Congress passed a law in 2005 that is key to the AIG scandal....

[Junkdrawer]

I'm sure the knowledgeable people already know this. But it turns out that one of the features of the 2005 Bankruptcy bill was to put derivative counter parties at the front of the line ahead of other creditors in bankruptcy proceedings. Actually, from what I can tell, they don't just go to the head of the line. They got to skip the line entirely. As the Financial Times noted last fall, "the 2005 changes made clear that certain derivatives and financial transactions were exempt from provisions in the bankruptcy code that freeze a failed company's assets until a court decides how to apportion them among creditors." As the article notes, ironically, this provision which Wall Street pushed for and got to protect investment banks actually ended up hastening the collapse of Lehman and Bear Stearns last year.

…

http://www.talkingpointsmemo.com/archives/2009/03/im_sure_the_knowledgeable_people.php

So if you're wondering why Bonus Limitations were secretly removed from the stimulus package in the dead of night, wonder no more.

Hush Money.

[havocmom]

1. bookmarking to study when I am awake

Thanks for posting this. Most interesting and damned good stuff to use against the FOX watching zombies from hell.

[Oceansaway]

2. K&R...

[Laelth]

3. Hush money? Those derivative counter-parties are the foreign banks that finance the U.S. debt.

We had to have AIG's participation in the bailout. Both parties knew it, and both parties have taken steps to insure it.

AIG and bank executives said they would not participate if their bonuses were capped. They blackmailed us. The Federal Government can't let these banks (nor AIG which insured the credit default swaps) fail, because if it did, foreign banks would lose confidence in the U.S. and would not loan the government the $1.5 trillion it needs to keep the government running. Foreign banks finance the U.S. national debt, and AIG insures those banks against losses. AIG held a gun to our head and said, effectively, give us our bonuses or the whole Federal Government collapses because no bank will be willing to lend the U.S. money.

So, Treasury insisted that the bonuses be allowed, and the restriction against them (that Dodd had insisted upon) was removed.

That's what I think happened.

:dem:

-Laelth

cross-posted--three times now.

[Junkdrawer]

4. Not just banks. Hedge funds that bet against the US housing market...

are also getting bailout money. How much goes where? That's what the AIG guys may know....

See:

http://www.democraticunderground.com/discuss/duboard.php?az=show_mesg&forum=102&topic_id=3788491&mesg_id=3788491

[Laelth]

5. AIG won't tell us.

And the Obama administration doesn't want us to know, because the American people would be absolutely outraged if they did know, but the fact is that foreign banks are getting most of the money (from what I can tell), and there's only one good reason for that. We need to keep those foreign banks happy so that they will continue to finance the national debt. If they don't, the federal government collapses.

:dem:

-Laelth

[slipslidingaway]

7. So nice to be a debtor nation :( n/t

[Laelth]

10. We didn't have this problem when Clinton left office.

We had a surplus, in fact. Had the banks collapsed then, we could have let them. We wouldn't have needed them to loan us money.

Right now, however, we need them badly. Thus, we are vulnerable to blackmail.

:dem:

-Laelth

[slipslidingaway]

16. Goes back further than Clinton, we may have had a budget

http://query.nytimes.com/gst/fullpage.html?res=950DE6D91F39F937A35754C0A96F948260

surplus, boosted in part by the SS Trust Fund and tech bubble, but we were still a debtor nation...and it continues.

But your point about having to keep foreign money satisfied with our system is worthy of more discussion.

U.S. Is Bigger Debtor Nation
Reuters
Published: Tuesday, July 4, 1989

http://query.nytimes.com/gst/fullpage.html?res=950DE6D91F39F937A35754C0A96F948260


"The United States, already the world's largest debtor, sank an additional $154.2 billion into the red last year as foreign money poured in to plug the nation's balance-of-payments gap.

The value of foreign investments in the United States, ranging from stocks to factories, exceeded American investments abroad by $532.5 billion at the end of 1988, up from $378.3 billion a year earlier, the Commerce Department said last week.

As recently as 1984, the United States was a net creditor to the rest of the world by about $3.3 billion.

In 1981, before the American budget and current-account deficits started to balloon, the net investment position was a positive $140.9 billion, the Commerce Department said..."

[Laelth]

17. I was just referring to the government, not the country as a whole.

The country has been a debtor nation for some time, sure, but the government didn't need to borrow any new money to keep operating in 2000 thanks to the Clinton surplus. Shortly after Bush II took office, that changed, and now the government is succeptible to blackmail by foreign banks because we must borrow a substantial amount of money every year just to keep the government running.

:dem:

-Laelth

[slipslidingaway]

21. Understand but we still needed their money to keep us going...

and the tech bubble had already begun to burst in early 2000.

Bush tried to reinflate the bubble and everyone was told to consume, he was a disaster.

[slipslidingaway]

18. Speaking of confidence in the US system...

http://contraryinvestor.com/2008archives/mooct08.htm

"The "Other" Consumer Confidence Report...What the heck are they thinking now? You know who we mean, the foreign investment community. Who else? Hopefully without wildly belaboring the point, we remain convinced that the US is ultimately going to face a funding issue down the road. Maybe not a funding issue in terms of being able to borrow funds, but rather the issue is the cost at which funds will ultimately be made available to the US. This is exactly what we addressed when we penned the Fun With Funding discussion last month. Put yourself in the shoes of the foreign investment community. Many moons ago, you started recycling trade related dollars back into US financial assets. In essence, you were able to facilitate a little mercantilist economics. By buying US financial assets (primarily bonds) you effectively helped keep US interest rates low and enabled the relatively blinded by asset inflation US consumer borrowing and spending (on your export products). As commodity prices rose, the BRIC nations and OPEC got into the dollar recycling game in a big way. If you remember the Fun with Funding article, one of the tables in the discussion showed us that since May of 2006, 100% of foreign purchases of US Treasuries were undertaken by Brazil, Russia, India, China and OPEC. Japan was a net seller over the period. Quite the happy circumstance...while it lasted.

But over the past seven months, the foreign community has been treated to the visual of three of the five largest US investment banks disappearing. One literally disintegrating in the night. They also watched as the largest two US residential mortgage-financing intermediaries entered Club Fed, never to be seen again in public. Let's face it, the foreign community knows Lehman had been around for 158 years. The firm had lived through a domestic civil war and a financial/economic depression. And what eventually took it down? Granite countertops, stainless steel appliances and travertine flooring. Quite the sorry commentary. You get the point. We suggest that one of the most important consumer confidence surveys of the moment is the monthly tally of foreign purchases of US financial assets. The foreign investment community has had a front row seat in the US credit cycle drama playing out amongst Wall Street and the Fed/Treasury/Administration. They, along with almighty Bill Gross, expressed their extreme concern over Fannie and Freddie solvency, instigating relatively immediate action. They, along with almighty Bill Gross (to the tune of $750 million) would have been hurt badly had AIG gone nose first into the tarmac without even attempting to pull the nose up before crash landing. We know in part what the foreign community has been saying, but what are they thinking at this point? To us, one of the most important questions as we move forward....


As a quick counterpoint to what we see as enhanced risk to foreign capital committing to US assets at the moment, be sure to keep your eye on many of the major European financial institutions. In terms of the raw numbers, leverage ratios for many of Europe's largest financial behemoths make former US investment bank outfits look like choirboys and girls. IF the European financial sector encounters meaningful credit issues ahead, as have their financial sector brethren in the US, we could indeed see Treasuries continue to be the safety trade of choice. A confusing time with a lot of moving parts globally as really global credit cycle reconciliation plays out? You better believe it.

Point blank, the US cannot afford to lose the confidence of the foreign investment and central banking communities in US financial asset markets. Now more than at any other time in recent memory, the US financial sector and real economy need access to relatively inexpensive foreign capital. We would just remind you of one truism we have repeated in these pages for years. Liquidity/Capital is a coward. There’s always too much around when it’s least needed and it’s never there when needed most. One has to look no further than the US residential mortgage markets to be reminded of the importance of this comment. But unfortunately and quite inconvenient for US financial and real asset markets is the fact that as humans, we’re “wired” incorrectly. In times of stress the fight or flight mechanism takes over. You can blame the cave men and women for that one. Hey, they don’t have any capital, do they? Just checking."

[Laelth]

20. That's is. Obama is in a very tough spot, one not of his making.

He inherited this deficit, and he needs to spend a lot more money right now to rejuvenate the American economy.

But what's the alternative? If he tells the American people the truth right now, Republicans score major points with their hypocritical "fiscal responsibility" argument (even though it was their fiscal irresponsibility that allowed us to get in a position where we could be blackmailed). Republicans would have an argument that the budget should be balanced so that we can not be blackmailed by foreign banks. It might be persuasive. If it were, Obama's whole agenda would be sabotaged, we'd spiral into a depression from the lack of necessary government spending, Obama would get the blame, and Palin might be President in 2012.
I trust he's doing what he thinks is best.

:dem:

-Laelth

[slipslidingaway]

22. We'll never know if we had to give foreign banks everything

that was owed to them, there has been no real accounting for the public to see.

Obama is in a bad spot, but he knew that when he decided to run, apponting some of the same people who helped get us in this predicament to fix this mess does not inspire confidence in many people.

[Laelth]

23. I hear you.

But knowing that he was in a bad spot, and knowing that someone would have to take the fall eventually for what he would have to do ...

can you think of any more deserving creeps that Geithner and Summers?

:dem:

-Laelth

[slipslidingaway]

27. But what does that say about the person who hired them to

formulate economic policy and to help allocate over 1 trillion dollars.

:shrug:

[Laelth]

28. It says Obama is a tough SOB.

He's not afraid to throw them under the bus.

:dem:

-Laelth

[slipslidingaway]

29. Cannot say that I agree with you....

we've just seen over 1 trillion go out the door with the advise of those who were appointed by Obama. He can throw them under the bus at some point, but he will lose credibility for appointing them in the first place. And now we are indebted to those nations we need to service our debt a bit more.

:(

I was never on board with his economic team, but it was practically treason to say so on DU.

[Laelth]

30. Fair enough.

Now that Dodd has agreed (or so it seems) to take the blame, Geithner and Summers are off the hook for the moment. This has been a bizarre couple of days, politically speaking.

Thanks for the responses and the interesting conversation.

:toast:

:dem:

-Laelth

[slipslidingaway]

32. We'll know in time how this all plays out....cheers :) n/t

[truedelphi]

34. You say or suggest that we cannot let the banks or parties to the

Derivatives transactions fail. Okay. I understand where you are coming from. And if this was a 20 Billion or 200 Billion dollar affair like the S & L failures of the eighties, I would be agreeing with you.

But some experts say the derivative failures clock in at 50 Trillion. Or even 150 Trillion. Or even 550 trillion.

So where do we go if those numbers are the bottom line? I don't think that there are even enough trees in North America to provide the printing presses with the money for a 550 trillion buck Bailout.

And as far as the 1.5 trillion you mention as being the reason that we did some of this Bailout, as you say without that 1.5 trillion the banks would not give the government the money that the government needs to keep running - that statement is simply absurd. We have already given the financial institutions 2.1 trillion just weeks ago when the Toxic Asset purchases were planned for. We also provided about 700 billion to the financial institutions between August 2007 and Sept 2008. Then we gave them the first ANNOUNCED Bailout of 700 Billion. (Oct2008 - oh and that Bailout was syupposed to get the banks to start loaning money again - only they haven't bothered to.)

Some experts claim that there have been other deals and that we have already handled about 8 trillion or so worth of Bailouts (including the Stimulus package.)

[Laelth]

36. I hear you. It is insane to believe we can cover those kinds of losses.

Only a rebound in the housing market and a robust American economy can turn that worthless paper back into something worthwhile again so that the paper losses do not look so bad. I don't know, but I think the administration's logic is that we need to just buy some time with intermittent payments to allow the market to rebound and to restore confidence.

But don't quote me on that. :shrug:

-Laelth

[Carni]

6. Can someone explain this to the more stupid amongst us

AKA : ME

What exactly was the effect of this:

"was to put derivative counter parties at the front of the line ahead of other creditors in bankruptcy proceedings"

I am not that familiar with bankruptcy law but did this mean the defaulters couldn't get out of paying? I am confused (not an uncommon thing)

[closeupready]

8. I think it means that if anything of value remains after filing Chap. 11,

those at the front of the line get first dibs on those assets. And then after their claims are satisfied, they go down the list.

[Carni]

12. OK I get it now

Many thanks!

[burythehatchet]

9. It means that all the fraudsters were aware of what was coming and made sure that laws

were passed that allowed them to go the head of line if the issuing party (AIG and others) was to go bankrupt. Creditors usually are first in line to be compensated in the event of a bankruptcy, these guys had the law changed so they go the head of the line.

[Carni]

11. Thank you NT

[Gin]

14. question?? if one division of AIG the FP division...caused all this...can't this division be

bankrupted and make all of those swaps null and void? or at least worth less? and all the people involved with AIG get canned?

[Laelth]

15. Bankrupt that division?

And several huge foreign banks lose trillions of dollars. Then, because they have no confidence that the U.S. can repay its debts, they refuse to lend money to the federal government. Then, the government collapses. We have to make those foreign banks happy right now because we need them to continue to finance the national debt (to the tune of @ 1.5 trillion this year).

That is why neither party is willing to let AIG fail.

:dem:

-Laelth

[leftstreet]

25. When will those international banks figure out we can't pay them back?

Why so much confidence in an economy where there are no jobs, where the remaining jobs pay less (adjusted) than 1970s wages, where the manufacturing sector is gone and won't return, where service/retail McJobs are the future, where there are no resources to exploit, etc.?

I don't get it.
Why would any country be stupid enough to loan us money?

[Laelth]

26. Let's hope they never figure that out.

When they do and refuse to lend us money, our government will collapse.

(or, at least, that's the fear that fueled the TARP).

And Clinton produced a budget surplus in 2000. We can pay them back ... just not right now, not in the middle of a global recession.

:dem:

-Laelth

[Solly Mack]

13. K&R

Thanks for posting!!

[No.23]

19. Your Vice President was a main water carrier for the bill too.

http://www.huffingtonpost.com/jackson-williams/joe-biden-true-friend-of_b_120776.html
Joe Biden: No True Friend of Working Men and Women

Which was why, in part, many of us couldn't vote for him and didn't.

[DainBramaged]

24. "YOUR Vice-President"??????

Excuse me, he is VP for THE ENTIRE FUCKING COUNTRY. You got a problem with that?????

[DainBramaged]

31. I still think WE deserve an answer.

[slipslidingaway]

33. Looking back at the Vanity Fair article on Bear Stearns...

http://www.vanityfair.com/politics/features/2008/08/bear_stearns200808?currentPage=7

"...When Schwartz relayed the $4 idea to his board, several, including Cayne, grew apoplectic. Cayne argued strenuously that Bear simply file for bankruptcy. “There were a lot of people at that point who were just saying, ‘Fuck ’em—let’s go 11,’ ” remembers one person in the boardroom. It was then that Gary Parr and the bankruptcy attorneys patiently explained that bankruptcy was actually not an option, not for a major securities firm. Changes to the bankruptcy code in 2005 would force federal regulators to take over customer accounts. All its securities would be subject to immediate seizure by creditors..."

[G_j]

35. K&R