International Writers Magazine - Our Tenth Year: US
- The Other Shoe
If you believe that this is the end of endlessly shoveling money
into the AIG black hole, think again. The other shoe has yet to
AIG was forced
by political pressure to reveal the names of the banks it has paid to
fulfill its obligations with regard to the CDO credit default swaps,
insurance policies against default of the worthless sub-prime mortgage
securities. Here are some of the policyholders who were paid off:
Goldman Sachs $12.9 bn
Société Générale - $11.9 bn.
Deutsche Bank - $11.8 bn.
Barclays Bank - $7.9 bn.
The above, totaling $45 bn. is just a partial list. These policies were
presumably paid at 100% of the face value of the contracts. In addition,
AIG paid $27.1 bn. to other bondholder at a discount to be released
from outstanding contracts. AIG paid out another $43.7 bn. to satisfy
obligations of its securities lending program, where it loaned shares,
which were used in short selling operations, for a fee.
AIG, though legally subject to regulation by the New York Insurance
Department, which compels insurance companies to set aside reserves
to pay off insurance policies, benefited from a loophole that classified
these contracts not as insurance policies but as financial instruments.
Therefore they didnt bother to set aside reserves.
The SEC didnt regulate them either. AIG just wrote policies on
the sub-prime mortgage-backed securities and pocketed the money, assuming
that since the securities were rated AAA by the rating agencies, they
couldnt fail. They just pocketed the money as profit. Easy money.
It later was revealed that the rating agencies were in the pocket of
the bond issuers.
These contracts werent cheap. In order to protect themselves from
the bonds defaulting, the banks paid a high premium: $500,000 plus 25%
of the nominal price of the bond. Billions. Hundreds of billions. When
the bonds defaulted, the banks presented the policies for payment.
AIG didnt have anywhere near that kind of coin. Nobody does. They
were prostrate. Fortunately for AIG, the U.S. Secretary of the Treasury
was Hank Paulson, who happened to be the former CEO of Goldman Sachs.
Paulson arranged for AIG to get the bailout, and the first creditor
to be paid was Goldman Sachs.
Since then AIG, who are the slickest operators in the universe, have
been stringing along the Treasury Department like a game fish, the same
way Madoff strung along the SEC. These regulators are divided into two
categories: boy scouts who dont have a clue and paid operatives
of the banks.
Im not going to cry crocodile tears for the taxpayers. Every step
of the way they were apprised as to what was going on. The politicians
told them, "We are going to end regulation of business". Did
you think they were kidding? They said, "America is all about getting
rich". Did you think they were kidding?
(Let me ask you this. If they said they were going to end police presence
in your neighborhood and rely on the enlightened self-interest of citizens,
would you believe that?)
You cant cheat an honest man. Madoff said, "Dont ask
me what Im doing". His suckers, er, clients, said, "Whatever
hes doing, I dont want to know. Hes putting money
in my pocket". They forgot the old maxim of "Theres
no honor among thieves".
Now AIG is insisting on paying $160 mn. in bonuses, yet, to the traders
who sold these policies to the banks. With a straight face, they are
saying "We have a contract with these agents. We have to respect
No you dont. You can refuse to pay them and let them sue you if
they really feel they earned the money. AIG has been nationalized and
the interest of the taxpayers has to be factored into the equation.
If you contracted a guy to fix your roof and the rain came into your
living room in buckets, the contract would not be legally binding, right?
I worked in the insurance industry for a while, and I know who would
be a perfect fit to throw out that bum, Liddy, and replace him at AIG.
The person I am thinking of is a French insurance CEO, and he turned
around a company that, though much smaller, was faced with exactly the
same issues AIG is. Also, he works for peanuts, relatively speaking,
because he is philosophically against the ethic of greed. But I cant
say his name because I signed a confidentiality agreement, and if I
shoot my mouth off too much I will wind up in a world of shit.
The problem today is, most people have never had a real job or done
any kind of business. Financial writers are hired right out of journalism
school, and they are set up by the newspapers as instant gurus. Politicians
and bureaucrats are processed like Kraft cheese slices and then slapped
into assembly line sandwiches. Its "Brave New World",
where youre classified as Alpha, Beta or Delta. This system is
not going to end until the whole thing crashes completely, because people
are not geniuses. Anything but. The schools are churning out MBAs and
MAs which are worth nothing because the grade inflation has reached
such a critical mass that professors give out As and Bs to students
just for showing up in class. What kind of education do you call that?
I overheard a couple of newly minted attorneys discussing the bar exam:
"I did OK on the multiple choice, but I had a real problem on the
written part of the exam". Knowing this guy, I bet! Next time you
have to go to court, remember that.
Then they go into the labor market and they think theyre still
in school. No, worse, they think the employer is in loco parentis, and
they expect to be indulged 100%.
Forget it, kid, I aint your freakin daddy.
A long time ago this old industrial guy, Jack Callari, was complaining
to me about the low quality of workers he had to hire. He told me "I
hate to say it, but what this country needs is a good depression."
Well, its here. People are going to have to work their way up
the ladder. Former Japanese finance minister Eisuke Sakakibara put it
succinctly: "After the recession is over things will be very different.
The American age is over". The only problem is, there arent
any well-paying industrial jobs like there used to be. MBAs are going
to be working in coffee bars, and glad to have the work. As for the
diploma, you can frame it and hang it up next to your AIG shares.
But that isnt the worst of it. I was saving the best for laffs.
Heres the other shoe. Remember the credit default swaps? Well,
the figures released by AIG show their exposure going forward to still
be in the neighborhood of 2 trillion dollars. At the rate of $160 billion
a year, we should have it paid off around 2020.
© Dean Borok March 20th 2009
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