From the pages of Barron's
March 31, 2009
Web Site Details AIG’s ‘Gift’ To Banks, Backhand To Taxpayers
Posted by Bob O'Brien
If this is borne out, this one’s a game-changer. For the financial sector. For the government’s bailout plans. For the Administration’s leadership.
The website Seeking Alpha published an account Monday of a maneuver by American International Group (AIG) to: a) fraudulently capsize its balance sheet, in order to; b) force the governmen to pour more capital into the capsizing insurance giant, by; c) unwinding billions of dollars of credit transactions with banks that took the other side of those trades, in a way that; d) swelled those banks’ balance sheets with what was effectively a one-time gift, and; e) the Treasury knew about the scheme, and by; f) pumping the capital that AIG clamored for, gave its tacit approval.
(See the Seeking Alpha account here.)
Keep in mind, according to the Seeking Alpha account, this wasn’t a plan by AIG. This was an act: covert, at least from taxpayers - who, let’s be honest, aren’t going to understand the intricacies of sales of credit-linked notes - but overt, with the complicity of AIG executives, especially at its AIG-Financial Products unit, along with banks and Administration officials.
The way it would have come down: AIG knows it needs more capital from the Treasury. To heighten the urgency of its circumstances, AIG placed phone calls with the trading desks of banks that had taken the other side of its financial instruments, and asked for prices from the banks for the value of their whole portfolio. Not a single product, not an individual trade - the whole portfolio.
This is akin to going into a retail store and asking the proprietor, ”How much for this item?” Instead of him saying, ”How much is it worth to you?” the proprietor says, ”Make me an offer.” And then doesn’t haggle.
The result: AIG effectively transferred a huge chunk of its balance sheet to its banking counter-parties. The banks got a one-time shot-in-the-arm to their bottom line. An increasingly desperate AIG gets the capital it clamored for.
Makes it a little less suspicious, doesn’t it, that banks such as JPMorgan (JPM) and Bank of America (BAC) would have come out in early March and said, effectively, ”Hey, we had a pretty darn profitable first two months of the quarter” - inasmuch as the AIG gift-giving would have taken place in January and February - and then followed up Friday with the admissions, ”March, though … not so much.”
In fact, the XLF - the financial ETF - jumped more than 60% from its early-March lows to last week’s highs, but declined nearly 15% combined on Friday and Monday.
The Seeking Alpha author described the maneuver as a ”phenomenal scam,” adding that it had the full ”over-sight and blessing of the U.S. government,” since Timothy Geithner would have known the extent of AIG’s capital requirements, and why it was that its position had withered so dramatically in so short a timeframe. And without disclosure of the money taxpayers effectively lost in the initiative.
The Markets today continued its rally of the Bulls ! The Dow (INDU) finished on a postive note +86.90 (+ 1.16%) at 7608.92. As the Nasdaq (IXIC) +26.79 (+1.78%) to 1528.59.
This day also marks the end of the First Quarter. Tommorrow starts the 2nd Qtr.
