Another AIG scandal? Helped transfer taxpayer $ to major banks giving them "abnormal profitability"

[sabra]

http://blogs.usatoday.com/ondeadline/2009/03/the-financial-blog-zero-hedge-has-posted-an-exclusivethat-claims-that-according-to-an-insiders-account-aig-yes-that-aig-w.html

Report: AIG bailout money behind banks' recent profitability

The financial blog Zero Hedge has posted an "exclusive" that claims that according to an insider's account, AIG (yes, that AIG) "was responsible for the banks' January and February profitability."

...

ZH says the insider perspective came in an email from "a correlation desk trader." Unless you're a finance whiz (and who is these days?!) you might get lost in the explanation of how AIG supposedly engineered this feat of profitability. But ZH tries to explain the "mumbo jumbo" in "layman's terms":

AIG, knowing it would need to ask for much more capital from the Treasury imminently, decided to throw in the towel, and gifted major bank counter-parties with trades which were egregiously profitable to the banks, and even more egregiously money losing to the U.S. taxpayers, who had to dump more and more cash into AIG, without having the U.S. Treasury Secretary Tim Geithner disclose the real extent of this, for lack of a better word, fraudulent scam.


In simple terms think of it as an auto dealer, which knows that U.S. taxpayers will provide for an infinite amount of money to fund its ongoing sales of horrendous vehicles (think Pontiac Azteks): the company decides to sell all the cars currently in contract, to lessors at far below the amortized market value, thereby generating huge profits for these lessors, as these turn around and sell the cars at a major profit, funded exclusively by U.S. taxpayers (readers should feel free to provide more gripping allegories).


What this all means is that the statements by major banks, i.e. JPM, Citi, and BofA, regarding abnormal profitability in January and February were true, however these profits were a) one-time in nature due to wholesale unwinds of AIG portfolios, b) entirely at the expense of AIG, and thus taxpayers, c) executed with Tim Geithner's (and thus the administration's) full knowledge and intent, d) were basically a transfer of money from taxpayers to banks (in yet another form) using AIG as an intermediary.


For banks to proclaim their profitability in January and February is about as close to criminal hypocrisy as is possible. And again, the taxpayers fund this "one time profit", which causes a market rally, thus allowing the banks to promptly turn around and start selling more expensive equity (soon coming to a prospectus near you), also funded by taxpayers' money flows into the market. If the administration is truly aware of all these events (and if Zero Hedge knows about it, it is safe to say Tim Geithner also got the memo), then the potential fallout would be staggering once this information makes the light of day.

[w4rma]

1. In other words they cannibalized AIG for the money after U.S. taxpayers bought it out. (nt)

[acmavm]

2. And all these false positives are being used to show what a great

plan Geithner and the Goldman Sachs boys have cooked up.

Eventually the walls will come tumbling down. And then watch out.

[leveymg]

5. That was the very point - guarantee returns to foreign counter-parties (China, Saudis, Swiss, etc.)

It's a continuation of the trend that's been going on since 2000 - wholesale transfer of ownership of US assets abroad. That's what it really boils down to. Read this: http://www.businessweek.com/the_thread/economicsunbound/archives/2009/03/a_simple_guide.html

A Simple Guide to the Banking Crisis
Posted by: Michael Mandel on March 12

I don’t know why I called this a “simple guide to the banking crisis.” Really, it’s the longest post I’ve written here. But here it is:
Why is the banking crisis so hard to solve? We stood and watched while Hank Paulson and Ben Bernanke fumbled with their response in the fall. Now we are being treated to the distressing spectacle of Tim Geithner struggling as well to articulate a clear policy for dealing with zombie banks. How come these smart and powerful men can’t get a handle on the problem?
I want to lay out 5 simple propositions which will help you understand why the banking crisis is so intractable. Then I will explain what happens next.
Proposition 1: The boom in the U.S. was funded almost totally by foreign money.
This is absolutely the key point for understanding the current banking crisis. Historically, households have been the major source of capital for the U.S. economy. That’s certainly what I was taught in economics graduate school.
But that quietly changed in 1999, when American households flipped from being net lenders to being net borrowers. Foreign money became basically the only source of capital for the U.S.
Take a look at the chart below, which charts net financial investment (adjusted for inflation). Net financial investment for households (the blue line) includes additions to savings and checking accounts, purchases of stocks and mutual funds, and additions to corporate and government pension funds, while subtracting the growth in household mortgages and consumer credit.
SNIP

Where is that "foreign investment" coming from? Ultimately, the source of those funds were U.S. consumers, themselves, who have been increasingly forced to rely on imports, as middle-class job growth and incomes have declined due to export of jobs and manufacturing by multinational banks that are now being bailed-out by taxpayers. The particulars of this relationship of dependency is reflected in the US trade imbalance:




And, finally, if anyone doubts this problem became most acute and unstustainable during the Bush policy era, take a look at the US-China figures. Bear in mind that AIG is really a front for large Chinese insurance companies and banks.

Table 1. U.S. Merchandise Trade with China: 1980-2008($ in billions)
Year U.S. Exports U.S. Imports U.S. TradeBalance
1980 3.8 1.1 2.7
1985 3.9 3.9 0
1990 4.81 5.2 -10.4
1995 11.74 5.6 -33.8
2000 16.3 100.1 -83.8
2001 19.2 102.3 -83.1
2002 22.1 125.2 -103.1
2003 28.4 152.4 -124.0
2004 34.7 196.7 -162.0
2005 41.8 243.5 -201.6
2006 55.2 287.8 -232.5
2007 65.2 321.5 -256.3
2008 *79.6 337.6 -258.0
Source: USITC DataWeb.Note: Data for 2008 are projections, on the basis of actual data for January-July 2008.
http://www.fas.org/sgp/crs/row/RL33536.pdf

[xchrom]

3. +4 -- they aren't going to change until

people -- and not just someone - is brought to justice.

[girl gone mad]

4. I posted this on Sunday.

http://www.democraticunderground.com/discuss/duboard.php?az=show_mesg&forum=114&topic_id=61960&mesg_id=61960

Glad to see it is getting more attention.