Geithner said to broker costly AIG deal with Wall Street in secret

Image by AFP/Getty Images via Daylife

When he was president of the New York Federal Reserve, Treasury Secretary Tim Geithner secretly negotiated the deal forcing AIG to repay some Wall Street creditors every last penny they were owed — even as the insurer tottered on the edge of insolvency, a new report says.

Usually, when businesses are about to go under, they can wring big concessions from creditors — paying a fraction of outstanding liabilities. Some creditors get nothing.

But according to a show-stopping story from Bloomberg, last November Geithner pushed aside an AIG executive to personally negotiate termination of $62 billion in complex derivative contracts with Goldman Sachs, Merrill Lynch, and other Wall Street creditors. The AIG executive reportedly was trying to extract big concessions — as much as 40 cents on the dollar.

Perhaps Geithner thought the payments would give him a discreet way to supply taxpayer dollars to firms that were struggling to stave off a Lehman-like end. Arguably, he may have been trying to prevent more panic in a panic-ridden market. In any event, according to Bloomberg. Geithner  agreed to pay the firms 100 cents on the dollar for pesky contracts — credit-default swaps — that insured all kinds of toxic waste now sitting in a Fed-run portfolio.

Bloomberg says the decision cost US taxpayers $13 billion.

Janet Tavakoli, founder of Chicago-based Tavakoli Structured Finance Inc., a financial consulting firm, says the government squandered billions in the AIG deal.

“There’s no way they should have paid at par,” she says. “AIG was basically bankrupt.”

Citigroup Inc. agreed last year to accept about 60 cents on the dollar from New York-based bond insurer Ambac Financial Group Inc. to retire protection on a $1.4 billion CDO.

via New York Fed’s Secret Choice to Pay for Swaps Hits Taxpayers – Bloomberg.com.

But William Poole, a former St. Louis Federal Reserve Bank president, defends the payments:

“I think the Federal Reserve was trying to stop the spread of fear in the market,” Poole says. “The market was having enough trouble dealing with Lehman. If you add, on top of that, AIG paying off some fraction of its liabilities, a system which is already substantially frozen would freeze rock-solid.”

The story continues:

Still, officials at AIG object to the secrecy that surrounded the transactions. One top AIG executive who asked not to be identified says he was pressured by New York Fed officials not to file documents with the U.S. Securities and Exchange Commission that would divulge details.

“They’d tell us that they don’t think that this or that should be disclosed,” the executive says. “They’d say, ‘Don’t you think your counterparties will be concerned?’ It was much more about protecting the Fed.”

Bloomberg is in the middle of pursuing a Freedom of Information Act filing to get the Fed to disclose its Operation Bailout activities. The story of what happened during the terrifying days of September and October is still unfolding. Andrew Ross Sorkin’s new hot-selling book Too Big to Fail reveals that despite many protestations otherwise, Goldman Sachs and Morgan Stanley were battling the same forces that brought down Lehman Brothers. As details emerge, taxpayers will learn whether Geithner got fleeced by more experienced negotiators or if he erred on the side of prudence in an effort to prevent the total collapse of Wall Street. One thing is clear: No one in the Fed or Treasury thought to make the hand-outs from AIG conditional on some kind of meaningful payback to taxpayers.

Where were you when the Dow hit 10,000?

Brueghel's Lancscape with the Fall of Icarus

Me? I was a captive in a giant bubble with a giant flat-screen TV blaring anything that came into the heads of the intrepid CNBC news team. We floated high over Manhattan and the busy waters of the Hudson, where ships, paying no attention to a woman looking desperately for the on/off button, sailed calmly by.

I tried not to look at the high definition images; but I couldn’t resist.  Which was more obscene, I wondered: The perfect hair or the way the talking mannequins handicapped the Dow like a horse race? Or is it that the Dow is skewed for success? The index of 2009 is nothing like the Dow of 1999 or even the 10,000 Dow of October 2008 — which included the now discarded Citicorp, AIG, and General Motors?

What exactly is it that everyone is cheering? That Dow Jones had the good sense to ditch losers? There was a nod on CNBC to pain and joblessness — 15 million and growing. But after doffing its hat to the pain of the unemployed, the cheering resumed: A toast to the future! A sigh of relief for the able-bodied survivors of the economic smash-up.

From a bubble close to the sun, glare creates unexpected blindspots: it’s easy to miss both the plane coming at you and the details way below. But it should be quite obvious that this milestone is pretty bogus unless you are a momentum or day trader, in which case you are REALLY happy. I think of this Dow 10,000 as the “let’s pretend rally.” Let’s pretend Citicorp isn’t a ward of the United States, that AIG isn’t the biggest boondoggle in the history of financial screw-ups, or that General Motors didn’t cost taxpayers a dime. Let’s pretend that we aren’t still facing massive defaults on mortgages and credit cards.  Let’s pretend that, say, if you’re a European investor that the value of your investment in the past decade isn’t down 25%- 30% with an unchanged Dow index because the greenback is, how shall we say, not even on the rez-de-chaussee and could soon be sharing a cold water flat with the Zimbabwe dollar, once home to more trillionaires than the Weimar Republic.

The blonde CNBC babe jabbering away on the floor of the New York Stock Exchange doesn’t seem to be focusing on those things — although to be honest I really wasn’t listening to what she was saying because to my amazement I thought she was showing some cleavage. Now I don’t normally notice women’s breasts. But somehow I thought, oh, great, there’s progress. In the course of ten years the Dow goes in one big fat circle and what the hell is she wearing?  And then she starts to interview these two super-sized galoots in gray suits who tower over her buxomness. And I’m thinking, yeah, those guys are really focused on Dow 10,000; they’re staring down the next big milestone.

You know, the problem all starts with our assumptions. Ask any economist or derivatives wizard creating their models about that! So let’s look at the assumption that is the basis for our joy at this glorious moment of the deca-millennial Dow. It’s always called a leading index. But with all the dollars sloshing around the financial system looking for a home, there’s more than one or two people who think this whole rally is just a central-bank induced run-up. Maybe the Dow isn’t a leading indicator anymore; check out this chart that challenges that notion as well.

Just as I’m reviewing all my old assumptions while floating in my bubble, I notice that the CNBC cameraman has  pulled back on the buxom business reporter revealing that…  she has a huge baby bump. The girl is hormonally enhanced. She can’t help being over-the-top voluptuous because Mother Nature has sprinkled fairy dust all over her and now I think someone should be offering her a seat. What’s wrong with those galoots?

As my day winds to an end, the Dow kisses 10,000 and  I miraculously board an elevator equipped with a pint-sized news screen (Weather: Sunny, not wet! The Dow dries our tears!) and then glide across marble floors toward the subway. Just before the exit, I pass a small, elegant restaurant. It’s no longer lunch, not yet dinner. The waiters snap open fresh white linen clothes and spread them on empty tables. Cobalt water bottles and elegant vases grace the recently changed tables. The sun sparkles. It’s  a Dow 10,000 kind of place. At a riverside table two middle-aged men in dark suits linger; the one facing me wears a yellow tie. He is smiling, still good looking; jowls barely noticeable. A waiter appears with a bill in a leatherbound book. His friend reaches for the check. “Oh, no, no,” the fair-haired executive seems to say. His friend vigorously shakes his head. The fair-haired executive concedes but indicates that next time, lunch is on him.

And then, I imagine his dining partner countering: “Don’t worry about it. It doesn’t really matter. The taxpayer will pay. Every time.”

Bon appetit. And felicitations, Dow. Quite a splash.

Art: Musees  royaux des Beaux-Arts de Belgique, Brussels 

You want bonuses? Pay the invaluable ones in AIG stock

Image via Wikipedia

Do you think Obama lost the little sticky note on his desk that said: Do something about the AIG bonus payments due on July 15?

Maybe the computer hackers in North Korea wiped out the Outlook calendar pop-up that would have reminded Kenneth R. Feinberg, the financial bonus czar, to manage the AIG p.r. bonus problem.

Or maybe someone in Barney Frank’s office devilishly tinkered with the White House tickler system so the congressman could appear before TV cameras all flushed and outraged about a company that has received $180,000,000,000 in taxpayer money paying $2,400,000 to its 40 top-ranking executives — about $600,000 per person.

In case you’ve missed the news, AIG is asking the White House for permission to pay its top executives bonsues — as contractually agreed — on July 15. I can only guess that the the White House will pretend to be surprised that AIG is asking for its blessing. But if you emasculate a company, then put it on life support with a tube running directly into the Executive Branch of government, what can you expect? Considered, independent judgment?

It’s really too bad that no one had the nerve last fall to put AIG out of its misery and into receivership, which Federal Reserve Chairman Ben Bernanke told Congress earlier this year would have been a very good option.  Then no one in the Administration would be forced to mumble something about how these contracts really, really count (no do-overs, except when it comes to handing out more and more $$$$) as opposed to the contracts that don’t count because when you’re about to go out of business and everything and anything should be up for negotiation. Now we’re stuck thinking once more about AIG, what a mess it is, and this whole bonus thing. Doesn’t everyone realize that it’s summer and we should be on the beach thinking about the little green shoots (aren’t they darling?) and how the world isn’t coming to an end after all? I feel like we just opened a national report card and the news is really bad. Summer school for everyone! The curriculum is brutal: wall-to-wall AIG with an emphasis on bonuses and the evils of Wall Street. First, we’ll be forced to review all the newspapers that wrote about those nasty bonuses; then we’ll read the bloggers; and if we still don’t get it, we’ll be forced to watch reruns of everyone shouting at one another on CNBC in surround sound.

I promise, next time round, to learn my lesson. But perhaps we can all avoid summer school by coming up with a solution to the AIG bonus problem. And believe it or not, I think I have it. Pay the bonuses in AIG stock. If these top guns think they can bring the company from the brink of oblivion, then they will welcome the opportunity for skin in the game. But if they secretly agree with Citigroup analyst Joshua Shanker, then they’ll be putting up their houses for sale. On Thursday, Shanker wrote that AIG stock has a 70% chance of going to zero, as in nada. Nothing. “That reflects the risk of further losses on credit-default swaps and the company’s increased willingness to sell businesses at low valuations, Shanker explained.”

Them’s fightin’ words. AIG stock slumped 21% after Shanker’s report made the rounds.

I say to the top execs of AIG, if you want to let Shanker know he’s wrong, then vow to take your bonuses in stock. Stand tall. Stand proud. And if you do a really good job — as in returning every last penny of American taxpayer money before my hair turns gray — you won’t ever have to ask the White House again for another compensation blessing.

Now, please, let us all return to our regularly scheduled vacation stupor.

The sword of Obamacles is back

The Sword of Obamacles

For a moment, in the wake of the much ballyhooed bank stress tests, the markets thought that Washington was going to back off from micromanaging Wall Street. But  word that the President is debating how to restructure pay for financial services firms — whether or not they have taken taxpayer bailout funds — is reversing all the feel-good energy in the markets. The Dow is off more than 2%; some bank stocks are down two to three times as much. You can blame the unexpectedly weak report on retail sales for the pullback, but I’m blaming the return of “lemon socialism” — the stealthy socialization of the private sector.

Let me take you on a walk down memory lane: It was less than a week ago that investors went wild for the regulators’ stress tests of the nation’s too-big-to-fail banks. Only 10 of the 19 banks involved needed money — and only $75 billion! A pittance in the trillions sloshing through the bailout mashup. In a story for The Big Money, I explained that the tests were shrewdly designed to minimize the need for dramatic government intervention (again) by delivering one of the few simple messages of the crisis: All clear. Nothing, of course, had really changed. First quarter bank profits were entirely based on trading gains and accounting quirks; core businesses were in miserable shape and expected to stay that way for sometime. The 0.4% drop in April retail sales, released today, validates that  scenario.

Think of the stress tests as one giant placebo that enabled everyone to believe that the government medics were packing up their kits. Whoa! Just one minute there. Government isn’t putting away its Q-tips so fast. Just as everyone thought it was safe to invest in the banking system again, along comes this WSJ story describing plans to overhaul pay for the financial services industry. It rings true with everything that has come from the White House thus far:

Among ideas being discussed are Fed rules that would curb banks’ ability to pay employees in a way that would threaten the “safety and soundness” of the bank — such as paying loan officers for the volume of business they do, not the quality. The administration is also discussing issuing “best practices” to guide firms in structuring pay.

At the same time, House Financial Services Committee Chairman Barney Frank (D., Mass.) is working on legislation that could strengthen the government’s ability both to monitor compensation and to curb incentives that threaten a company’s viability or pose a systemic risk to the economy.

Who can be against creating incentives that discourage bad behavior rather than encouraging it?  But that’s not quite the point. Government shouldn’t be monitoring compensation per se — boards of directors should and they should somehow be made responsible for their actions as leaders of private industry. Government, however, can create punishments for boards that make decisions that lead to the destruction of the American economy. It’s absolutely scandalous how many people have walked away from the rubble unscathed despite playing key roles in the economic implosion.

Administration sources are quick to tell the WSJ that the government has no interest in micromanaging pay. That is patently false. President Obama has shown great willingness to micromanage, right down to selecting an executive recruiting firm for basically government-run firms. Earlier this week, the WSJ reported that the White House had forced its hand-picked chairman at troubled GM to hire a search firm to replace at least half of the members of its board. And even then, Kent Kresa, the former chairman of Northrop Grumman, wasn’t free to select his own recruiter: Spencer Stuart was the one and only. Here’s how the WSJ describes the transaction:

… officials at the Treasury, which has lent GM $15.4 billion, “strongly” suggested that Mr. Kresa choose Spencer Stuart for GM’s board search, telling him that the search firm “can do it quickly,” said a person close to the matter. They told Mr. Kresa he would be contacted by Tom Neff, head of the firm’s U.S. operations, this person said.

Spencer Stuart is having a field day. The White House has also tapped it to help rebuild the boardrooms at Fannie Mae, Freddie Mac, AIG, Citicorp, and GMAC. And it doesn’t look as if it even had to compete for the business.

The stress tests placebo is wearing off and fast. Government micromanagement is the poison of the private sector. Unfortunately, the Administration of hope and change is showing little imagination in addressing the structural flaws in the system. It is hewing to an old model that assumes government can simply pull the strings of needy corporations and the chips will fall where they expect. Don’t count on it.

Even Spencer Stuart’s Neff  has implied that the heavy-handed federal interference can hurt more than it can help. (Guess the White House vetted him the way it vetted so many of its other anointments).

Shareholder panic and activism are soaring, especially when it comes to CEO compensation. There is a strong move now to put limits on CEO pay, some of which we consider ill-advised. It is a board’s responsibility to get incentives aligned with shareholders’ interests and focused on longer-term value creation.

via Why Boards need to keep an eye on value creation

Of course, the statement could just reveal that Neff has a fundamental conflict of interest: Does his pay go up if he can score richer compensation packages for the candidates that get hired at taxpayer-backed corporations?  I’m going to find out. It may take a while, but I’ll be back with this.

image via Wikipedia

(H/T to @pdelinger for the phrase “lemon socialism”)

The Feds think we can't handle the truth

Bank of America CEO testifies befoe Congress in February (Chip Somodevilla/Getty)

In a blockbuster story, the Wall Street Journal reports that Bank of America CEO Ken Lewis said that he believed Federal Reserve Chairman Ben Bernanke and then US Treasury Secretary Henry Paulson wanted him to keep silent about big losses at Merrill Lynch. BoA had agreed to buy Merrill in September and later discovered that Merrill was harboring huge losses which hurt BoA shareholders:

Under normal circumstances, banks must alert their shareholders of any materially significant financial hits. But these weren’t normal times: Late last year, Wall Street was crumbling and BofA faced intense government pressure to buy Merrill to keep the crisis from spreading. Disclosing losses at Merrill — which eventually totaled $15.84 billion for the fourth quarter — could have given BofA’s shareholders an opportunity to stop the deal and let Merrill collapse instead.

“Isn’t that something that any shareholder at Bank of America…would want to know?” Mr. Lewis was asked by a representative of New York’s attorney general, Andrew Cuomo, according to the transcript.

“It wasn’t up to me,” Mr. Lewis said. The BofA chief said he was told by Messrs. Bernanke and Paulson that the deal needed to be completed, otherwise it would “impose a big risk to the financial system” of the U.S. as a whole.

What makes this story even more interesting is a point the WSJ makes deep in the piece: lack of disclosure, known on Wall Street as transparency, has been a key element both in the destruction of wealth and the regulatory efforts to bail out ailing companies. I can understand in the heat of the moment why regulators were afraid that Merrill Lynch might go under — Lehman Brothers had just failed. AIG was on the brink. Fear was the emotion of the day. But that is no longer the case, or at least to the same degree.

Regulators continue to be masterly at avoiding the Obama call for greater transparency in the system.  Congress and the public for some time have been trying to find out how TARP firms are spending taxpayer dollars. We still don’t have answers. AIG got another $30 billion last month after arguing vaguely yet persuasively that the financial system would collapse if it didn’t get more funds. It’s still not clear why the insurance monster got the dough.

By now, the regulators should have gotten the message: Protecting the public and lack of transparency are not one in the same. In the heat of the moment, I can’t second guess the Fed and Treasury. But the intense fear has passed. Now is the time for full disclosure. Back in the Vietnam era, government suffered what was known as a credibility gap: the public didn’t believe the statements coming from top officials. If a credibility gap yawns any further now, policymakers will likely have a hard time taking the steps they deem necessary to bolster the economy.