Bernanke Says Fed Would Welcome ‘Full Review’ of AIG Aid by GAO
I applaud this choice but I want to make sure we are clear that there are major questions about giving “back-door bailouts” to Goldman Sachs and a few foreign banks by giving 100 cents on the dollar for credit-default swaps AIG held. Other counter-parties did take a discount or “haircut” on those debt insurance contracts so there is some explaining to do on those decisions.
To this point both Treasury and the Federal Reserve do not see any problem with their choices on this matter and the amount of U.S. tax payer money they used to bailout this insurance company. Honestly, the financial products division did not need to be bailout out, their normal insurance operations where is separate subsidiaries so even if that company failed they would still be able to make good on their other obligations. The reality is that major investment banks and foreign banks did not do proper due diligence on the ability of AIG to make good on this insurance in the event of a economic downturn and they should of been made to pay in a true free market system.
Bloomberg, New York - Federal Reserve Chairman Ben S. Bernanke said the central bank would welcome a “full review” of its aid to American International Group Inc. by congressional auditors and make all necessary records and personnel available to them.
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U.S. bill would restrict over-the-counter (OTC) derivatives with new regulations
This is much needed. In no way can we have financial instruments that equal ten times the globe’s GDP and not have it under strict regulation. The reason is because these paper contracts were used to get more leverage which is fine when everything is stable but can be a total disaster when the economy goes south or the firms that have written these go bust and causes them to go to “full performance”.
These should not be on any off-balance-sheet transaction and any company holding them should have strict capital requirements just like any other form of insurance that protect the policyholder against the institution from defaulting. If you read a book called “The New Monetarism” it has an interesting chart that shows an inverted pyramid with real assets at the bottom and OTC derivatives at the top and that represents global liquidity. In this chart, these derivative instruments represented 75% of all the liquidity in the system.
News (Reuters):
U.S. financial regulators would gain the power to restrict holdings of over-the-counter derivatives under legislation to be considered this fall, the chairmen of two House committees said on Thursday.
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Investors show that canned soup is safer than U.S. Bonds
This is quite funny that traders and investors actually prices the risk of the U.S. Treasury defaulting on thier obligations higher than Campbell Soup doing the same. With the amount of bonds being issued and the rising interest rates from the “Bong Vigilantes”, I have to agree that canned soup is safer at this point.
I heard a hearing with Ben Bernanke in front of Congress this weekend and he was asked if foreign investors could not buy all the Treasuries we are going to issue this year, would he monetize that debt via open market purchases. He said he would not, I am not sure how he is going to “not” do that unless we are going to raise taxes through the roof and seriously cut government spending. I don’t see either happening soon so I would think the easy way out for the politically minded folks, is to just print the money and devalue the dollar.
News (Reuters):
No, we’re not talking about stocking a bunker for survival. This is talk about safe investments.
U.S. Treasuries, traditionally considered the safest of all investments because the debt is backed by full faith and credit of the U.S. government, is losing favor among derivatives traders to Campbell Soup Co, Microsoft Corp and Intel Corp as concerns over the government’s massive deficits and costly bailouts mount.
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New York’s Attorney General Cuomo Widens His A.I.G. Investigation
Hopefully we will see our justice system starting working soon and many of this actors in this huge fraud put on the the American (and others) people. I am really surprised we have not seen the proverbial “witch-hunt” happened, its pretty obvious that crimes were committed and many people were complacent.
Instead we are worried about millions in bonuses (what about the trillions in secret loans from the Fed?) or booting GM’s CEO when we have not removed one bank or insurance CEO when they have losses that amount to ten times what these automakers have. In defence of the Big 3, at least they are providing jobs and we are making something compared to the shenanigans these banks are pulling. Please Mr. Cuomo, set the precedent we need so these does not happen again, soon.
News (NY Times):
Attorney General Andrew M. Cuomo of New York said Thursday afternoon that he was widening his investigation of the American International Group to examine whether its trading counterparties improperly received billions of dollars in government money from the troubled insurer.
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A.I.G. Reports 4Q Loss of $61.7 Billion as U.S. Gives More Bailout Aid
Wow, that just about sums it up. $61.7 billion loss in a single quarter. That is some major derivative exposure and losses. I can’t believe we are actually throwing money at this black-hole of liabilities. There will be outrage if we actually bailout all these unregulated insurance contracts out. It really makes me question why I am sending 1/3rd of my pay to our representatives that in turn have decided to reward greedy corrupt people, if save this flawed system, that is one thing. But, I want to see the board, executives, shareholders and bondholders get wiped out so I know they are not profiting from this mess and we are setting a precedent that will make the next lot think twice about running these types of practices. Here was the most scary statement of the whole article, “Although he avoided offering a forecast on the first quarter, Mr. Liddy said A.I.G.’s outlook was “very much going to be influenced by what happens to the condition of the economy and the financial marketplace around the globe.”” Well if I read this right, you have insurance that is tied to the markets going up when it looks like we are about to have Great Depression 2.0. When do this intervention stop and we let the markets sort this out?
News:
The loss of $22.95 a share compared with a fourth-quarter loss in the period a year ago of $5.3 billion or $2.08 a share. For the year, A.I.G. lost $99.3 billion or $37.84 a share, compared with a profit of $6.2 billion or $2.39 a share for 2007.
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Warren Buffett defends the use to derivatives at Berkshire Hathaway
Warren can defend these all he wants but he was also the one who coined them as “Weapons of Financial Mass Destruction”. I am surprised that he has so much exposure ($67 billion) to these products. I hope he has been doing the right thing and keep reserves for these insurance contracts like a normal regulated insurance product would normally be.
I really don’t have much issue with the concept of a financial product like this, but be unregulated and a industry that did not have the foresight to self-implement some sort of reserve requirement is no good and as a important lesson, we should not bailout any of these companies that are taking losses like these, the fees were easy in the boom years so companies got greedy, now its time to instill fear back to these markets to keep the balance between fear and greed.
News:
Saying “derivatives are dangerous,” Warren Buffett defended his use of them after they played the main role in driving Berkshire Hathaway Inc annual profit to a six-year low.
Buffett devoted one-fifth of his 21-page annual letter to Berkshire shareholders to explaining how he uses derivatives to make long-term bets on stock markets, corporate credit and other factors.
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Bank nationalizations may not trigger credit-default swaps
This may be true but what is being not said is that anyone who is nationalizing that bank will have to take over their own credit-default swap exposure as well and with the BIS (Bank of International Settlements) reporting there is over $500 trillion dollars of this paper running around, that would be quite a large amount of liability exposure to back. These banks are insolvent in my eyes because of their bad decisions and they should go under and have have their assets sold to a prudent bank. This is the way of the markets are we should let it take its course.
News:
Governments would need to take over all the assets of a bank and take charge of daily operations for a nationalization to trigger payouts on credit-default swaps, according to Bank of America Corp. analysts.
Simple nationalization wouldn’t be enough to settle the derivatives, which protect investors against a company defaulting on debt repayments, New York-based strategist Glen Taksler wrote in a note today. A collapse in share prices of New York-based Citigroup Inc. and Royal Bank of Scotland Group Plc is stoking speculation the U.S. and U.K. will be forced to take full ownership of some financial institutions.
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