreed that an AIG failure posed unacceptable risk to the global financial system and the U.S. economy. On March 24, 2009, Fed Chairman Ben Bernanke testified before the House Financial Services Committee [P.9]:
[C]onceivably, its failure could have resulted in a 1930’s-style global financial and economic meltdown, with catastrophic implication[s].
From July 2007, AIG’s financial situation deteriorated while so-called “AAA” collateralized debt obligations (CDOs) dropped in value. AIG sold credit default swaps (CDSs) on these CDOs and had to post more collateral, as the prices plummeted.
Goldman Sachs was AIGFP’s (UK-based AIG Financial Products) largest CDS counterparty with around $22.1 billion, or about one-third of the problematic trades. Goldman underwrote some of the CDOs underlying its own CDSs, and also underwrote a large portion of the CDOs against which French banks SocGen, Calyon, Bank of Montreal, and Wachovia bought CDS protection. Goldman provided pricing on these CDOs to SocGen and Calyon. Goldman was a key contributor to AIG’s liquidity strain and the resulting systemic risk. (See “Goldman’s Undisclosed Role in AIG’s Distress”)
Apocalypse AIG
By mid September 2008, AIG’s long-term credit rating was downgraded, its stock price plummeted, and AIG couldn’t meet its borrowing needs in the short-term credit markets. According to SIGTARP, “without outside intervention, the company faced bankruptcy, as it simply did not have the cash that was required to provide to AIGFP’s counterparties as collateral.” [P.9] The Federal Reserve Board with Treasury’s encouragement authorized a bailout. 2
The Federal Reserve Bank of New York (FRBNY) extended an $85 billion revolving credit facility, so AIG could make its collateral payments to Goldman and some of its CDO buyers. AIG also met other obligations, such as payments under its securities lending programs owed to Goldman and some of its CDO buyers. (See also: “AIG Discloses Counterparties to CDS, GIA, and Securities Lending Transactions.”)
Goldman “Would Have Realized a Loss”
Fed Chairman Bernanke said AIG’s crisis put the world at risk for a global financial meltdown. Goldman purchased little credit default protection3 against an AIG collapse. Even if Goldman escaped a collateral clawback of the billions it held from AIG4, the
…

Tags: AIG, AIG Counterparties, apology, derivatives, Goldman Sachs, Hank Paulson, Janet Tavakoli, Maiden Lane III, retractment of apology, Stephen Friedman, the Fed, Timothy Geithner, Treasury officials, Troubled Asset Relief Programs
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by ilene - October 28th, 2009 7:29 pm
Courtesy of Henry Blodget at Clusterstock
When the historians finally finish sorting through the appalling decisions that have been made in the past two years, this one will probably be at the top of the heap.
Last fall, as AIG began to realize how screwed it was, it started negotiating with the counterparties to all the credit default swaps it had written. One of the AIG’s goals was to persuade these counterparties--including Goldman Sachs--to accept buyouts discounts of as much as $0.40 cents on the dollar.
These sorts of negotiations are exactly what should happen when a company gets in trouble. It goes to its creditors and says, look, we can’t pay you everything, so here’s your choice: Take something, or take your chances in banktuptcy court. (And, in this case, this wouldn’t have been much of a choice, given the standing of CDS holders in the liquidation line).
But then Tim Geithner, head of the New York Fed, stepped in.
A few weeks later, the counterparties--all of whom voluntarily did business with AIG and understood the risks--were bailed out at par: 100 cents on the dollar.
Thus began the most nauseating giveaway in the history of the country.
Bloomberg has the whole sickening story:
By Sept. 16, 2008, AIG, once the world’s largest insurer, was running out of cash, and the U.S. government stepped in with a rescue plan. The Federal Reserve Bank of New York, the regional Fed office with special responsibility for Wall Street [run by Tim Geithner], opened an $85 billion credit line for New York-based AIG. That bought it 77.9 percent of AIG and effective control of the insurer.
The government’s commitment to AIG through credit facilities and investments would eventually add up to $182.3 billion.
Beginning late in the week of Nov. 3, the New York Fed, led by President Timothy Geithner, took over negotiations with the banks from AIG, together with the Treasury Department and Chairman Ben S. Bernanke’s Federal Reserve. Geithner’s team circulated a draft term sheet outlining
…

Tags: AIG, Goldman Sachs, Maiden Lane III, Tim Geithner, Treasury, Wall Street
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