AIG gonna pay back $170B of the $182B bailout?

[Dorian Gray]

http://www.slate.com/id/2247558/

snipparoo

Here's how: The Fed in September 2008 extended an $85 billion credit line to the company. AIG paid down $40 billion of that debt when the Treasury Department injected $40 billion of taxpayer funds into the company. But even after the assist, AIG has effectively drawn down about $51 billion of that line. In March 2009, AIG turned over two of its crown jewels, AIA (Asian insurance operations) and Alico (the U.S. life insurance unit) to the Fed in exchange for converting $25 billion of that credit into preferred shares in the two subsidiaries. Once markets recovered, AIG would sell these two units and use the proceeds to pay back the Fed.

A year later, the Fed's strategy seems to have panned out. On March 1, AIG agreed to sell AIA to Prudential plc for $35.5 billion, including $25 billion in cash. A week later, Met Life offered to purchase Alico for $15.5 billion, including $6.8 billion in cash. If both those transactions close this year, and if the stock AIG receives in payment holds up in value (two admittedly big ifs), AIG will generate about $51 billion. That's enough to pay off the Fed's $25 billion in preferred shares plus the remaining balance on the Fed's credit line by early 2011.

But wait, there's more. The Fed in November 2008 created two investment vehicles to remove toxic assets from AIG's balance sheets. The first, dubbed Maiden Lane II, borrowed $19.5 billion from the Fed and bought $20.8 billion in mortgage-backed securities at half their original price. The second, Maiden Lane III, borrowed $24.3 billion from the Fed and bought a portfolio of collateralized debt obligations from former AIG customers, also at about half their face value. Since then, the credit markets have recovered, and these two investment vehicles—hedge funds with concentrated positions, really—are generating enough income to pay off the loans (about $10 billion so far). Meanwhile, the assets, particularly the CDOs, have risen in value. (The figures are updated weekly in the Fed's H.4.1. release.) Government sources suggest that the funds, managed by Black Rock, both have the capacity to pay back their loans and, in the case of Maiden Lane III, to generate billions in profits for the Fed.

snippydippydoo

Billions in profits for the Fed. And people say it's socialist. Why, this is the very epitome of capitalism AND proof that the Government can run health care and turn a profit doing it.





He suggested with tongue in cheek.

[SRW]

http://www.slate.com/id/2247558/



Billions in profits for the Fed. And people say it's socialist. Why, this is the very epitome of capitalism AND proof that the Government can run health care and turn a profit doing it.





He suggested with tongue in cheek.

You got me, I was going to make a comment about apples and oranges... carry on.

[drkitten]

[
Billions in profits for the Fed. And people say it's socialist. Why, this is the very epitome of capitalism AND proof that the Government can run health care and turn a profit doing it.


It does, however, suggest that the all the deficit chickenhawks who were suddenly panicking about how the bailouts were going to ballon the national debt massively didn't understand the difference between spending, lending, and investing.

[Puppycow]

Billions in profits for the Fed.

Huh? 182 > 170.

[Puppycow]

It seems that things are better than they could have been, or seemed likely to have been, but even in an optimistic scenario the taxpayers are out $12-$20 billion according to the article if share prices hold up.

That's probably still better than the cost to the economy would have been of not doing a bailout and just letting the AIG go down in flames and take the whole financial world with it, which probably would have caused another great depression. Too bad we'll never know for sure what would have happened in an alternative universe where no-one got bailed out.

[mhaze]

http://www.slate.com/id/2247558/

Billions in profits for the Fed. And people say it's socialist. Why, this is the very epitome of capitalism AND proof that the Government can run health care and turn a profit doing it.

He suggested with tongue in cheek.

Problem A.

AIG agreed to sell AIA to Prudential plc for $35.5 billion, including $25 billion in cash. A week later, Met Life offered to purchase Alico for $15.5 billion, including $6.8 billion in cash. If both those transactions close this year, and if the stock AIG receives in payment holds up in value

$31.8B in cash originating from the taxpayers is given out, in return for securities of questionable value. The cash is a "sweetener" required to cover risk of further loss in value of the smelly assets handed over with the cash.

But where did these assets originate?

AIG turned over two of its crown jewels, AIA (Asian insurance operations) and Alico (the U.S. life insurance unit) to the Fed in exchange for converting $25 billion of that credit into preferred shares in the two subsidiaries.

For that $25B to be recovered, $31.8B in cash was given away. And the $25B equity, what part was recovered? 10.5+8.7 or 19.2B.

A loss of 5.8B or 20% on a cash basis, not considering the $31.8 in kited funds.

Problem B.

The first, dubbed Maiden Lane II, borrowed $19.5 billion from the Fed and bought $20.8 billion in mortgage-backed securities at half their original price. The second, Maiden Lane III, borrowed $24.3 billion from the Fed and bought a portfolio of collateralized debt obligations from former AIG customers

These shell companies use new Fed money in the amount of $43.8B to take crap stuff out of AIG.

I know we've been taken to the cleaners, but has anything actually been cleaned? Is the goal here to be able to spin some rhetoric on the top level deals that sounds good, while really imitating (poorly, since this is the gubbermint) Enron?

[Malerin]

http://www.slate.com/id/2247558/



Billions in profits for the Fed. And people say it's socialist. Why, this is the very epitome of capitalism AND proof that the Government can run health care and turn a profit doing it.





He suggested with tongue in cheek.

Assume we actually make money on the whole thing. What about the moral hazard of bailing out businessess that behave irresponsibly? Who will the next AIG be?

[drkitten]

Assume we actually make money on the whole thing.

Okay,....

What about the moral hazard of bailing out businessess that behave irresponsibly?

What about the moral hazard? Last time I checked, the investors in AIG had lost their shirts; the reason the government is making money is because it bought the company at a fire-sale price.

As far as I can tell, the lesson here is "if you run a business badly, uncle sam will take it away from you and make the money you could have made yourself."

I'm not seeing why this lesson is problematic.

[funk de fino]

I'm not seeing why this lesson is problematic.

Probably because you are not an idiotic, bail outs are bad, sheeple.

[Malerin]

Okay,....



What about the moral hazard? Last time I checked, the investors in AIG had lost their shirts; the reason the government is making money is because it bought the company at a fire-sale price.

As far as I can tell, the lesson here is "if you run a business badly, uncle sam will take it away from you and make the money you could have made yourself."

I'm not seeing why this lesson is problematic.

Let's say I see an investment opportunity. If I buy X, I can make a bundle, but there's also a chance I can lose my shirt. I'm cautious about buying X, whatever X is. But my neighbor's not the cautious sort.

My neighbor sinks nearly all his money into buying X. But the investment goes sour on him and he's left with a bunch of X's nobody will buy. Nobody can agree on what they're worth. He's teetering on the brink of bankruptcy. But just before he goes under... along comes the government with a TARP program and cleans up my neighbor's balance sheet by buying the X's he can't sell. My neighbor is flush with cash again, and those pesky X's are gone.

What will I think the next time I see a risky investment that has a potentially huge downside? Won't I think the govt. will come in and buy X if things get bad enough? Won't that result in me taking much more of a risk than I normally would?


"In fact, the Fed became not just a source of emergency borrowing that enabled Goldman and Morgan Stanley to stave off disaster — it became a source of long-term guaranteed income. Borrowing at zero percent interest, banks like Goldman now had virtually infinite ways to make money. In one of the most common maneuvers, they simply took the money they borrowed from the government at zero percent and lent it back to the government by buying Treasury bills that paid interest of three or four percent. It was basically a license to print money — no different than attaching an ATM to the side of the Federal Reserve."

http://www.rollingstone.com/politics/story/32255149/wall_streets_bailout_hustle/print

Is that ^^ accurate?

ETA:

PAUL SOLMAN: Goldman's status as a bank holding company means it can borrow money directly from the Fed. Moreover:

DAVID STOCKMAN: In its wisdom, the Federal Reserve has driven interest rates down to 10, 15, 30 basis points, so their cost of funding is zero.

PAUL SOLMAN: So, you mean Goldman Sachs borrows money from the Federal Reserve at a tenth-of-a-percent, a quarter-of-a-percent, takes that money, invests in U.S. Treasury securities at 3.5 percent, 4 percent...

DAVID STOCKMAN: Three-and-a-half percent, exactly.

PAUL SOLMAN: ... and they make the money just...

DAVID STOCKMAN: On the spread.

PAUL SOLMAN: And the money is simply being recirculated from the Fed back to the Treasury?

DAVID STOCKMAN: That's exactly right.
http://www.pbs.org/newshour/bb/business/jan-june10/goldmansachs_02-12.html

Why not skip the middle-man and just give GS T-bills? Was a veneer of legitimacy required or something?

[drkitten]

Let's say I see an investment opportunity. If I buy X, I can make a bundle, but there's also a chance I can lose my shirt. I'm cautious about buying X, whatever X is. But my neighbor's not the cautious sort.

My neighbor sinks nearly all his money into buying X. But the investment goes sour on him and he's left with a bunch of X's nobody will buy. Nobody can agree on what they're worth. He's teetering on the brink of bankruptcy. But just before he goes under... along comes the government with a TARP program and cleans up my neighbor's balance sheet by buying the X's he can't sell.

At a price that leaves your neighbor broke.

That's what you're missing.


My neighbor is flush with cash again, and those pesky X's are gone.

The people who owned AIG when the government took it over are in no sense "flush with cash again." The people who come closest are the counterparties to the various deals that AIG set up, but those counterparties (by definition) aren't part of AIG.

A better analogy is that your neighbor saw an opportunity to buy a house way beyond his means, and couldn't keep up the payments. The government took over the payments for him, but didn't pay him a dime directly; he lost everything he put into the house, and essentially is left in the same spot a bankruptcy court would have put him, but the bank that gave him the mortgage is better off because it has the house payments instead of the white elephant of a house....


What will I think the next time I see a risky investment that has a potentially huge downside? Won't I think the govt. will come in and buy X if things get bad enough? Won't that result in me taking much more of a risk than I normally would?

Not really. There's no reason for you to think that the government will take the downside off your hands.


"In fact, the Fed became not just a source of emergency borrowing that enabled Goldman and Morgan Stanley to stave off disaster — it became a source of long-term guaranteed income.

Bingo. Goldman and Morgan Stanley, not AIG.


Borrowing at zero percent interest, banks like Goldman now had virtually infinite ways to make money. In one of the most common maneuvers, they simply took the money they borrowed from the government at zero percent and lent it back to the government by buying Treasury bills that paid interest of three or four percent. It was basically a license to print money — no different than attaching an ATM to the side of the Federal Reserve."

http://www.rollingstone.com/politics/story/32255149/wall_streets_bailout_hustle/print

Is that ^^ accurate?

Roughly, with one important caveat. Of course, what the economy needed at that point was for someone to print lots and lots of money, because the money supply had dropped dramatically (actually, the supply was about the same, but the velocity had tanked, which amounts to the same thing in economic terms). So if the government hadn't licensed GS to print money, it would have needed to do the same thing itself, and then it would have needed to figure out a way to get the newly printed money to the banks to support the sagging lending sheets and keep credit in circulation.

So the government could have created more money and given it to the banks. Instead they skipped a step and let banks create money directly. Still not seeing the problem.

And, of course, a key aspect that you're missing here is the more that GS borrows and uses to buy securities, the greater the demand for those securities becomes, and therefore the less the yield on those securities is. Indeed, while this was happening, the actual yield on those T-bills wasn't three or four percent. The yield was actually closer to zero percent and actually dipped negative from time to time. That's right, GS would borrow $101 million from the government and use it to buy $100 million in bonds, resulting in an actual loss of money!

While this sounds irrational, it actually wasn't. The problem was that GS needed to get high-quality, low-risk securities on its books to balance out the "crap," and so it wasn't so much interested in "printing money" as it was simply establishing that it had deep enough pockets (enough money on its balance sheet) that it could still compete for quality investments. And it was worth paying a million or so for GS to have $100 million in high-quality T-bills.

Indeed, the government could have used this financial crisis as an excellent money-making opportunity, by simply offering fewer T-bills (and therefore letting people bid more and more for the limited supply of them). But since the government isn't really in the money-making business, but in the business of stabilizing the economy, it found that the best way to do this was to make lots of low cost money available, knowing that most of it was coming back in at near zero interest anyway.....

[Malerin]

At a price that leaves your neighbor broke.

That's what you're missing.

Right, my neighbor has less money, but is not bankrupt, which is what would have happened. I guess "flush" wasn't the right word. But my neighbor is better off with the government having bught the toxic assets.



The people who owned AIG when the government took it over are in no sense "flush with cash again." The people who come closest are the counterparties to the various deals that AIG set up, but those counterparties (by definition) aren't part of AIG.

Without TARP, wouldn't AIG have gone under?

A better analogy is that your neighbor saw an opportunity to buy a house way beyond his means, and couldn't keep up the payments. The government took over the payments for him, but didn't pay him a dime directly; he lost everything he put into the house, and essentially is left in the same spot a bankruptcy court would have put him, but the bank that gave him the mortgage is better off because it has the house payments instead of the white elephant of a house....

But AIG did get "dimes". Quite a lot of them. TARP was specifically designed to buy assests nobody wanted. Shouldn't there be a risk of bankruptcy for businesses like AIG?




Not really. There's no reason for you to think that the government will take the downside off your hands.

Wasn't the downside of "utter collapse" removed with TARP? What would have happened without it?



Bingo. Goldman and Morgan Stanley, not AIG.

OK.



Roughly, with one important caveat. Of course, what the economy needed at that point was for someone to print lots and lots of money, because the money supply had dropped dramatically (actually, the supply was about the same, but the velocity had tanked, which amounts to the same thing in economic terms). So if the government hadn't licensed GS to print money, it would have needed to do the same thing itself, and then it would have needed to figure out a way to get the newly printed money to the banks to support the sagging lending sheets and keep credit in circulation.

So the government could have created more money and given it to the banks. Instead they skipped a step and let banks create money directly. Still not seeing the problem.

There's not a problem with me loaning you money at 0% and you loaning me that very same money at 3%?

And, of course, a key aspect that you're missing here is the more that GS borrows and uses to buy securities, the greater the demand for those securities becomes, and therefore the less the yield on those securities is. Indeed, while this was happening, the actual yield on those T-bills wasn't three or four percent. The yield was actually closer to zero percent and actually dipped negative from time to time. That's right, GS would borrow $101 million from the government and use it to buy $100 million in bonds, resulting in an actual loss of money!

A 10 yr T-bill has never fallen below 2%.
http://fixedincome.fidelity.com/fi/FIHistoricalYield

Or are you talking about when the fed had a bond auction, the bidding was driving the prices up and the yields down to nothing?





While this sounds irrational, it actually wasn't. The problem was that GS needed to get high-quality, low-risk securities on its books to balance out the "crap," and so it wasn't so much interested in "printing money" as it was simply establishing that it had deep enough pockets (enough money on its balance sheet) that it could still compete for quality investments. And it was worth paying a million or so for GS to have $100 million in high-quality T-bills.

Indeed, the government could have used this financial crisis as an excellent money-making opportunity, by simply offering fewer T-bills (and therefore letting people bid more and more for the limited supply of them). But since the government isn't really in the money-making business, but in the business of stabilizing the economy, it found that the best way to do this was to make lots of low cost money available, knowing that most of it was coming back in at near zero interest anyway.....

Wouldn't it have been better if these banks didn't have the "crap" on their balance sheets to begin with? So now when future "crap" rears its ugly head, banks can be reasonable sure TARP II will come along and take it off the books if things get bad enough. That's the moral hazard I'm talking about.

[drkitten]

Right, my neighbor has less money, but is not bankrupt, which is what would have happened. I guess "flush" wasn't the right word. But my neighbor is better off with the government having bught the toxic assets.

Without TARP, wouldn't AIG have gone under?

You seem to be under the mistaken impression that the people who owned AIG pre-bailout are the people who own it now....

TARP covered a lot of things, including structuring a bankruptcy for two automobile companies. It didn't just buy toxic assets. I'm not sure whether the "nationalization" of AIG came from TARP funds or just happened via Fed fiat, but it doens't really matter. The point is that AIG now --- the company that sold the assets to TARP -- is not the same AIG as the AIG then; the stockholders are almost entirely different.



But AIG did get "dimes". Quite a lot of them. TARP was specifically designed to buy assests nobody wanted. Shouldn't there be a risk of bankruptcy for businesses like AIG?

Why? The stockholders already lost (nearly) all their money when AIG collapsed.




There's not a problem with me loaning you money at 0% and you loaning me that very same money at 3%?

Not if what you're trying to go is pump money into the system, no. Seems like a very good way for you to get what you want.


A 10 yr T-bill has never fallen below 2%.
http://fixedincome.fidelity.com/fi/FIHistoricalYield

Or are you talking about when the fed had a bond auction, the bidding was driving the prices up and the yields down to nothing?

Yes, that's exactly what I'm talking about. Yields didn't just fall "down to nothing"; they fell to (literally) below nothing -- negative yields. You can even google "treasury negative yield" if you want some exact dates.

T-bills are sold at the same type of auction as T-bonds and "suffered" exactly the same issues. 2% yield in an environment of expected inflation (I seem to recall you were one of the doom and gloom inflation hawks at that time, telling us about how inflation was going to killl us all over the next ten years) is, again, actual negative yield. The bill buyers as well as the bond buyers were buying Treasury securities with the knowledge/expectation that they were actively losing money at each purchase, but wanted to buy the security and the high-quality paper.


Wouldn't it have been better if these banks didn't have the "crap" on their balance sheets to begin with?

It would have indeed.

So now when future "crap" rears its ugly head, banks can be reasonable sure TARP II will come along and take it off the books if things get bad enough.

After wiping out all the stockholders equity. Boy, that's an incentive, yes.. :rolleyes

That's the moral hazard I'm talking about.

Still not seeing it.

Let me get this straight. Someone in a Brook Brothers' suit walks in and says that he's got this great investment plan, where he writes a lot of junk loans, and then if they go bad, the company tanks, the government comes in and nationalizes your investment for pennies on the dollar and proceeds to take control --- and you think there's no downside? You're worried about people being encouraged to take risks because a company with the same name might rise from the ashes and make profits that they can't share?

If you held AIG stock in July 2007, it was worth about $1500/share. Today it's worth $30 if you have any shares at all (and its price to book value is still well over 100). And somehow there's a moral hazard because instead of losing $1500/share, you only lost $1470?

[Malerin]

You seem to be under the mistaken impression that the people who owned AIG pre-bailout are the people who own it now....

TARP covered a lot of things, including structuring a bankruptcy for two automobile companies. It didn't just buy toxic assets. I'm not sure whether the "nationalization" of AIG came from TARP funds or just happened via Fed fiat, but it doens't really matter. The point is that AIG now --- the company that sold the assets to TARP -- is not the same AIG as the AIG then; the stockholders are almost entirely different.

My point is that AIG would have gone completely under, if nothing had been done.

Why? The stockholders already lost (nearly) all their money when AIG collapsed.

How did the executives who ran the company do?

"American International Group said it paid a $47 million severance package to former Chief Executive Martin J. Sullivan, whose resignation took effect on Tuesday."
http://www.cnbc.com/id/25482825/AIG_Pays_Former_CEO_a_47_Million_Severance_Package

Not too shabby for a guy ranked one of the worst CEO's of all time.
http://www.cnbc.com/id/30502091?slide=7

"In the ongoing AIG bonus saga, the troubled insurer will distribute around $100 million in bonuses today, that's likely much to the dismay of taxpayers who now own the firm. Despite the fact that AIG is technically under compensation restrictions, many so-called "guaranteed bonuses" that were in place before AIG's collapse still must be honored by law."

http://www.theatlantic.com/business/archive/2010/02/-100-million-more-in-aig-bonuses-causes-another-stir/35280/

Did anyone besides the shareholders get hurt by all this?


Yes, that's exactly what I'm talking about. Yields didn't just fall "down to nothing"; they fell to (literally) below nothing -- negative yields. You can even google "treasury negative yield" if you want some exact dates.

I believe you. Everyone was frantic for a safe place to park their money.

T-bills are sold at the same type of auction as T-bonds and "suffered" exactly the same issues. 2% yield in an environment of expected inflation (I seem to recall you were one of the doom and gloom inflation hawks at that time, telling us about how inflation was going to killl us all over the next ten years) is, again, actual negative yield. The bill buyers as well as the bond buyers were buying Treasury securities with the knowledge/expectation that they were actively losing money at each purchase, but wanted to buy the security and the high-quality paper.

I was talking about how the national debt is a huge problem and only getting worse. If we hit a period of prolonged high interest rates, servicing the debt will gobble up a huge(er) chunk of discretionary spending. This is on top of multi-trillion liabilities from S.S. and Medicare. It's unsustainable. I'm hardly alone in this view.


After wiping out all the stockholders equity. Boy, that's an incentive, yes.. :rolleyes

Goldman Sachs has been trading at almost $180 recently. Before Lehman collapsed they were trading at around $180. How can you say the shareholders were wiped out? What would they be trading at had they not received 12 billion in bailout money? Would they even be around?

Still not seeing it.

Let me get this straight. Someone in a Brook Brothers' suit walks in and says that he's got this great investment plan, where he writes a lot of junk loans, and then if they go bad, the company tanks, the government comes in and nationalizes your investment for pennies on the dollar and proceeds to take control --- and you think there's no downside?

Who took control of Goldman?

You're worried about people being encouraged to take risks because a company with the same name might rise from the ashes and make profits that they can't share?

Goldman rose from the ashes?

If you held AIG stock in July 2007, it was worth about $1500/share. Today it's worth $30 if you have any shares at all (and its price to book value is still well over 100). And somehow there's a moral hazard because instead of losing $1500/share, you only lost $1470?

Back to Goldman again. They received billions in bailout money and their stock has recovered nicely. They were also able to borrow money at essentially a 0% rate.
Wells Fargo's stock has mostly recovered ($25 billion in bailout)
JP Morgan has recovered ($25 billion)
GMAC is back to 2008 levels ($16 billion)

Where's the moral hazard with these? Where's the "wipeout" in shareholder equity? Would they be around withhout the bailouts? What would the stock value be? Shareholders who bought at the end of 08/start of 09 have made out like bandits. Shareholders who simply held onto the stock have lost a little. Hardly a "wipeout".

[Malerin]

This better summarizes what I was trying (badly) to say:

The substantial costs of TARP — in money, moral
hazard effects on the market, and Government credibility — will have been for
naught if we do nothing to correct the fundamental problems in our financial system
and end up in a similar or even greater crisis in two, or five, or ten years’ time.
It is hard to see how any of the fundamental problems in the system have been
addressed to date.
• To the extent that huge, interconnected, “too big to fail” institutions contributed to the crisis, those institutions are now even larger, in part because of the substantial subsidies provided by TARP and other bailout programs.
• To the extent that institutions were previously incentivized to take reckless risks through a “heads, I win; tails, the Government will bail me out” mentality, the market is more convinced than ever that the Government will step in as necessary to save systemically significant institutions. This perception was reinforced when TARP was extended until October 3, 2010, thus permitting Treasury to maintain a war chest of potential rescue funding at the same time that banks that have shown questionable ability to return to profitability (and in some cases are posting multi-billion-dollar losses) are exiting TARP programs.
• To the extent that large institutions’ risky behavior resulted from the desire to justify ever-greater bonuses — and indeed, the race appears to be on for TARP recipients to exit the program in order to avoid its pay restrictions — the current bonus season demonstrates that although there have been some improvements in the form that bonus compensation takes for some executives, there has been little fundamental change in the excessive compensation culture on Wall Street.
• To the extent that the crisis was fueled by a “bubble” in the housing market, the Federal Government’s concerted efforts to support home prices — as discussed more fully in Section 3 of this report — risk re-inflating that bubble in light of the Government’s effective takeover of the housing market through purchases and guarantees, either direct or implicit, of nearly all of the residential mortgage market.
Stated another way, even if TARP saved our financial system from driving off a cliff back in 2008, absent meaningful reform, we are still driving on the same
winding mountain road, but this time in a faster car.
http://www.sigtarp.gov/embargoed/embargo.pdf

[drkitten]

My point is that AIG would have gone completely under, if nothing had been done.

How did the executives who ran the company do?

The executives made out like bandits. Which makes perfect sense, because the people who were supposed to supervise them (the stockholders) were asleep at the wheel. If you let the people who ostensibly report to you write their own compensation package and their own job description, naturally they'll overpay themselves.

The stockholders harvested what they had sown. Perhaps this will suggest to the stockholders, after taking a 98% loss, that they should pay more attention.

Still not seeing the problem. If I tell you to go buy a car, and that price is no object, how are YOU in the wrong when the car you buy is a Porsche?



"In the ongoing AIG bonus saga, the troubled insurer will distribute around $100 million in bonuses today, that's likely much to the dismay of taxpayers who now own the firm. Despite the fact that AIG is technically under compensation restrictions, many so-called "guaranteed bonuses" that were in place before AIG's collapse still must be honored by law."

http://www.theatlantic.com/business/archive/2010/02/-100-million-more-in-aig-bonuses-causes-another-stir/35280/

Did anyone besides the shareholders get hurt by all this?

Nope. Which is a good thing. Normally people like the idea of rule of law. The "guaranteed bonuses" would still have been paid out under a bankruptcy proceeding.....







I was talking about how the national debt is a huge problem and only getting worse. If we hit a period of prolonged high interest rates, servicing the debt will gobble up a huge(er) chunk of discretionary spending.

Well, actually, you weren't. You were talking about TARP funding and why is AIG still in business.

But if you want to admit defeat on this issue, I'll happily discuss the deficit. Starting with your assumption (that appears not to be born out) that we are going to hit a period of prolonged high interest rates. Keep in mind that the whole observation that started this thread is that the companies that took TARP funding are paying them back and that the Fed is likely to be showing a profit overall. This makes TARP an active method of reducing the debt, because more money is coming in than went out, and the excess can be used to pay for other stimulus activities or simply to reduce overall debt.


Goldman Sachs has been trading at almost $180 recently. Before Lehman collapsed they were trading at around $180. How can you say the shareholders were wiped out? What would they be trading at had they not received 12 billion in bailout money? Would they even be around?

Oh, so, now you want to talk about Goldman Sachs.

All right. They received about $10 billion in bailout money and paid it back nearly a year ago.

What's the problem?




Back to Goldman again. They received billions in bailout money and their stock has recovered nicely. They were also able to borrow money at essentially a 0% rate.

Right. Able to borrow.

Which they've repaid.


Where's the moral hazard with these?

Yes, that's right. What's the problem with a bank borrowing money and subsequently repaying it in full?

[drkitten]

This better summarizes what I was trying (badly) to say:


Stated another way, even if TARP saved our financial system from driving off a cliff back in 2008, absent meaningful reform, we are still driving on the same
winding mountain road, but this time in a faster car.[/I]
http://www.sigtarp.gov/embargoed/embargo.pdf


So even your rather biased source admitted that TARP saved the financial system.

And it looks like the government is actually making a profit off of TARP as well, as banks are lining up to make repayments. The banks that have not been able to make repayments have been nationalized.

So without TARP, we'd have higher deficits and more failures in the banking system.

I'm still failing to see a single issue.

[Malerin]

The executives made out like bandits. Which makes perfect sense, because the people who were supposed to supervise them (the stockholders) were asleep at the wheel. If you let the people who ostensibly report to you write their own compensation package and their own job description, naturally they'll overpay themselves.

Oh, I agree with this.

The stockholders harvested what they had sown. Perhaps this will suggest to the stockholders, after taking a 98% loss, that they should pay more attention.

To the stockholders who took that kind of loss? Maybe. To the stockholders who didn't take that kind of loss (Goldman, JP Morgan, Wells Fargo, PNC Fiancial), I doubt it. The next time they get in trouble, the govt. will be there with billions in bailout money. After all, that's what happened, right? Why shouldn't it happen again?

Still not seeing the problem. If I tell you to go buy a car, and that price is no object, how are YOU in the wrong when the car you buy is a Porsche?

What is this relating to?

Nope. Which is a good thing. Normally people like the idea of rule of law. The "guaranteed bonuses" would still have been paid out under a bankruptcy proceeding.....

My point had to do more with the idea of "guaranteed bonuses" in the first place. Shouldn't bonuses be paid for profitable work?


Well, actually, you weren't. You were talking about TARP funding and why is AIG still in business.


YOU went off on a tangent about my alleged fears of an inflationary period. I reminded you that in the thread you're talking about (http://forums.randi.org/showthread.php?t=162505), I was concerned (along with Meadmaker) NOT about inflation, but about the trillions being added to the national debt.

But if you want to admit defeat on this issue, I'll happily discuss the deficit.

Admit defeat? Is it possible for you to just discuss something? I happen to disagree at the moment. Maybe you'll change my mind. Is your ego at stake or something?


Starting with your assumption (that appears not to be born out) that we are going to hit a period of prolonged high interest rates.

When did I assume this? I stated a conditional: if we hit a prolonged period of high interest, servicing the debt will become extremely painful(er). Do you dispute this?

Keep in mind that the whole observation that started this thread is that the companies that took TARP funding are paying them back and that the Fed is likely to be showing a profit overall.

How much has been paid back, out of the $700 billion? Fannie, Freddie, and GM alone receieved $175 billion. Have we made money on that?

This makes TARP an active method of reducing the debt, because more money is coming in than went out, and the excess can be used to pay for other stimulus activities or simply to reduce overall debt.

Unless you count the hundreds of billions that haven't been repayed at all yet. If you double a $10 investment and lose half of a $100 investment, have you made money?



Oh, so, now you want to talk about Goldman Sachs.

Did they not receive $10 billion in bailout money? Did their shareholders get "wiped out"?

All right. They received about $10 billion in bailout money and paid it back nearly a year ago.

Good. What happens if they make even riskier investments next time? Will they pay out the next billions from TARP II? Remember, my point is moral hazard. If I bail out my friend, and he does well in the market and pays me back, that doesn't me the next time I bail him out I'll be so lucky.

What's the problem?

Ummm.... what the report from the office of the Special Inspector General for TARP stated?

To the extent that institutions were previously incentivized to take reckless risks through a “heads, I win; tails, the Government will bail me out” mentality, the market is more convinced than ever that the Government will step in as necessary to save systemically significant institutions. This perception was reinforced when TARP was extended until October 3, 2010, thus permitting Treasury to maintain a war chest of potential rescue funding at the same time that banks that have shown questionable ability to return to profitability (and in some cases are posting multi-billion-dollar losses) are exiting TARP programs.

Makes sense to me.

[Malerin]

So even your rather biased source admitted that TARP saved the financial system.

Huh? The Office of the Special Inspector General for the Troubled Asset Relief Program is biased? Because he doesn't agree with you?

Under EESA, the Special Inspector General has the responsibility, among other things, to conduct, supervise and coordinate audits and investigations of the purchase, management and sale of assets under the Troubled Asset Relief Program ("TARP"). SIGTARP's goal is to promote economic stability by assiduously protecting the interests of those who fund the TARP programs - i.e., the American taxpayers. This is achieved by facilitating transparency in TARP programs, providing effective oversight in coordination with other relevant oversight bodies, and through robust criminal and civil enforcement against those, whether inside or outside of Government, who waste, steal or abuse TARP funds
http://www.sigtarp.gov/index.shtml

Where's the bias?

Is Neil M. Barofsky biased?

Prior to assuming the position of Special Inspector General, Mr. Barofsky was a federal prosecutor in the United States Attorney’s Office for the Southern District of New York for more than eight years. In that office, Mr. Barofsky was a Senior Trial Counsel who headed the Mortgage Fraud Group, which investigated and prosecuted all aspects of mortgage fraud, from retail mortgage fraud cases to investigations involving potential securities fraud with respect to collateralized debt obligations. Mr. Barofsky also had extensive experience as a line prosecutor leading white collar prosecutions during his tenure as a member of the Securities and Commodities Fraud Unit, which included the case that led to the conviction of the former President of Refco Inc., Tone Grant, and the guilty plea of Phillip Bennett, Refco’ s former Chief Executive Officer. Mr. Barofsky received the Attorney General’s John Marshall Award for his work on the Refco matter. Mr. Barofsky also led the investigation that resulted in the indictment of the top 50 leaders of the Revolutionary Armed Forces of Colombia (FARC) on narcotics charges, a case described by the then Attorney General as the largest narcotics indictment filed in U.S. history.

Seems like a pretty good guy to have overseeing TARP.

And it looks like the government is actually making a profit off of TARP as well, as banks are lining up to make repayments. The banks that have not been able to make repayments have been nationalized.

With such a small amount actually repaid, I don't know how you can make a judgement about profit one way or another.

So without TARP, we'd have higher deficits and more failures in the banking system.

This is supposedly a free market. Are failures always bad? Isn't that normally the risk for engaging in insanely speculative behavior? Should we have bailed out the horse-and-buggy industry?

Since we're in counterfactual territory, let me propose one: the absence of TARP would have led to a much sounder financial system, greatly reduced deficits, and lessened the likelihood of another ginormous bailout.

I'm still failing to see a single issue.

Read the inspector general's report.

[drkitten]

To the stockholders who took that kind of loss? Maybe. To the stockholders who didn't take that kind of loss (Goldman, JP Morgan, Wells Fargo, PNC Fiancial), I doubt it. The next time they get in trouble, the govt. will be there with billions in bailout money. After all, that's what happened, right?

No, it's not, and they've got the examples of AIG and Citi right there in front of them.

They can't rely on being JP Morgan next time and not AIG.


My point had to do more with the idea of "guaranteed bonuses" in the first place. Shouldn't bonuses be paid for profitable work?

The idea that the compensation committees seemed to have was that it was more important to get the right person for the job than it was to incentivize them to make a profit.

Which sounds like a total failure of the compensation committees to adequately supervise.


When did I assume this? I stated a conditional: if we hit a prolonged period of high interest, servicing the debt will become extremely painful(er). Do you dispute this?

No, but I also wouldn't necessarily dispute the idea that an asteroid hitting the Earth would cause serious economic problems, while at the same time discounting the idea that it will actually happen.

[Malerin]

No, it's not, and they've got the examples of AIG and Citi right there in front of them.

They can't rely on being JP Morgan next time and not AIG.

But they can count on the possibility they might be the next Goldman, or Morgan, or Wells Fargo, or even BofA, which took a huge hit but $17 a share is better than zero a share, right?

My point is, the bailouts skew the risk analysis that a large (i.e., too big to fail) bank makes. The fear of utter insolvency is greatly diminished. This is echoed by the Inspector General's report (whose "bias" you simply asserted, never argued for). If I'm contemplating a risky investment, I have little concern the company will be completely destroyed if we invest heavily. Nor do I have to worry that I'll necessarily lose any money at all, if it all goes sour. There's now a precedent for pumping insane amounts of cash into companies like mine when we get in trouble, and some of those companies recovered most or almost all of their value.

Or, as the Inspector General's report put it: To the extent that institutions were previously incentivized to take reckless risks through a “heads, I win; tails, the Government will bail me out” mentality, the market is more convinced than ever that the Government will step in as necessary to save systemically significant institutions

You still see no moral risk at all? None whatsoever? SIGTARP has no idea what they're talking about?

Which sounds like a total failure of the compensation committees to adequately supervise.

Agreed, and you're right: shareholders have to take responsibility for allowing it to come to this.


No, but I also wouldn't necessarily dispute the idea that an asteroid hitting the Earth would cause serious economic problems, while at the same time discounting the idea that it will actually happen.

A period of high interest rates in the near future has the same liklihood as an economically crippling asteroid strike? :rolleyes:

If you think so, I'll bet you $1 that we'll be experiencing high interest rates within five years. Since you liken it to an asteroid strike in the next five years, I'm sure you'll have no problem giving me 50,000-to-one odds? 10,000-1?

[drkitten]

But they can count on the possibility they might be the next Goldman, or Morgan, or Wells Fargo, or even BofA, which took a huge hit but $17 a share is better than zero a share, right?

My point is, the bailouts skew the risk analysis that a large (i.e., too big to fail) bank makes.

Yes. And that point is ridiculous; the same argument would suggest that ERs create "moral hazard" in drivers, because there is a chance that first aid and a skilled surgeon might be able to keep you from dying.

[Dorian Gray]

No, the same argument would not suggest that. Try again.

[Malerin]

Yes. And that point is ridiculous; the same argument would suggest that ERs create "moral hazard" in drivers, because there is a chance that first aid and a skilled surgeon might be able to keep you from dying.

Peltzman Effect (http://en.wikipedia.org/wiki/Peltzman_effect)

One study that found the Peltzman Effect to be true looked at increased safety technology in NASCAR race cars. This study found that safer cars and improved restraint devices have led to riskier behavior on the part of the race car drivers and an increase in collisions on the speedway
http://www.nationalsafetycommission.com/alerts/2009/09/safe-roads-and-peltzman-effect.php

Our results clearly support the existence of offsetting behavior in NASCAR--drivers do drive more recklessly in response to the increased safety of their automobiles
http://www.entrepreneur.com/tradejournals/article/167344739_3.html

[Malerin]

The good doc seems to have fled the thread. And before I could admit defeat and talk about the deficit! :)