AIG is practically blackmailing the U.S. government to pay out undeserved bonuses and unnecessary retention money. This while still not saying who the $170 billion the taxpayer gave it has been going to. Yes, they revealed some numbers yesterday but those were a. already known and b. make up only some 60% of the total. Where is the rest?
The hapless or nefarious (you decide) bailout of the big banks and bondholders may finally start to create some movement against it.
What's really driving this forward — and what makes it such a dangerous moment for the White House — is the jarring image of the administration's impotence.
This will make it very difficult to get any new stimulus or bailout program through Congress even if it would makes sense and may be needed.
Luckily for the administration the public, while watching the AIG show, misses the real robbery.
Most of the money used for the general bailout is coming from the Federal Reserve and is not under control of Congress. The new version of the Term Asset-Backed Securities Loan Facility (TALF) will put another trillion Fed/taxpayer money at risk. The program will lend to banks and hedgefunds to buy up 'asset' backed papers (bundled consumer and loans, commercial real estate loans etc.). It allows for great profits for those bank entities with the Fed taking 90% of the risk (also here):
Through the program, an investment fund can put down $5 to $14 for every $100 it plans to spend, borrowing the remaining $95 to $86 cheaply from the Fed. It agrees to buy highly rated securities issued by lenders that the Fed deems eligible collateral for the loans.
The aim is said to be to create more consumer lending, but I see no signs that consumers are willing to borrow more. Saving rates are going up as people become more frugal.
I suspect the more likely but unspoken real aim of the program seems to move 'toxic' assets from the banks balance sheets by subsidizing the buyers of these assets with the default risk transfered to the Fed. Consider:
Wall Street dealers, including J.P. Morgan Chase & Co. and Barclays PLC's Barclays Capital, have created vehicles to participate in the TALF that would allow investors in the program to circumvent many of the restrictions laid out by the Fed. The vehicles resemble collateralized debt obligations, or CDOs, and use some of the financial engineering that was partially responsible for the collapse of the credit markets.
…
Under the new proposal, a bank such as Barclays or J.P. Morgan would set up a trust to buy securities with money borrowed from the Fed. The trust would then sell investors securities in the trust. Those securities would give returns similar to the TALF loan, but without the strings attached. The dealers say they could create markets for these derivative securities to trade, and a presentation by Barclays says they may be rated by credit-ratings companies and listed on the Irish Stock Exchange, a home for many CDOs.
It is not yet clear to me how this would work but the instruments used here are the same that created the current mess in the first place – it is insane. Can anyone explain how this is actually to work?
I read it like this:
The asset backed papers bought for a likely too high price with the Fed money will be sliced and diced by 'vehicles' into CDO tranches with each tranche carrying a different default risks. But who will then buy the risky parts of those CDO's and take the first losses? My best guess is that the most risky CDO parts will stay as collateral for the Fed within those 'vehicles' while the less risky parts will be sold off. Eventually the 'vehicles' will default on the Fed loans and the Fed is left with worthless paper as collateral.
A complicate scheme which will give the investment banks lots of fees, allows overpayment for toxic assets and transfers the risk of the overpayment to the general public. What's not to like with that.
Last year the Paulson plan to heal the banks balance sheets was to buy up toxic assets for too high prices and later Geithner planed similar schemes. Both planed to use treasury money for this and the general scrutiny about these programs prevented their implementation. But now the Fed will be abused to implement this.
To be able to subsidize this the Fed will need to create more unsterilized money. The bill for the losses the Fed is sure to take on this scheme will later have to be payed by the taxpayers through massive inflation.
So while the public is now waking up to the sideshow of AIG bonuses, the big money continues to be moved out through the backdoor.