Tag Archives: Federal Reserve Bank of New York

The Blood Doll of Wall Street

Do you know what a “blood doll” is? Well, it’s a girl who craves to be the regular victim of or willing donor to a vampire, according to the Institutional Risk Analyst who use it as a metaphor for the fallen insurance giant AIG. I guess it has something to do with zombies…

“Some of the same banks that caused the collapse of AIG and the subsequent looting of the Fed are now acting as underwriters in an offering that nobody should touch.”

Institutional Risk Analyst

“Following our suggestion of over a year ago, Treasury Secretary Tim Geithner has finally taken the Federal Reserve Bank of New York out of its involuntary equity stake in AIG. Indeed, Treasury is disposing of stakes in zombie companies at a brisk clip, including Ally Financial and Citigroup. We applaud Secretary Geithner’s industry; selling these public stakes in private firms is precisely the right policy, but it would have been better had the investments not occurred at all.”

It’s always nice be updated on the issues that have brought us so much anger, fear and frustration, and yet even some amusements and raw laughter.

Well, the folks at Institutional Risk Analyst (IRA) pretty much sums up the situation with AIG right now; the insurance company that once was the largest in the world.

I am not sure, however, if it is a laughing matter this time, or one of the more irritating moments.

Read for yourself:

Geithner apparently now intends to offload the government’s position in AIG onto the public, declare success and ride off into the sunset — and hopefully back to the private sector. But the real question is whether or not there is anything left at AIG for public investors to buy. After selling most of the prime assets to repay the Fed and Treasury, AIG still looks insolvent to us. In fact, given that the most problematic liabilities of AIG were not reduced at all by the asset sales to date, the financial viability of AIG is arguably less certain than ever before.

A report published over the Christmas holiday by Bloomberg News, “AIG Didn’t Report $18.7 Billion of Guarantees, Pennsylvania Regulator Says,” illustrates the scale of the fraud and malfeasance seemingly still running rife at the government-owned AIG: “National Union Fire Insurance Co. (“NUFIC”) of Pittsburgh and American Home Assurance Co., which issued the guarantees to bolster other AIG units, had contingent liabilities tied to the promises of $157 billion on Dec. 31, 2008, compared with the $138.3 billion disclosed at the time, Robert Pratter, the state’s acting insurance commissioner, said today in a report. AIG was instructed by the regulator to limit or end its intra-group guarantees, according to the report,” Bloomberg News reports. You always read the holiday news clips.

The regulatory order to end intra-group guarantees by the insurance units of AIG is the key factoid for investors who want to understand the value proposition here. For years, AIG has used what seems to be a Ponzi scheme of credit-default swaps, side letters and overt reinsurance claims to generate revenue, but all the while concealing the true nature of the total liabilities facing the company. See our earlier comment: (“AIG: Before Credit Default Swaps, There Was Reinsurance, April 2, 2009)

While the AIG guarantees on mortgage securities issued by firms such as AMBAC Financial Group (See “An A.I.G. Lesson From Wisconsin,” Reuters, 3/25/10) might be sufficient by themselves to kill the company, the internal guarantees between American Home Assurance (“AHA”) and other units of AIG are far larger. AIG takes the position that these guarantees, which are visible in the statutory reporting for the regulated insurers, are unlikely to be paid out, but the scale of the portfolio and the lack of reserves supporting it beg the question. AHA has issued unconditional guarantees to other units covering “all present and future liabilities of any kind” And here’s the best part: the shell parent company of the AIG group is the guarantor for AHA. The snake eats its own tail in public, yet the banksters have no problem finding sufficient numbers of credulous investors to subscribe to an offering of shares.

Likewise NUFIC has issued unconditional guarantees of performance to affiliated companies within AIG. Again, the AIG parent company is the guarantor for these obligations by NUFIC. The guarantees include $21 billion in obligations issued by American International Assurance (Bermuda) and $6 billion in potential claims exposure written by American International Life Assurance (New York). The total capital surplus backing these potential claims is $2 billion. In all, NUFIC has issued $40 billion unconditional guarantees of performance backed by just $6 billion in capital surplus. Did we mention that NUFIC has over a $1 billion of its meager capital surplus tied up in real estate partnerships with other AIG companies?

Putting aside the financial condition of AIG for a moment, let’s now consider the spectacle of the Treasury draining AIG of assets to repay the bailout funds and then selling what remains to the investing public in a share offering. In his zealous advocacy of the financial interest of the American people, Geithner makes a lie of his previous sworn protestations that he is not an investment banker. Oh, our boy Timothy is a master of the universe all right, a regular Jedi warriror, but one who serves the Dark Side. And like his peers at GS and JPM, skirting a few securities laws along the way to cashing in at the great casino called Wall Street is not a problem.

Apparently Geithner is so excited about the AIG stock offering that he commanded his direct reports at the Treasury to put on a full-court press in the media, demanding positive press stories about AIG. Yet despite his intensity and supposed intellect, Geithner remains ignorant of many aspects of finance and law that bear directly on his responsibilities as chief fiscal officer of the US, especially when it comes to selling stock in zombie banks and other companies. Whether the beneficiary of the share sale is a private individual or the US Treasury matters not, according to the lawyers we consulted.

First and foremost, somebody needs to gently remind Secretary Geithner that he and the members of the Treasury staff are subject to the Securities Act of 1933 just like everyone else. Now that Treasury has announced its intention to sell shares in AIG and other companies, making any statements about AIG and/or its financial condition, or encouraging members of the media to write positive stories about the company, appears to be a violation of the law. And yet thus is precisely what has been going on for at least a month, according to several news organizations contacted by The IRA.

Jake Siewart, counselor to the Treasury Secretary since June 2009, apparently has been communicating with members of the media and the public regarding the offering of AIG shares. Since the decision to sell the shares was made well before the holidays, the communications of Siewart regarding the AIG offering, including both verbal and email communications to members of the media, are arguably a willful violation of the 1933 Act.

We contacted AIG yesterday and asked whether they were aware that employees of the Treasury are contacting members of the public and also the media regarding the upcoming sale of stock in AIG. We asked if such contacts were not a violation of the Securities Act of 1933 and FINRA regulations. We reminded them that sellers of securities are prohibited from making any statements regarding the offering except via a written prospectus. Also, none of the personnel at Treasury who have been making these solicitations regarding the AIG equity offering are registered with FINRA.

AIG officials did not reply directly to written questions from The IRA seeking comment on the activities of Treasury officials. About an hour after we sent our email to AIG, however, we heard from several senior lawyers from the Treasury. They assured us that all Treasury officials were aware of the law and the specific requirements regarding a public offering of securities.

When we asked, hypothetically you understand, whether Tim Geithner calling Arthur Sulzberger or other senior managers at the New York Times and demanding favorable coverage of AIG in front of an offering would be a violation of the law, they reiterated that all Treasury officials are doing their utmost to comply with the securities laws. We are delighted to hear it. But still, we understand from several members of the media that Siewart, the former and last press secretary for President Bill Clinton, has been offering to arrange interviews with AIG management and senior Treasury officials. Again, if these allegations are true, Mr. Siewart’s actions look an awful lot like conditioning the market in advance of a securities offering.

Read the full post here.

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Filed under Laws and Regulations, National Economic Politics

Credits: The Price of Accountability

Remember President Barack Obama’s pompous “BP-Will-Be-Held-Accountable”-speech? The president’s remarks on the oil spill dragged BP’s  share price right to the bottom and pushed the CDS’ straight through the roof. However, when The White House this week announced that US banks will be held accountable for any foreclosure violations, there was hardly any reaction in the financial markets at all.

“Whether investors chalked it up to part of mid-term election campaigning or simply could not discern the market impact is debatable.”

Otis Casey

Earlier this week, market price action seemed to suggest that investors were struggling to properly define the extent and impact of the potential foreclosure violations case. By the end of the week, however, I think they’ve started to see a more clear – not pretty – picture.

Bank of America, who had halted foreclosures in all 50 states, signalled on Tuesday that is was time to resume the foreclosure process. As for their process, CEO Brian Moynihan simply said; “Without question we’re doing it right.”

The day before Citigroup stated that their process was “sound”.

“While no one expected that the uncertainty in litigation risk could just disappear overnight, it at least appeared to be moderating a bit,” credit analyst Otis Casey writes in the weekly credit wrap from Markit Financial Information.

“There seemed to be a perception that the majority of the headlines would be read in the rear-view mirror – at least,” Otis Casey writes, but point out: “That sentiment was short-lived.”


Reminiscent of President Barack Obama’s “BP Will Be Held Accountable” speech, the White House announced this week that banks would be held accountable for any foreclosure violations.

This was not surprising, considering that a key part of the President’s communication strategy has been to side with “Main Street” against “Wall Street.”

“Whether investors chalked it up to part of mid-term election campaigning or simply could not discern the market impact is debatable, in any case the announcement did not have anywhere near the same market moving impact on CDS spreads the way that the BP speech did last spring on BP’s CDS spreads,” Casey notes.


“Then some of the biggest investors in the world decided to react like it was “Wall Street vs Wall Street” (nevermind
that PIMCO headquarters is in Newport Beach),” Casey goes on.

Reports surfaced that indicated PIMCO, BlackRock and the Federal Reserve Bank of New York are looking for a way to force  Bank of America to repurchase bad mortgages that is a part of some $47 billion in bonds, packaged by its Countrywide Financial unit.

Other investors are expected to join this group.

“Furthermore, the tactic is expected to be repeated in other cases where investors believe that the quality of mortgages may have been misrepresented,” Casey adds.

CDS spreads on the major mortgage lending banks widened significantly on the news and set a negative tone for the corporate credit markets generally.

However, by the week’s end, the CDS spreads for the major US banks were tighter than where they were a week ago.

Wells Fargo reported record earnings despite lower revenues.

While Bank of America reported a third quarter loss, adjusted results beat analysts’ estimates.

Earnings results in general have given support in the last two sessions, which has helped improve sentiment and again shifted focus away from the foreclosure issues – at least in the news headlines.


On the European side,  a bit more clarity emerged on the subordinated debt of Anglo Irish Bank.

The bank announced on Thursday that it was offering to exchange up to approximately 1.6 billion euro principal amount outstanding subordinated debt for new euro-denominated floating rate notes, due 2011, at an effective price of 20% of face value.

A separate offer for 300 million GBP, callable, subordinated notes at 5% of face value was also made.

“The exchange offers are “voluntary” but if holders choose not to participate, they could receive as little as 0.01 euro per 1,000 euro of principal amount,” Otis Casey writes.

The latest quotes are 10 points and 68 points upfront, for senior and subordinated protection, respectively.

Related by The Swapper:

Comments Off on Credits: The Price of Accountability

Filed under International Econnomic Politics, National Economic Politics

The Dirty Little Secret Of The Dodd-Frank Legislation

“The dirty little secret of the Dodd-Frank legislation is that by failing to curtail the worst abuses of the OTC market in structured assets and derivatives, a financial ghetto that even today remains virtually unregulated, the Congress and the FED are effectively even encouraging securities firms to act as de facto exchanges and thereby commit financial fraud,” the Institutional Risk Analyst writes in its recent news letter.

“No more QE thank you please.¤

Institutional Risk Analyst

“With the passage of the Dodd-Frank Wall Street reform legislation, many financial analysts and members of the press believe that investment banking revenues and resulting earnings are in danger, but nothing is further from the truth,” the Institutional Risk Analyst writes.

The Volcker Rule and other limitations on the principal trading and investment activities of the largest universal banks do nothing to address the true cause of the crisis, namely the creation and sale of fraudulent securities and structured assets based on residential mortgages, toxic waste which was sold over-the-counter (OTC) as private placements and without SEC registration, according to the Institutional Risk Analyst, know for its regular publication of the IRA Bank Stress Monitor.

Here’ some more from the rather harsh commentary:

It is not own account trading but the derivatives sales desks of the largest BHCs whence the trouble lies.

Even as the big banks make a public show for the media of implementing the new Dodd-Frank law with respect to limits on own account trading and spinning off private equity investments, these same firms are busily creating the next investment bubble on Wall Street – this time focused on structured assets based upon corporate debt, Treasury bonds or nothing at all – that is, pure derivatives.

Like the subprime deals where residential mortgages provided the basis, these transactions are being sold to all manner of investors, both institutional and retail.

The Perverse Structure

It is the perverse structure of the OTC markets and not the particular collateral used to define these transactions that creates systemic and institution specific risk.

One risk manager close to the action describes how the securities affiliates of some of the most prominent and well-respected U.S.

BHCs are selling five-year structured transactions to retail investors.

These deals promise enhanced yields that go well into double digits, but like the subprime debt and auction rate securities which have already caused hundreds of billions of dollars in losses to bank shareholders, the FDIC and the U.S. taxpayer, these securities are completely illiquid and often come with only minimal disclosure.

The Dirty Secret

The dirty little secret of the Dodd-Frank legislation is that by failing to curtail the worst abuses of the OTC market in structured assets and derivatives, a financial ghetto that even today remains virtually unregulated, the Congress and the FED are effectively even encouraging securities firms to act as de facto exchanges and thereby commit financial fraud.

Allowing securities firms to originate complex structured securities without requiring SEC registration is a vast loophole that Senator Christopher Dodd (D-CT) and Rep. Barney Frank (D-MA) deliberately left open for their campaign contributors on Wall Street.

But it must be noted these same firms have a captive, client relationship with the FED and other regulators as well, thus a love triangle may be the most apt metaphor.

Of course retail investors love the higher yields on complex structured assets. Who can blame them for trying to get a higher yield than available on treasuries, while the FED keeps rates at historic lows to, among other things, re-capitalize the zombie banks.

The Only Trouble

The only trouble is that the firms originating these ersatz securities, as with the case of auction rate municipal securities, have no obligation to make markets in these OTC structured assets or even show clients a low-ball bid. And because of the bilateral nature of the OTC market, only the firm which originates the security will even provide an indicative valuation because the structures and models behind them are entirely opaque.

In fact, we already know of two hedge funds that are being established specifically to buy this crap from distressed retail investors as and when rates start to rise.

The sponsors expect to make returns in high double digits by making a market for the clients of large BHCs who want to get out of these illiquid assets. But the one thing that you can be sure of is that nobody at the FED or the other bank regulatory agencies knows anything about this new bubble.

As with the early warnings brought to the FED about private loan origination and securitization activities as early as 2005, the central bank and other regulators are so entirely compromised by the political pull of the large banks that they will do nothing to get ahead of this new problem.

Consider a specific example:

Shall We Reward Incompetence?  – The Case of Sarah Dahlgren and the FED of New York.

Read the rest at IRA’s homepage here.

Related by the Econotwist:

So, You Thought BP Was An OIL Company?

Webster Tarpley: The Financial Reform Is A Failure

Transantlantic Bailout Buddys Agree To Disagree

Civil And Criminal Probes Against JP Morgan For Silver Manipulation

Two Thirds of Americans Support Stricter Financial Regulations

Living In A Derivative World


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Filed under International Econnomic Politics, National Economic Politics