The Dodd Mess

Comes Chris Dodd to Hardball to explain how the February 11 language was put into the bill:



So, number one, Chris Dodd knew the language was going in during the House-Senate conference. His staff wrote it in.

Number two, it was at the insistence of Treasury who would otherwise have had the entire section taken out.

Number three, it was a senior administration official telling The New York Times on deep background that Dodd put the language in, while leaving out the Treasury's part in the matter. For what it's worth, Greenwald thinks it was Rahm.

Very depressing stuff to look through here. One of the few bright spots in this:



Still looks more and sounds more like a president than Bush ever did.

Greenwald on Dodd Smear: Obama's Fingerprints

Glen Greenwald has pulled together the best presentation of this yet, and it's clear that the language exempting bonuses before February 11, 2009 in the stimulus legislation was put in at the behest of the Obama administration.

And the smear against Dodd is also coming from the White House:

Yet now, the Obama administration is feeding reporters the accusation that it was Dodd who was responsible for the exemptions that protected already-vested bonuses. The Times article from Saturday that started the Dodd scandal thus contains this outrageously misleading claim:

The administration official said the Treasury Department did its own legal analysis and concluded that those contracts could not be broken. The official noted that even a provision recently pushed through Congress by Senator Christopher J. Dodd, a Connecticut Democrat, had an exemption for such bonus agreements already in place.

And yet another New York Times article from today ("Fingers Are Pointed Across Washington Over Bonuses") -- this one by David Herszenhorn -- contains this White-House-mimicking, misleading passage:

But Mr. Reid mostly ducked a question about whether Democrats had missed an opportunity to prevent the bonuses because of a clause in the economic stimulus bill, part of an amendment by Senator Christopher J. Dodd, Democrat of Connecticut, that imposed limits on executive compensation and bonuses but made an exception for pre-existing employment contracts.

That was the exact provision that Geithner and Summers demanded and that Dodd opposed. And even after Dodd finally gave in to Treasury's demands, he continued to support an amendment from Ron Wyden and Olympia Snowe to impose fines on bailout-receiving companies which paid executive bonuses (which was stripped from the bill at the last minute). But now that Treasury officials are desperate to heap the blame on others for what they did, they're running to gullible, mindless journalists and feeding them the storyline that it was Dodd who was responsible for these provisions. And today, during his White House Press Conference, Robert Gibbs advanced this dishonest attack by repeatedly describing the offending provisions as the "the Dodd compensation requirements."

How in Hades did these "administration officials" think they could get away with it? This is going to be the first real mess that the Obama White House has gotten themselves into, full fledged. Stupid politics, stupid internicene war, stupid all around.

Fox News Smears Chris Dodd -- Did NOT Grandfather AIG Bonuses

There has been a lot of fury expended over the past few days about the bonuses AIG executives in the derelict Financial Products division received, and rightfully so. However, Fox Business has published what it considers a scandalous story. According to them, Chris Dodd inserted language into the stimulus package bill that protected these bonuses.

While the Senate was constructing the $787 billion stimulus last month, Dodd added an executive-compensation restriction to the bill. That amendment provides an “exception for contractually obligated bonuses agreed on before Feb. 11, 2009” -- which exempts the very AIG bonuses Dodd and others are now seeking to tax.

Of course, this is going all over the conservative blogosphere.

Yet funnily enough, the actual text of Dodd's amendment concerning executive compensation doesn't have this February 11th exception in the text. In other words, the Fox Business smear merchants didn't bother to do any basic research. They knew Dodd had submitted this section through amendment, and there the language is now, so Dodd must have put it in there, right?

Well, no. Actually Dodd's amendment was to another amendment to the main bill, Amendment 98. Amendment 98 was a substitute amendment, so called because it wipes out the language of the bill or amendment it is "amending" and substitutes its own. Dodd's amendment to #98 did pass, but the original amendment was withdrawn later on.

The final bill passed by the Senate on February 10 was the text of another substitute amendment (#570) submitted by Republican senator Susan Collins of Maine. It did have the language of Dodd's Amendment 354, but the grandfather clause currently giving Dodd-haters the vapors is still not in there.

That language was not inserted until the House-Senate conference to reconcile differences between the bills. This was the next day, February 11, 2009, and funnily enough, that was the date used to grandfather these bonuses in. And since Dodd was not one of the conferees working out these details, it remains to be seen just how he was supposed to have inserted this language.

The actual conferees were, from the House: Obey, Rangel, Waxman, Lewis (CA), and Camp -- and from the Senate: Inouye, Baucus, Reid, Cochran, Grassley. Of these, four are Republicans -- Grassley, Cochran, Lewis, and Camp.

There is no indication whatsoever that Chris Dodd had anything to do with this clause. Consider this right wing lie debunked.

AIG Names Names

The gig is up and Congress' questions are answered. AIG has released names and numbers for who got what from them directly and from Maiden Lane II and III.

Maiden Lane II was dealing with unwinding loans made on good assets to buy up toxic assets.

The top beneficiaries of payments tied to the unwinding of the securities lending portfolio were Barclays (BCS) of the U.K., with $7 billion, Deutsche Bank, with $6.4 billion, BNP Paribas of France, with $4.9 billion, Goldman with $4.8 billion and Bank of America (BAC, Fortune 500) with $4.5 billion.

Maiden Lane III was buying bad toxic assets from institutions that had purchased credit default swaps from AIG on those toxic assets:

...the top recipients of payments under the CDO purchase program, with SocGen getting $6.9 billion, Goldman $5.6 billion, Merrill $3.1 billion and Deutsche Bank $2.8 billion.

And finally, those same institutions who sold their toxic CDOs to Maiden Lane III were made whole through payouts from AIG that also terminated the CDSs:

The top recipients of CDS-related collateral were France's Societe Generale, with $4.1 billion, Germany's Deutsche Bank (DB), with $2.6 billion, and Goldman Sachs and Merrill Lynch of the United States, with $2.5 billion and $1.8 billion.

I wonder what the Wall Street Journal was looking at, though. They said the biggest two recipients were Goldman and Deutsche Bank, but by far the biggest recipient of taxpayer cash from AIG was Societe Generale, with $11 billion coming through Maiden Lane III and AIG directly.

The AIG Bailout

More details from a whitepaper published on the fifth of March:

On February 28, 2008, American International Group, Inc. (AIG), the largest insurance company in the United States, announced 2007 earnings of $6.20 billion or $2.39 per share. Its stock closed that day at $50.15 per share. Less than seven months later, however, AIG was on the verge of bankruptcy and had to be rescued by the United States government through an $85 billion loan. Government aid has since grown to $200 billion. AIG's stock currently trades at less than $1.00 per share.

The Article explains why AIG, a company with $1 trillion in assets and $95.8 billion in shareholders' equity, suddenly collapsed. It then details the terms of the government bailout, explores why it was undertaken, and questions its necessity. Finally, considering a likely legacy of AIG is increased regulation of credit default swaps, the Article describes the current regulatory landscape for CDSs, advocates restoring Securities and Exchange Commission power to regulate them, but cautions against regulating before the CDS market has had a chance to self-correct.

I'm about halfway through, so I don't know about the conclusions. I do like the very cogent description of the mess AIG is in.

How Paulson Used AIG To Throw Goldman Sachs A Big Old Bone

Among a lot of others, mind you.

It's in the WSJ today and branching out from there -- several of the counterparties receiving par payouts for their toxic CDOs now owned by the taxpayers have been identified. The first name on the list is Goldman Sachs:

Among those institutions are Goldman Sachs Group Inc. and Germany's Deutsche Bank AG, each of which received roughly $6 billion in payments between mid-September and December 2008, according to a confidential document and people familiar with the matter.

Other banks that received large payouts from AIG late last year include Merrill Lynch, now part of Bank of America Corp., and French bank Société Générale SA.

More than a dozen firms with smaller exposures to AIG also received payouts, including Morgan Stanley, Royal Bank of Scotland Group PLC and HSBC Holdings PLC, according to the confidential document.

This is big news because the vice chairman of the Fed, Donald Kohn, would not identify any of these companies when he appeared before the Senate Banking Committee on Thursday.

However, it was already known that Goldman Sachs, Societe, and Deutsche Bank had gotten a big payout from the AIG debacle, as this December 17 article from Business Week shows.

I've been trying to understand what happened here. Putting the Business Week article together with the Kohn testimony and this summary of part of the deal and other sources, you get a clearer idea of just how billions in TARP money has been funneled to these institutions. And it stinks.

To help explain what's happened, I've prepared a PDF presentation of this, relying mostly on Kohn's testimony. You can access it at my unrelated website here (pdf).

Let's go back a bit to when Bear Stearns went under. The Federal Reserve worked together with JPMorgan Chase to get JPMorgan a great deal. The Fed created a limited liability company in Delaware, named after the street the New York Fed bank is on, Maiden Lane. Maiden Lane, LLC, received $29 billion in loans from the Fed, and $1 billion in loans from JPMorgan. Maiden Lane used that money to buy up the toxic assets at the heart of Bear Stearns' woes. JPMorgan Chase then purchased Bear Stearns, free of the toxic assets with $30 billion sitting there all nice and tidy. And then JPMorgan bought Bear Stearns at $10 a share (although, remember, Hank Paulson wanted them to sell at $2).

Now this whole deal stunk mightily in the nostrils of Congress, and they saddled the Federal Reserve with some more strigent restrictions on how they deal out the money. And Maiden Lane, LLC, has actually lost $5 billion in value since that time. But that didn't stop them from pulling out the old playbook when AIG came staggering in through the door.

Well, what else was the Fed going to do?

AIG is actually a quite stolid and no-nonsense company for the most part. But one of its arms, AIG Financial Products (AIGFP), was described recently by Ben Bernanke:

"If there is a single episode in this entire 18 months that has made me more angry, I can’t think of one other than AIG," Bernanke told lawmakers today. "AIG exploited a huge gap in the regulatory system, there was no oversight of the financial-products division. This was a hedge fund basically that was attached to a large and stable insurance company.

What AIGFP was pretty wild. First they took out loans on stable assets owned by AIG and used that cash to invest in what would become toxic assets -- the collateralized debt obligations (CDOs) that have become so familiar to ordinary Americans nowadays. These are the complex financial instruments that all sorts of mortgages had been bundled into, sliced up, and rebundled to help minimize risk. AIGFP bought up a lot of them.

They also had friends out there doing the same thing. These companies wanted a kind of insurance on their CDO's, so AIGFP sold them credit default swaps (CDSs). This meant that AIG would be responsible for losses on the CDOs after a deductible of sorts was reached. But since they were all as safe as houses, the money being paid into AIGFP was a windfall. Money for everyone, and all granted under AIG's Triple A credit rating. Nice of them to lend that out to the underregulated, loophole-exploiting Financial Products arm, don't you think?

Of course, the housing market started to tank. And the truth is, AIG had been trying to extricate itself from this godawful mess for a while. They stopped issuing these types of deals back in 2005 when they started feeling squishy about them. They'd been working with regulators to unwind all of this mess.

But then a crisis point was reached. The counterparties who held the loans on their stable assets were starting to ask for their money back. The counterparties who'd bought credit default swaps on their toxic assets were losing cash and starting to call in their CDSs. And AIGFP had not set aside any capitalization against those CDSs -- they didn't have to! They weren't technically insurance. They were derivatives. And AIGFP was having difficulty selling their own toxic assets to meet their obligation to these two sets of counterparties.

This is the essence of a liquidity crunch. The cash has seized up. AIG needed help fast and a lot of it.

On September 16, 2008, the Federal Reserve provided AIG with a huge line of revolving credit. They created a facility with the quirky name Revolving Credit Facility. They put $85 billion inside this facility and opened up a window for AIG. This was the plan -- AIG draws on the credit as they have need to satisfy their obligations. Over time good assets get freed up and/or toxic assets become good boys and girls again. By selling these assets, AIG could then pay back the Revolving Credit Facility. And it had two years to do so, and then, poof! The Revolving Credit Facility is no more and AIG has learned a very important lesson.

And just to make extra sure that the government wouldn't lose any money in the deal, AIG had to place 79.9% of preferred convertible stock into a trust payable to the Treasury. The important thing here to know about preferred convertible stock is that if the Treasury decides to, it can convert this preferred stock into common stock, which means the Treasury really does own a massive controlling interest in AIG at that point.

So that worked, right? Not quite. By October 1, AIG had already drawn out $61 billion of the $85 billion available to it. Yes, you read that right. Two weeks later.

The toxic CDOs were getting worse and worse. They still couldn't sell their own, and the cash collateral calls from the counterparties from whom they'd borrowed were stacking up and the CDSs were mounting as well.

So the Fed took some further steps. They created a second facility for AIG, the Secured Borrowing Facility, that allowed several AIG subsidiaries to borrow up to $37.8 billion more to pay off the cash collateral calls. This was only a temporary fix, meant to buy AIG time to start selling assets and get their own cash flow running again.

Do you think it worked? Does a bear poop in the Vatican?

By November, the economic crisis was deepening and AIG was about to lose its Triple A credit rating. That would have mean immediate needs to pump up their available capital, with more collateral calls and more people bailing out of other financial arrangements. Plus, they did have this thing called actual insurance that they did occasionally like to sell to people, and that business was drying up fast as well. AIG was barely hanging on.

But by November, Hank Paulson had gotten his $700 billion in the Troubled Asset Relief Program and the wheeling and dealing had begun. Bernanke was spitting nails already about the whole situation, so the two of them got together and start thinking about restructuring the entire AIG bailout.

They came up with this. First, Bernanke capped the first facility from September, the Revolving Credit Facility, at $60 billion. He also lowered the interest rate AIG paid on this money and stretched out the loan term to five years. But AIG had to post all proceeds from asset sales into this facility and pay off the $60 billion.

Paulson agreed to give AIG $40 billion in TARP funds in exchange for $40 billion in Senior Preferred Stock in AIG. Fancy!

Then the Fed created two more Maiden Lane corporations, Maiden Lane II and Maiden Lane III. Paulson funded both of these institutions with TARP funds and then both started dealing with AIG's major problems, their own toxic assets and the CDSs on other counterparties' toxic assets.

Maiden Lane II got $20 billion in TARP funds from the Treasury. It went to the AIG subsidiaries that had been borrowing from the Secured Borrowing Facility created in October by the Fed. In exchange, the subsidiaries forked over the toxic assets they held. They were worth $40 billion at par (what AIG paid for them in the first place) but AIG only got $20 billion for them. They took the hit themselves, writing off the rest, and then paid back the Secured Borrowing Facility what they had borrowed.

And, poof! The Secured Borrowing Facility was terminated.

Maiden Lane II has 6 years to repay the TARP money to the Treasury. Its only holdings are these toxic assets bought at about 50 cents on the dollar, so the Fed is betting that the assets will at least be worth that $20 billion plus interest in six years. If there's any money left over after the Treasury is paid off, the Fed gets 67% of that and AIG gets 33%. Cross your fingers!

But it's Maiden Lane III that is the real piece of work. Keep your eye on the ball...

Maiden Lane III has been funded with $25 billion of the TARP funds (under the same terms as Maiden Lane II), and AIG was told to kick in $5 billion as well. Maiden Lane III has gone to to the counterparties that purchased the credit default swaps from AIG and given them an offer they couldn't refuse - all of their money back.

Here's how it worked. There was around $62 billion of toxic assets (at this point) being held by these counterparties. They gave them to Maiden Lane III for the grand total of $25 billion. Sounds bad, right? Sounds like they took a bad loss for buying such crazy assets in the first place, right?

AIG paid them everything else.

That's right. In exchange for terminating the CDSs they held on AIG, these counterparties received every single cent they ever paid for these crappy assets. They got par. Now it may very well be that these counterparties have more CDOs that weren't backed up by AIG's credit default swaps, and could still be in a world of hurt. But how nice was it that Maiden Lane comes along with TARP funds and brokers them a par payment on these crappy derivatives!

AIG, of course, took the hit here as well. $37 billion writeoff here, plus $20 billion writeoff because of Maiden Lane II, and $5 billion paid to Maiden Lane III... well, it's a good thing old Hank, former CEO of Goldman Sachs, plugged $40 billion extra of TARP funds into AIG, because that spectacular net loss of $62 billion in the fourth quarter could have been $100 billion.

And now we know that one of the two biggest beneficiaries of this incredible money shuffle was Goldman Sachs, which got (according to the Wall Street Journal) 10% of the money paid out through this deal.

Goldman Sachs received full par payment of their toxic assets backed up by AIG, $6 billion worth, thanks to the keeper of the TARP funds, Hank Paulson.

How is this not the definition of moral hazard, the dreaded term so hated by Paulson that he actually let Lehman Brothers collapse to avoid it? Yes, Lehman Brothers was one of Goldman Sachs' competitors, now that you mention it. They get the shaft, Goldman gets a great big bone from Paulson, AIG writes off billions, and the taxpayers are left holding the bag.

But wait, it gets better. In the Business Week December article, not all of this money had been thrown around yet. The figures are incomplete. Here, only $15 billion had come from TARP into Maiden Lane III, and with the $5 billion from AIG, Maiden Lane III had purchased only $46 billion from this counterparties at that point in time. So AIG had paid out $26 billion due to its CDS obligations.

The final numbers are $24.3 billion from TARP. Now they leave AIG's $5 billion in Maiden Lane III to guard against loss of asset value. So that left $4.3 billion to buy up $16 billion more in toxic assets. That was about 25 cents on the dollar for those assets. Yay, us. But of course AIG made up the difference to terminate the CDSs, so these companies also got par for this junk.

How are all of these assets performing in the Maiden Lane LLCs? How does Paulson justify throwing that kind of money at his old company? How much did Paulson know about these CDSs? After all, Paulson wasn't Treasury Secretary until the middle of 2006 and AIG had stopped all sales of these CDSs in 2005. In other words, Goldman Sachs got all of their AIG credit default swaps while Paulson was CEO.

Oh, by the way, Goldman Sachs did post a fourth quarter 2008 loss, $2.8 billion. They still managed to end the year with a $2.32 billion profit, though. I guess that $6 billion from the AIG situation really helped out at the end of the day.

I hope we do as well.

TPM: Maiden Lane I, II, and III

Hoo boy. After Bernanke's appearance today in front of the Senate Banking, Housing, and Urban Affairs Committee to deal with the AIG mess, a rather astute observer wrote Josh Marshall with a succinct explanation of what the Fed's been up to. Brace yourself:

Josh, your reporting on the AIG credit default swap/counterparties issue has been spot-on. But to understand what happened there, you have to understand the Fed's "Maiden Lane" vehicles and how it's used them to avoid what Congress intended with TARP, which was the real story that came out of Dodd's hearing on the AIG mess today. And the roots of it go back to the Bear Stearns rescue last year.

By law, the Fed isn't allowed to buy assets -- it can only lend, as lender of last resort. That was a problem for the Bear Stearns bailout, because JP Morgan said it would only buy Bear if someone else assumed responsibility for the crap. Fed came up with this idea to start a shadow company, called a special purpose vehicle (SPVs were how Enron operated, creating "Chewco" and the like named after Chewbacca - the New York Fed called their SPV "Maiden Lane LLC" for name of the street the NY Fed is located on in southern Manhattan). The deal then was JP Morgan put $1 billion into Maiden Lane, the Fed put $29 billion in cash into it. Maiden Lane paid Bear Stearns $30 billion, which went straight back to JP Morgan as this deal happened simultaneously to JP's purchase of Bear. So Morgan got $30 billion in cash ($29 billion net) and the Fed got stuck owning the crap, but was legally only making a loan to Maiden Lane, who was the legal owner (Maiden Lane was incorporated not in NYC, but in Delaware to avoid paying taxes). By the Fed's own accounting - which is very different from a real company's accounting - Maiden Lane has lost $5 billion between its creation and today.

The same problem happened in AIG, but this time there was no buyer. In Sept, the Fed bought AIG (80%) in exchange for an $85 bill loan. By Oct, it was clear AIG was still dying, so the Fed lent it another $40 billion. This $40 billion was restructured in November when the Treasury put in $40 billion of TARP funds, which was needed to bail out the Fed's loan which had by this time gone bad. But essentially AIG had 2 problems: it had lent out safe securities with real values and used that money to buy shit mortgage backed securities -- this was called 'Secured Lending Facility' which was done right under the nose of the state insurance commissioners. It was in the hole $20 billion. The other problem was the crappy insurance that AIG's financial products company had written on other people's shit mortgage backed securities - the credit default swaps (CDS). When the bad mortgages that AIG insured went bad, the insurance had to pay-up -- but because it wasn't called insurance, but rather derivatives, AIG hadn't reserved any money against it. This had lost about $25 billion.

Using the loophole it had learned during Bear Stearns, the Fed set up two new companies: Maiden Lane II and Maiden Lane III. Two dealt with the secured lending and Three the shitty credit default swaps. The Fed lent each Maiden Lane $20 billion and $25 billion and then Maiden Lane paid off the investors that had either lent AIG the money to buy the shitty mortgage backed securities (ML II) and those who had the shitty mortgages and the corresponding insurance (ML III). To avoid booking a loss on the Fed's balance sheet, because the Fed had some legal problems if either of these Maiden Lanes lost money, and because of a reporting requirement that Dodd had put into TARP which actually required the Fed to report to the Congress and the public about the cost to taxpayers from ML I, the Fed did some creative accounting. They still paid all of the investors off at full value (par), so that they didn't lose anything. But they booked the loss on AIG's balance sheet and kept Maiden Lane clean. This is the hidden story behind how AIG went from losing $38 billion during the first 9 months of 2008 to losing $61 billion in the 4th quarter.

This was all exposed at today's hearing. And despite repeated requests from Senators on both sides - Dodd, Shelby, Corker, Warner - the Fed is still refusing to say who it bailed out through Maiden Lane II and III.

I didn't get to hear this today but I'm going to watch as much as I can at C-Span.org. I've embedded the hearing below so you can, too.

I'll be back with more on this once I've seen the video.

Update: It's Donald Kohn, the vice chairman of the Fed, giving testimony, not Bernanke. More up above.