The Semtex in the AIG Retention Contracts

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Here’s how I understand the white paper AIG just used to convince Tim Geithner that, while the US government can force car companies to cut the wages of line workers, the US government cannot force banksters to cut the wages of the thugs who broke the global financial system. There’s a lot of mumbo jumbo about contract law, but that’s not the real reason AIG is arguing Geithner can’t strip the bonuses. It’s the "business reasons" that amount to a deliberate threat:

For example, AIGFP is a party to derivative and structured transactions, guaranteed by AIG, that allow counterparties to terminate in the event of a “cross default” by AIGFP or AIG. A cross default in many of these transactions is defined as a failure by AIGFP to make one or more payments in an amount that exceeds a threshold of $25 million.

In the event a counterparty elects to terminate a transaction early, such transaction will be terminated at its replacement value, less any previously posted collateral. Due to current market conditions, it is not possible to reliably estimate the replacement cost of these transactions. However, the size of the portfolio with these types of provisions is in the several hundreds of billions of dollars and a cross-default in this portfolio could trigger other cross-defaults over the entire portfolio of AIGFP.

Translated, I take that to mean that AIGFP is a party to a bunch of contracts insured by AIG the US government. And if AIGFP somehow does something that equates to a default on those contracts, then AIG the US government is on the hook for hundreds of billions of dollars. 

The white paper goes on to explain just one scenario that might trigger a default in terms of these contracts.

Departures also have regulatory ramifications. As an example, the resignation of the senior managers of AIGFP’s Banque AIG subsidiary would allow the Commission Bancaire, the French banking regulator, to appoint its own designee to step in and manage Banque AIG. Such an appointment would constitute an event of default under Banque AIG’s derivative and structured transactions, including the regulatory capital CDS book ($234 billion notional amount as of December 31, 2008), and potentially cost tens of billions of dollars in unwind costs. Read more →

The McCain Economic Leadership that Might Have Been

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Just for shits and giggles, I thought I’d compare how one Villager regurgitated the myth–propagated after McCain "suspended" his campaign in September "to respond to the economic crisis"–that John McCain might lead us out of our financial woes…

Sen. John McCain’s surprise announcement that he would temporarily suspend his campaign to return to Washington to help broker a deal to save the financial industry is the latest in a series of political gambits surrounding the financial crisis on Wall Street, and is sure to reshape political calculations and voter attitudes around the volatile issue.

The move is an obvious attempt by McCain and his campaign to paint the Arizona senator as above politics, willing to put aside his campaign for the good of the country.

It comes as two new national polls — including one conducted by the Washington Post — show McCain slipping in the head-to-head matchup against Barack Obama due in large part to voters’ inclination to trust the Illinois senator to solve the financial problems of the country.

The McCain campaign believes that their candidate is at his best when he is seen as a deal-maker, willing to reach across party lines to get things done for the good of the country. This economic crisis, they believe, provides McCain a chance to show the sort of leadership that voters value in the Arizona senator.

"John McCain’s leadership and experience credentials outrank Barack Obama’s," said Sarah Simmons, a McCain campaign strategist, this morning. "[We are] walking through a crisis and people are looking to see how it is going to be handled."

With the news that, 167 days later, McCain is attempting to put together a "definitive" economic platform.

Sen. John McCain is putting together a major economic plan that will be structured, in some ways, off of Newt Gingrich’s famous Contract With America.

In an email obtained by the Huffington Post, the Arizona Republican’s chief of staff, Marc Buse, asked an outside adviser for help with a "ten principles" program that the senator could use as a "definitive" platform.

"We are looking for some guidance on a definitive plan (aka contract with america style) on the economy…principles," writes Buse. "Ten principles that JSM could point to on what MUST BE DONE to address the problems our nation faces."

Buse doesn’t offer specific suggestions of his own, save "NO TAX INCREASES."

Because that’s my definition of leadership: 167 days after a failed photo op, Read more →

The FDIC Takes Over a Bank

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I made a juvenile joke the other day about the Northeast taking over Commerce and Freedom in Georgia. But the reality that banks are being taken over by the FDIC all over the country is no laughing matter.

FDIC allowed 60 Minutes to follow it as it closed down one small bank–watch the YouTube to see how it works (in this case it was fDiC taking over our Heritage, ha ha).

Two things, though. First, notice Sheila Bair’s reaction to two questions: how many more (she didn’t answer, "tons") and why not Citi (she didn’t answer, "we’re not equipped to take over Citi yet"). If I were Sheila Bair, I’d already be having nightmares about FDIC’s upcoming feast on Citi.

As to the latter point, remember this video shows a five branch bank being taken over, and the FDIC stationed 8 FDIC employees at each branch when they did the simultaneous takeover. How many branches does Citi have? This says 1,400, plus 3,800 ATMs. So 8 employees for all 1,400 branches, and the FDIC needs at least 11,200 employees just for the takeover, even before you get to runs on the ATMs and the website and the infrastructure (and given the global reach of Citi, "simultaneous" gets more challenging). I guess that’s why they’re hiring in big ways.

Retroactive Immunity for the Banksters, Too?

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On October 18, 2007, the Senate Intelligence Committee passed the first version of a bill that would grant corporations retroactive immunity for helping Bush spy on Americans.

The Senate intelligence committee yesterday produced a new bipartisan bill governing foreign intelligence surveillance conducted inside the United States, but objections by several Democratic lawmakers to some of its provisions raised questions about how quickly it might gain passage.

[snip]

It would further give some telecommunications companies immunity from about 40 pending lawsuits that charge them with violating Americans’ privacy and constitutional rights by aiding a Bush administration’s warrantless surveillance program instituted after September 2001. That provision is a key concession to the administration and companies, which lobbied heavily for the provision. 

On October 22, 2007, right in the middle of the larger debate about retroactive immunity, FBI Deputy Director John Pistole gave a pep talk at a money laundering conference, cheering the work bankers had done to help pursue terrorists. He described the pattern analysis FBI was doing on financial transactions.

We established a specialized section in our Counterterrorism Division called the Terrorism Financing Operations Section, or TFOS. 

The mission of our agents and analysts in TFOS is to trace transactions and track patterns.  This painstaking work helps us identify, disrupt, and prosecute terrorists, their associates, their leaders, and their assets. 

Read more →

Sully Goes to Washington

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picture-73.thumbnail.pngAfter Chesley "Sully" Sullenberger and his union crew brought US Airways 1549 to a safe landing and evacuation on the Hudson River last month, I pointed out that most of the key parties involved in the rescue–the pilots, the flight attendants, the ferry crews, the first responders, and the air traffic controllers–had all benefited from years of union activism demanding better safety training.

But Sully, who testifies before the Aviation Subcommittee of the House today, says that the cuts airlines have demanded of pilots in recent years have been chasing the best pilots out of the business, which may lead to a decline in safety in the industry.

It is an incredible testament to the collective character, professionalism and dedication of my colleagues in the industry that they are still able to function at such a high level. It is my personal experience that my decision to remain in the profession I love has come at a great financial cost to me and my family. My pay has been cut 40%, my pension, like most airline pensions, has been terminated and replaced by a PBGC guarantee worth only pennies on the dollar.

While airline pilots are by no means alone in our financial struggles – and I want to acknowledge how difficult it is for everyone right now – it is important to underscore that the terms of our employment have changed dramatically from when I began my career, leading to an untenable financial situation for pilots and their families. When my company offered pilots who had been laid off the chance to return to work, 60% refused. Members, I attempt to speak accurately and plainly, so please do not think I exaggerate when I say that I do not know a single professional airline pilot who wants his or her children to follow in their footsteps.

I am worried that the airline piloting profession will not be able to continue to attract the best and the brightest. The current experience and skills of our country’s professional airline pilots come from investments made years ago when we were able to attract the ambitious, talented people who now frequently seek lucrative professional careers. That past investment was an indispensible element in our commercial aviation infrastructure, vital to safe air travel and our country’s economy and security. If we do not sufficiently value the airline piloting profession and future pilots are less experienced and less skilled, Read more →

Lebanese Recipe For Economic Health: Go With What You Know

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Whether it is Henry Paulson, Tim Geithner or the yammering dipsticks on CNBC, it seems the there has been a headlong rush to seek analysis, wisdom and solutions from the very self proclaimed geniuses that put the US and the world in the problem to start with. Aren’t there any big bankers/finance ministers that really got it right? Turns out there are, and he comes from a most unexpected place. From the Los Angeles Times comes the story of Riad Toufic Salame:

Instead, the silver-haired banker became a hero by playing it very, very safe. In 2005, he defied pressure from the Lebanese business community and bucked international trends to issue what now looks like a prophetic decree: a blanket order barring any bank in his country from investing in mortgage-backed securities, which contributed to the most dramatic collapse of financial institutions since the Great Depression.

So as major banks in America and Europe were shuttered or partly nationalized and thousands of people in the U.S. financial sector were laid off, Lebanon’s banks had one of their best years ever.

Billions in cash continue to pour in to the relative safety of Lebanese savings accounts, with comfy but not extravagant yields of 6%. A nation shunned for years as the quintessential failed state has become a pretty safe bet, or as safe a bet as investors are likely to find in this climate.

Well, that is kind of refreshing, how did Salame do it? By being a rational technocrat, eschewing excesses, turning a deaf ear to cries for irrational rates of return, maintaining tight regulation, imposing conservative balance-sheet requirements, refusing to launder dirty money and, most critically:

When the real estate boom crested this decade and investors began bundling debt into nebulous financial instruments fueled by easy credit, the pressure was on for Salame to let banks take advantage of the high yields.

But Salame steadfastly refused.

He says the mortgage-backed securities worried him from the start. He watched curiously as investment bankers engaged in what he calls "rituals" to please the credit ratings agencies and got back such safe assessments of their products. He didn’t get it. Why were these considered safe investments? They were just too complicated. They went against a major tradition in Lebanese and Middle Eastern banking: Know to whom you’re fronting cash and who’s going to pay you back.

"We could not really sense who would be responsible in the end Read more →

Why American Industry (And Its Future) Matters

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Image from ExploreHistory.com

Image from ExploreHistory.com

Ian has a great piece up at FDL on the financial sector’s problems, their genesis, and the Obama Administration’s conventional wisdom, status quo, manner of dealing with them:

I have become increasingly concerned that some in the Obama administration are treating this economic crisis as a "black swan" event. That is a very rare, random and unpredictable event. The key thing about black swans is that they are random and unpredictable and you can’t stop them from happening, you can only create your systems so that they can handle them if they occur.
…
But, of course, the economic and financial crisis unfolding right now was not random. It was predicted by multiple people, and it was predicted because of policy steps taken by government and widely known private actions.
…
All of which is to say the crisis was caused by a number of factors. It was not random. It was predictable and predicted. If we just muddle through this current meltdown—spend a lot of money bailing out the banks, throw some stimulus around—and don’t fix the fundamentally flawed incentives and structures of the system, it will likely happen again.

Ian was discussing the financial sector, but it strikes me that the same applies for America’s industrial and manufacturing sector. The United States was built on the backs of hard working people that planted and built things, sweated, toiled and prevailed. In the post-modern hustle and flow of the digital and financial whiz bang world, we seem to both forget and neglect the industry, manufacturing and workers that put us here. I want to focus, and open a discussion, on that.

I am not expert on the issues and economics that underpin this area, so I am going to rely on the collective wisdom here to engage and flesh out the discussion. I do, however, want to open that discussion on a familiar note, the American automotive industry. Roland Jones at MSNBC.com yesterday did an interesting piece as to why bankruptcy is not a viable option for General Motors:

“If these companies went into bankruptcy right now, in exactly the position they are in today, they would be liquidated because no one out there would supply them with the financing they need to get through bankruptcy,” Mark Zandi, chief economist with Moody’s Economy.com, told CNBC Wednesday.

That would mean a few million jobs lost, Zandi said, which would be “cataclysmic” for Read more →

Veni, Vidi, Vici – Obama’s Foreclosure Reveal In Phoenix

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246349.thumbnail.jpgAs you may know, President Obama came to Phoenix in order to roll out his $75 Billion Plan to Fight Home Foreclosures. This was exciting for me, because Obama spent last night at a resort, Montelucia, about 3/4 of a mile from my house. Lots of excitement; even more jammed up traffic yesterday afternoon and evening. Still, all in all, pretty exciting for an old desert dweller. Our dog, Kiki, is still barking at all the helicopters. Interlaced into this post will be a series of pictures taken by various Phoenicians and submitted to the Arizona Republic for open use on their website. I would have taken proprietary photos for Emptywheel, especially of the shots going down the road right by my house and entering Montelucia, but, alas, I was tied up with conference calls with multiple attorneys, all of whom are every bit as annoying as I am. Trust me on the latter.

246347.thumbnail.jpgFrom the New York Times:

President Obama pledged on Wednesday to help as many as 9 million American homeowners refinance their mortgages or avert foreclosure, an initiative he said would shore up distressed housing prices, stabilize neighborhoods and slow a downward spiral that he said was “unraveling homeownership, the middle class, and the American Dream itself.”

The plan, more ambitious than many housing analysts had expected, was unveiled by Mr. Obama in a high school gymnasium here, in a community that is among the nation’s hardest hit by the foreclosure crisis.246467.thumbnail.jpg

“This plan will not save every home, but it will give millions of families resigned to financial ruin a chance to rebuild,” the president told the crowd. “It will prevent the worst consequences of this crisis from wreaking even greater havoc on the economy. And by bringing down the foreclosure rate, it will help to shore up housing prices for everyone.”

In a nutshell from the LA Times, the plan would:

• Remove restrictions on Fannie Mae and Freddie Mac that prohibit the institutions, both taken over by the government last year, from refinancing mortgages they own or have guaranteed when more is owed on a home than it is worth. The White House says this could reduce monthly payments for up to 5 million homeowners.

246470.thumbnail.jpg• Create incentives for lenders to modify subprime loans at risk of default or foreclosure. For lenders that agree to reduce rates to levels borrowers can afford, the government will make up part of the difference between the old monthly payment and the new payment. Participating lenders also will be required to cut payments to no more than 31 percent of a borrower’s income. Up to 4 million homeowners could benefit.

Read more →

Maybe We’ve Got Each Other By the Nuts…

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I asked yesterday whether or not the "private investors" whom Geithner expects to pony up billions if not trillions to bail out our biggest banks were Sovereign Wealth Funds.

The WSJ and Robert Reich suggested they might be. But, Reich wondered, what incentive would other countries have to keep investing in our shitpile?

Some additional financing is thought to come from China, Japan, and the Middle East. (It seems likely that some hedge fund financing is now coming from rich Arabs.) But why exactly would Asia or the Middle East be willing to commit even more money to the United States when they’re already nervous about their US loans and investments, and when their own economies are under more and more stress?

Meanwhile, Atrios points to what might be one source of leverage we have to persuade Asia and the Middle East to ante up again.

WHEEEEEEEEEEEE

The Fed has decided it can do whatever it wants. Just in case you didn’t know.

WASHINGTON — The White House plan to rescue the nation’s financial system, announced on Tuesday by Timothy F. Geithner, the Treasury secretary, is far bigger than anyone predicted and envisions a far greater government role in markets and banks than at any time since the 1930s.

Administration officials committed to flood the financial system with as much as $2.5 trillion — $350 billion of that coming from the bailout fund and the rest from private investors and the Federal Reserve, making use of its ability to print money.

Yes, it can do that.

WHEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEE

It seems the "public-private partnership" gimmick presents the world with an either/or proposition. Either "private investors" (of which foreign countries have some of the most ready cash) ante up, or the Fed will just print money and print money and print money until it comes up with the cash.

I’m beginning to see why foreign investors–and SWFs more specifically–might have an incentive to invest. 

Countries have SWFs, after all, as a way to do something with their giant surplus of dollars. The manufacturing exporters (Asia) and oil exporters (Middle East) created them as a means to invest their dollar reserves, hopefully getting a higher return on all those dollars just sitting and collecting dust. Now, as I suggested, a lot of those SWFs may be willing to invest further because it’s the only thing staving off nationalization of companies they own up to 5% of.

Read more →

Senate Stimulus: Steal from the Poor to Give to the Affluent

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ProPublica has done a comparison of the House and Senate stimulus packages. It shows, in striking fashion, how much the Grassley-Isakson-Coburn-Collins-Bad Nelson bill skews spending away from the poor–the most stimulative kind of spending, since these people need this money badly and would spend it right away–to the upper middle class:

Aid to Low-Income Families Total $124,186,000,000 $97,230,900,000 ▼$26,955,100,000
Health insurance aid   $2,272,000,000 ▲$2,272,000,000
Unemployment benefits $36,000,000,000 $39,490,000,000 ▲$3,490,000,000
COBRA healthcare for unemployed $30,300,000,000 $20,000,000,000 ▼$10,300,000,000
Hunger programs $21,176,000,000 $17,100,000,000 ▼$4,076,000,000
Housing $13,510,000,000 $8,600,000,000 ▼$4,910,000,000
Medicaid for unemployed $8,600,000,000   ▼$8,600,000,000
Job training and placement $5,120,000,000 $4,300,000,000 ▼$820,000,000
Disabled and elderly programs $4,200,000,000   ▼$4,200,000,000
Other $5,280,000,000 $5,468,900,000 ▲$188,900,000

 The Senate bill took out $27 billion in spending for the poor, ending with a total of $97 billion.

Tax Cuts Total $282,284,000,000 $358,162,000,000 ▲$75,878,000,000
Manufacturing   $1,603,000,000 ▲$1,603,000,000
Individuals $184,637,000,000 $302,198,000,000 ▲$117,561,000,000
State and local governments $42,957,000,000 $14,272,000,000 ▼$28,685,000,000
Businesses $29,483,000,000 $17,546,000,000 ▼$11,937,000,000
Energy projects $19,961,000,000 $17,682,000,000 ▼$2,279,000,000
Other $5,246,000,000 $4,861,000,000 ▼$385,000,000

The Senate bill put in $117 billion in new tax cuts for individuals–more money than the entire $97 billion they give for those items ProPublica classifies as "Aid to Low-Income Families."

Those tax cuts consist primarily of two things: the AMT patch ($64 billion), which affects primarily upper middle class people in areas with high home prices, and the house flipping subsidy (up to $48 billion), the full credit of which is only available if inidviduals pay at least $7,.500 in taxes a year (there’s also $10-11 billion for auto sales incentives).

There are other reasons to oppose including these two tax cuts in the stimulus. The AMT patch, which isn’t really stimulative in the first place, would get passed and properly off-set in the budget appropriations process anyway. And the house flipping subsidy does little else than put money in realtor’s pockets. 

But the biggest reason is this: we’re taking food, housing, and medical care away from those who desperately need it, to put more money in the pockets of the upper middle class.

The Senate "Moderates’" reverse Robin Hood: Steal from the poor and give to the affluent!