Freedom of Expression
Warning: This is Not another Wall Street Conspiracy Theory, but Facts
I found an article by a noted economic adviser, Shah Gilani in a very important economic periodical on the net. The topic addressed in this is related to subjects quite close to our own in this country. How in the US stock market taxpayers’ money is swindled to fill pockets of Goldman Sachs and others is discussed. The height of corruption in that country becomes clear from this discussion and so I am giving it on this blog so that we will know what our counterpart boys are likely to indulge in, when big banks like State Bank, ICICI, Orient, Punjab are going to blunder by investing the depositors money on the gambling den of the stock market. To save the banks there in the States Fed (Federal Reserve) poured taxpayers money to them and there is no questioning to them as the bosses are all hands in gloves similar to here where CEOs of the banks are hand in gloves with the racketeers from the stock market. The ultimate looser is the taxpayer and the depositor and he even does not know about it!
Please read what Shah has said about the affairs in the US.
Just last week, the House Committee on Oversight and Government Reform held a hearing on the U.S. Federal Reserve's decision to directly pay billions of dollars to banks as part of its scheme to bail out insurance giant American International Group Inc. According to committee Chairman Dennis Kucinich, D-Ohio, the testimony that congressmen heard just didn't "pass the smell test." What really stinks about the whole mess is not only the cover-up of what really happened and why, but the inability of anybody in Congress to actually do their homework and be able to frame pointed questions and get to the truth. It's not complicated, but it is convoluted (long-winded). Here are the facts and some questions that Congress needs to ask - and that the American people deserve straight answers to.
What the House Committee heard, overwhelmingly, on Wednesday was that AIG had to be bailed out because if it wasn't, the financial implosion (explosion that causes building to collapse within) that would result would send unemployment to 25% and America into the tailspin of another Great Depression.
U.S. Treasury Secretary Timothy Geithner and former Treasury Secretary Henry M. "Hank" Paulson Jr. both testified that the systemic risk resulting from the bankruptcy of AIG would destroy the company's insurance businesses, devastating millions of Americans and resulting in economic ruin.
Let's start there. The reality is that at the time of the government's initial $85 billion infusion into AIG on Sept. 16, 2008, for which it received a 79.9% ownership interest; there was no mention of AIG's endangered insurance subsidiaries. In fact, New York Insurance Superintendent Eric Dinello, who oversaw AIG's insurance businesses, was confident enough in the subsidiaries to consider transferring $20 billion in excess reserves from the insurance subsidiaries to their AIG parent.
What were really sucking the life out of AIG were collateral demands - in other words, margin calls. A wholly owned, London-based financial-products subsidiary of AIG had written hundreds of billions of dollars of credit-default-swap contracts on exotic collateralized debt obligations (CDOs).
The derivative swaps on the CDOs were insurance policies that would protect the buyers of those CDOs against losses on underlying sub-prime mortgage pools. As losses on sub-prime mortgages mounted, the insured parties demanded more collateral from AIG. AIG ran out of cash to make the collateral calls. At the time of AIG's crisis, the Fed and the Treasury Department were terrified that if the "counterparties" to AIG's credit default swaps weren't paid, the ripple effect would threaten all counterparties - not to mention the entire financial system.
So here's what the Fed did. It formed two Delaware-based, limited-liability companies, Maiden Lane II and Maiden Lane III (Maiden Lane I had already been set up and funded by $29 billion of taxpayer money to buy and hold the bad assets from the failure of The Bear Stearns Cos., so that JPMorgan Chase & Co. (NYSE: JPM) could take over whatever remained of Bear's carcass). Taxpayers money is used without the consent from the senate, all done clandestinely!
Maiden Lane II borrowed $19.5 billion from the Federal Reserve Bank of New York to buy $39.3 billion of residential mortgage backed securities from AIGs solvent insurance subsidiaries for $20.8 billion, or about 50 cents on the dollar. Maiden Lane III borrowed $24.3 billion from the New York Fed to buy an asset portfolio of CDOs, whose "fair value" was estimated to be $29.6 billion.
The CDOs were purchased from AIG's counterparties. Between the $29.6 billion the counterparties received, and the cash they got from the collateral calls provided by taxpayers when AIG didn't have the cash to make good on its obligations, those counterparties were made 100% whole on more than $62 billion in par value of toxic-derivative CDOs. Toxic-derivatives are those investments who are sure to fail!
Here's the rationale behind this egregious (very bad) maneuver: Government officials believed that the counterparties would sell their toxic junk, and would then cancel their CDS insurance contracts with AIG - which would then end the margin calls. They are likely to sell that junk to any outside country like India or China! Indian prime minister who is known to be the agent of American interest is expected to force any one of the above mentioned banks to buy them and that means Indian taxpayers will pay for it ultimately!
In the public hearings, House Committee members focused on why the Fed paid out 100 cents on the dollar to the counterparty banks and why those involved in the payout scheme then tried to hide who got that taxpayer money. But the real story was unfolding behind the scenes. Congress doesn't know about it, and the American people don't know about it either. Nevertheless, it will prove to be nightmare affair of massive proportions. Although there were many U.S. banks that received inordinate amounts of money in this pay-off scheme, an equally sickening amount was paid to a handful of foreign banks.
But the biggest recipient of the cash siphoned from taxpayers was Goldman Sachs Group Inc. (NYSE: GS).
A Conspiracy Theory You Can't Laugh Off
The same day that AIG received the $85 billion taxpayer infusion back in September 2008, Goldman Sachs Chief Financial Officer David A.Viniar said he "would expect the direct input of our credit exposure to both of them [referring also to bankrupt Lehman Brothers Holdings (OTC: LEHMQ)] to be immaterial."
Goldman officials had been telling every analyst or journalist who would listen that the investment bank was hedged against any counterparty risk. But what Goldman officials weren't saying at the time was that the company was also hedged against AIG going bust. How? The company had purchased credit-default-swap insurance on AIG's demise. We know that is true because Stephen Friedman - the former Goldman CEO and onetime New York Fed chairman who was called to testify at the hearing - said so.
Attached to Friedman's "Factors Affecting Effects to Limit Payments to AIG Counterparties: Prepared Testimony of Stephen Freidman Jan. 27, 2010," was a "Chronology of Selected Events and Disclosures."
That chronology included a reference to an Oct. 31, 2008 Wall Street Journal article that Friedman specifically chose to illustrate that it was common knowledge that Goldman was not in need of any government assistance, and wouldn't be in any danger if AIG were to fail. This Journal excerpt included by Friedman contained the statement: "Goldman hedged its exposure by making a bearish bet on AIG, buying credit-default swaps on AIG's own debt, according to one person knowledgeable about this move."
Friedman was called to testify for one very key reason: At the time of the payments to the counterparties, he was chairman of the board of the New York Fed, which authorized those payments. But that's not all. As a member of the board of directors and a former CEO of Goldman Sachs, Friedman would no doubt have had an excellent idea of the investment bank's exposure to AIG - as well as what it stood to gain from those payments. Freidman subsequently resigned from his post at the New York Fed on May 7, 2009, in response to criticism of his December 2008 purchase of $3 million of Goldman stock, which added to his substantial holdings - a purchase made only after he had ushered through Goldman's approval to become a bank-holding company, enabling the firm to feed at the Fed's generous liquidity trough.
Friedman continues to serve on Goldman's board. But that's another story.
Another Way to Print Money
Congress and the public have forgotten what was happening in the fall of 2008. Mortgage-backed securities (MBS) were not trading. There were no buyers. It was impossible to accurately price mortgage securities and even harder to price CDOs. The only "price discovery" mechanism was the London-based Markit Indices. These indices were supposed to represent various pools of mortgage securities and CDOs. Unfortunately, it is possible to make bets on the direction of the indexes. In order to hedge what holders of these complex and toxic assets couldn't sell - or for pure speculation or "other" purposes - traders sold short and drove down the indexes.
It didn't matter that mortgage pools really weren't defaulting and that they were still paying out cash flow, they were judged to be worth pennies on the dollar simply because the only "active" price-discovery mechanism against which they could be valued were the indexes. And it was these indexes - which were being shorted by "interested parties" - that drove down prices and triggered collateral payments on credit default swaps to AIG's counterparties.
Goldman was paid 100 cents on the dollar - or some $12.9 billion - for the CDOs it had AIG write credit default swaps on. All the counterparties got 100 cents on the dollar. Why is that an issue? Because the CDOs that were insured hadn't actually defaulted and were still - according to what Maiden Lane III paid - worth about 50 cents on the dollar. So why would the Fed assume the CDOs were never going to recover and that the insured parties were entitled to get paid as if the collateralized securities were totally worthless?
Even more suspicious is the fact that there was a more elegant and simple solution to the problem. And that solution was already available. Why was it not used?
The problem at the time was that rating-agency downgrades were about to trigger more margin calls against AIG. By then, however, the U.S. government already owned 79.9% of AIG. Surely it would have been cheaper for the government to make any margin calls than to pay off all of the counterparties. Even more sickening: If that solution was implemented as the value of the CDOs increased (which some have), collateral that was given to the counterparties would actually have to be returned to AIG - now 80% owned by U.S. taxpayers. We cannot say this simple solution U.S. government did not get to. That means the whole affair was deliberately concocted. For whose benefit?
This whole affair raises scores of questions. Last week's hearing before Congress drove that point home. In fact, as I watched the testimony, I realized that our elected representatives didn't even know the correct questions to ask. That's why it's time to write your congressmen and tell them to ask the, to the point, questions to get the facts out of the horses mouth.
- Why didn't the Treasury Department make the required margin calls - if they were needed - and stand to get collateral back if the insured CDOs rose in value?
- Why did the New York Fed buy paper at 50 cents on the dollar and pay banks 100 cents, when they had no idea what the intrinsic value of those securities was at the time?
- Who really leaned on the New York Fed to not disclose who got our taxpayer money?
- What did Stephen Friedman know about the payments to Goldman?
- What records exist of correspondence between Friedman and Timothy Geithner, who was then president of the New York Fed?
- What records exist of correspondence between Friedman and Henry M. Paulson, Geithner's predecessor as Treasury secretary and a former Goldman CEO himself?
- If Goldman was really hedged as Friedman appeared to claim, then why did taxpayers pay the investment bank 100 cents on the dollar?
- Did Goldman (and others) drive down the value of securities to collect cash, demands to be made whole and at the same time buy credit-default-swap insurance on AIG, which they were helping to sink?
- Can we see the trade blotters of Goldman's trading desks to determine what trading strategy those traders employed during this period and later when making record profits?
- Why are so many Goldman Sachs people in so many powerful government positions?
- Why has the United States government allowed a cabal (group) of financial interests to hijack America?
To this report, American responses were quite eloquent. Let us read them too.
Shah Gilani’s article raises some questions that I think our Congress is too afraid or stupid to ask, after all, no one in Congress is going to loose their jobs over the financial crises that has this country in a strangle hold. And perhaps the people of this country are too afraid or stupid to hold Congress accountable for allowing the banks to rob us blind, yet again. See the mental set up of American ordinary people is almost same as that of our Indian counterpart!
Few have any financial knowledge or interest except to get re-elected. Questions would embarrass their primary funding sources and perhaps cut off their supply of money for their next run. This situation will be swept under the rug after appropriate grandstanding and we savers will be left to pay the bills. American politicians are not different from those here!
The centralizing flow of money away from the people and the land needs to be reversed at the source, not at the top where more banks can find more ways to subvert any new ‘banking’ laws. Indian Reserve Bank is not answerable to people!
Congress is owned by Wall (Dalaal) Street. Blank Fein and Dimon let their dog bark at them from time to time to perpetuate the illusion of democracy. But it’s all bullshit! Your role is to shut up, buy cars and LCD TV’s, eat fast food, and send your sons to die in some foreign hell-hole so Halliburton shareholders can get richer. The beauty of this system is that Americans actually believe all the crap (nonsense) and believe they are the best. This last comment tells about the slapdash mentality of American common man, when he is careless why should his representatives be more vigilant.
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