Swans Commentary » swans.com March 23, 2009  



Blips #83
 From The Martian Desk


by Gilles d'Aymery





"I cannot imagine any condition which would cause a ship to founder. I cannot conceive of any vital disaster happening to this vessel. Modern ship building has gone beyond that."
—Captain Edward J. Smith, Commander of the Titanic


(Swans - March 23, 2009)   HEY CLASS, had fun last week? Got your blood boiling over those AIG bonuses? Took your pitchfork out of the garden tool shed to go after the 400-plus miscreants who were awarded a share of those $165 millions of taxpayer money? We could use a few scapegoats to vent our angst, couldn't we? Perfect target, right? And what to say of the members of the House Financial Services Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises expressing their outrage as they grilled Edward Liddy, the chairman of AIG? Great spectacle, right? The Cable channels had a feast, an entire week of show business. Poor Liddy had his ass whipped. The masses applauded.

AN INTERESTING fellow this Edward Liddy. He was called upon for service to his country last September by the then-secretary of the Treasury, Hank Paulson, came out of retirement, and for a symbolic $1 salary went to work to salvage the giant financial company. He was the right choice, having been the chairman of another big insurance company, Allstate, from 1999 to 2007, which rewarded him with $137 million in compensation, of which $14 million were awarded in stock as "a tool for retaining executive talent." (Sounds familiar?) In addition to his skills in the insurance business, Mr. Liddy, a self-defined "modest worker" who owns only three residences, had knowledge in the financial and industrial markets. He was on the board of directors of 3M, Boeing, Kroger, and whadya know, Goldman Sachs -- the latter being a plum job worth over $600,000 a year. Liddy resigned from the board when he took over the AIG stewardship -- but he was in the loop during those fateful September days when Lehman Brothers was let to fall, some would say driven, into bankruptcy (that was on September 15, 2008...note the date) and AIG, immediately thereafter, on September 16, was rescued with a Fed and Treasury bailout of some $85 billion.

AIG had sent an instructive memo to the federal authorities entitled "AIG: Is the Risk Systemic?" (PDF), also known as a gun-to-the-head memo explaining, in short, that if the government did not come to the rescue the company would take the entire financial WORLD down with it. Allow me to refresh your memory and dress the picture. Mr. Liddy was a member of the board of GS who was tapped for the AIG chair. The four people who decided on the rescue were: 1) Then treasury secretary Paulson, a former CEO of GS. 2) Timothy Geithner, then president of the Federal Reserve Bank of New York and current secretary of the Treasury -- a protégé of Robert Rubin, the secretary of the Treasury under Bill Clinton, former CEO of GS, and until recently a Citigroup top honcho and interim chairman. 3) Ben Bernanke, the chairman of the board of governors of the Fed, and a protégé of Alan Greenspan, the former Fed chief. 4) Lloyd Blankfein, the current CEO of GS, who was according to the reports an American citizen willing to help for the sake of the country. As said, the decision was made and signed off by then president George W. Bush on September 16, 2008.

MORE HAPPENED during those fateful days. Take September 15. On or around that day, according to Representative Paul Kanjorski -- the Democrat of Pennsylvania and chairman of the House Financial Services Subcommittee, which gave Liddy a hard time for the benefit of the gallery -- a record $550 billion was drawn out of money market accounts in the U.S. in just one hour or two. Actually, listen to what Rep. Kanjorski had to say on January 27, 2009, in a C-Span interview regarding the events that occurred around September 15, 2008:


$550 Billion Disappeared in "Electronic Run On the Banks"


YOU CAN WATCH the interview in its entirety on C-Span. For those of you with only a modem connection, here is an excerpt:

On Thursday [ed. presumably Sept. 18], at about 11:00 in the morning the Federal Reserve noticed a tremendous draw down of money market accounts in the United States, to the tune of $550 billion was being drawn out in a matter of an hour or two. The Treasury opened up its window to help. It pumped $105 billion into the system and quickly realized that they could not stem the tide. We were having an electronic run on the banks. They decided to close the operation, close down the money accounts, and announce a guarantee of $250,000 per account so there wouldn't be further panic out there. That's what actually happened.

If they had not done that, their estimation was that by 2:00 pm that afternoon, $5.5 trillion would have been drawn out of the money market system of the United States, would have collapsed the entire economy of the U.S., and within 24 hours the world economy would have collapsed. Now we talked at that time about what would happen if that happened. It would have been the end of our economic system and our political system as we know it.

KANJORSKI, no dummy, went on to say, "[w]e are no better off today than we were three months ago because we have a decrease in the equity positions of banks because other assets are going sour by the moment." He concluded with a somber metaphor, saying that "somebody threw us in the middle of the Atlantic Ocean without a life raft and we are trying to determine which is the closest shore and whether there's any chance in the world to swim that far... We don't know!"

FAST FORWARD to one-plus month later -- that is last week: While you good people were crying for the hanging of some 400 traders and managers that are trying to unwind AIG positions in credit derivatives, which so far they have reportedly managed to lower the risk from $2.7 trillion to $1.6 trillion, some other news were left from the front pages of your local newspaper and from the TV reporting. For instance, AIG released the list of counterparties (PDF) to which the taxpayer (of the future) bailout money was handed over. Goldman Sachs tops that list with almost $13 billion, which, depending upon your outlook, could be viewed as an irony or a deepening swindle concocted to transfer ever more money from the bottom of the polity to the sharks at the top of the pyramid. Let me elucidate that little chicanery. GS had a $20 billion exposure to AIG, but we were told that the risk was fully hedged. Then Baldie (former trez sec and former GS CEO) let GS off the hook, allowing the investment bank to become a bank holding company -- a commercial bank -- which gave GS the opportunity to benefit from the TARP money in the order of $10 billion. Well, it now turns out that GS got another gift, courtesy of the polity, in the order of $12.5 billion. AIG has become a channel to redistribute money once again from the bottom to the top.

ONE GUY who got the shenanigan real fast is the former governor of New York, Eliot Spitzer. As he wrote in Slate on March 17, 2009, "The Real AIG Scandal: It's not the bonuses. It's that AIG's counterparties are getting paid back in full." Spitzer poses all the right questions (though, I think he is incorrect in regard to the initial US $25 billion capital infusion in GS -- I think it was "only" $10 billion, but I can be wrong, right?). Amusingly, just over one year ago, then NY governor Spitzer was on his way to Washington to testify in the same committee chaired by Rep. Kanjorski about the financial malfeasance of who else but AIG and the investment banks like GS, when he was taken down for a tryst with a call girl -- nothing less than a political assassination. You may recall that at the time our masters of the universe in their laminated and marble-covered business suites uncorked bottles of champagne galore. That was just a year ago. Time flies.

SO, IT'S NOT particularly hard to fathom the reason behind the tar-and-feathering of a few unlucky fellows that found themselves in the middle of a crossfire over Dead Street. It's called a distraction from the real events and a diversion created to lead the rabble away from the real site of the crimes that keep taking place under our confused noses and brainy emptiness.

SOMETHING ELSE that was not much reported last week -- and I shall leave you with this tidbit -- is the speech delivered to community bankers by Federal Deposit Insurance Corp. Chairman Sheila Bair. Bair, who has been quite prescient, said that "[w]ithout additional revenue beyond the regular assessments, current projections indicate that the [depositor investor] fund balance will approach zero." Keep in mind that the FDIC insures over $13.5 trillion deposits in some 8,300 institutions. Here goes your $250,000 guarantee!

AND LAST WEEK, the FDIC had to take over yet another two financial institutions with combined assets of $57 billion, the U.S. Central Federal Credit Union and Western Corporate Federal Credit Union.

POST SCRIPTUM: I once suggested that at the closure of Mr. Bush's tenure the federal debt would reach $10 trillion. I regretfully missed the mark slightly. The federal debt has officially passed the $11 trillion mark. And the Fed "assets," which were about $1 trillion dollars, are expanding toward $4.5 trillion, thanks to the famed printing press. I've been saying it all along, the problem is not the (falling) value of assets, which cannot be valued in frozen markets anyway...the predicament is one of too much debt. Debt must be erased.

WHAT IS IT that you do not understand gang? Okay, go hang a few bonus-getters if it makes you feel better (avoid my door, I am worthless). But you should keep in mind the words of Captain Edward J. Smith.

 . . . . .

C'est la vie...

And so it goes...


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La vie, friends, is a cheap commodity, but worth maintaining when one can.
Supporting the life line won't hurt you much, but it'll make a heck of a 
difference for Swans.

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Internal Resources

Blips and Tidbits


About the Author

Gilles d'Aymery on Swans (with bio). He is Swans' publisher and co-editor.



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Swans -- ISSN: 1554-4915
URL for this work: http://www.swans.com/library/art15/desk083.html
Published March 23, 2009