Goldman and AIG: A Tale of Two Tales

Hank Greenberg

The New York Times, in a display of wicked irony, today published in its online edition two stories connected at more than the hip. The articles, placed adjacent to one another on the paper's splash page. concerned Goldman Sachs and A.I.G. At one point during the day, a third feature, focusing on former A.I.G.'s chairman Hank Greenberg's nemesis, Eliot Spitzer, joined the twosome. Well, someone at the Times certainly had a sense of humor.

In 2008, A.I.G. and its house of subprime loans collapsed. The Federal Reserve essentially seized the firm. Bernanke's minions arranged for Goldman Sachs and a select few other Wall Street institutions to receive one hundred percent on the dollar for its A.I.G. debt. Let's just say that action is highly unusual in a de facto bankruptcy process. Hank Greenberg, who knows the inside game perhaps better than anyone, was "upset."

The former Army Ranger took his umbrage to court, suing the government for what Greenberg perceived as unfair treatment of his former firm. The case was considered a long shot. However, a federal judge today ruled in favor of Greenberg's suit.

Andrew Ross Sorkin
(Image: marketwatch.com)

The Times' lead financial dog, Andrew Ross Sorkin, expressed something close to disbelief in the judicial decision. He also got others to assert on the record that the judgment would create chaos the next time too-big-to-fail....um....fails. In fairness, Sorkin has a subtle understanding of the complex events of the 2008 crash. However, Greenberg happened to be right about the looting of A.I.G. for Goldman Sachs' (and other institutions') benefit.

One wonders what Greenberg thought when he saw today's Times story about Goldman. The Wall Street firm intends to get into the online, retail loan business. Yes, small-time loans would be a new profit center for the Masters of the Universe. In the event of default, guess who gets one-hundred percent on the dollar. Again.

Iceland President: "Why Do We Consider Banks To Be Like Holy Churches?"

Icelandic President Grigsson
(photo: http://www.forseti.is/)

In all the financial media's hoopla over the high-profile, big-think, but little-action event known as the World Economic Forum in Davos, Switzerland, one breath of fresh air emerged. That came courtesy of Iceland's president Olafur Ragnar Grimsson, whose nation painfully experienced fiscal disasters similar to those Lehman Brothers symbolized in the United States.

Grimson asks -- and answers -- not-so-rhetorical questions such as why banks are considered capitalism's sacred cows, too big to fail, too powerful to scrutinize, and too arrogant to question. The financial blog zerohedge.com posted on Grimsson's remarks. The post includes a video clip of the complete, three-minute interview of Grimsson.

The Icelandic president's comments and his line of reasoning are absolutely spot on. It's ironic his remarks came during the victory lap of one Timothy Geithner. The now former US Treasury secretary worked overtime to ensure America's largest financial institutions felt as little pain as possible for their acts of corporate folly. Instead, taxpayers were offered a poisoned chalice masquerading as a "solution" to the prospect of a second Great Depression.

Hank Greenberg

Former AIG chairman Hank Greenberg's disingenuous lawsuit against the Federal government approaches the chalice from an insider's perspective. In essence, Greenberg claimed the Federal actions, which essentially took over AIG, were designed to funnel money from the insurance company to major Wall Street institutions. Geithner played a very strong role in this situation, which included paying Goldman Sachs and other firms one hundred percent on the dollar for certain AIG instruments they held. What's unusual about that arrangement is that firms typically take a haircut on these fire sales. Greenberg asserted these actions were really a back-door bailout of Wall Street's "too big to fail" holy churches.

The corruption, which is at the heart of these issues, runs very deep. The excellent financial writer Bethany McLean notes that directions, such as jailing bankers, quickly enter deep waters that defy 
simplistic answers to these issues. One area which would impact the corruption, in her view, is to hit the bankers where they feel it -- their compensation. That approach, along with Icelandic president Grimsson's views, are useful starting points in what promises to be a long, difficult fight against very entrenched, powerful constituencies.

Ex-AIG Boss Hank Greenberg Fights Fraud Rap

Hank Greenberg
(photo from Time)

AIG's former chief executive Hank Greenberg continues his legal war against New York State. The war began when Eliot Spitzer bravely went after Greenberg and AIG, a stance history has ultimately vindicated. It took guts, as Greenberg was one of New York's most connected and feared power brokers.

Currently, New York governor Andrew Cuomo and New York state attorney general Eric Schneiderman are pursuing a fraud case against Greenberg and an AIG associate. Of course, AIG remains at the heart of the American financial disaster. Greenberg bitterly watched AIG collapse. In a way, it was a shame. Greenberg had -- and has -- profound flaws and is "challenging" to deal with. Even so, he had -- and has -- more brains than the fools who fecklessly and arrogantly led the nation into financial catastrophe.

The story of Greenberg's trial was reported in the online edition of the Chicago Tribune and other publications.

Final note: Greenberg has always been a pugnacious individual. He's achieved his toughness honestly: he was among the Rangers who climbed Pointe du Hoc during D-Day.

Big Banks Buy AIG Toxic Commercial Mortages

With all the deserved attention over funky residential mortgages, their less publicized commercial counterparts offer competition for dodginess. Their value has not escaped the attention of major banks and their staffs. They understand these instruments, their nuances, and their true value. In purchases that should raise eyebrows both inside and outside the commercial mortgage business, Deutsche Bank and Barclays won an auction of "complex packages of commercial mortgage bonds at the heart of the controversial government bailout of AIG," according to a story in today's Financial Times.

Deutsche Bank certainly knows these mortgages, as it was the "original counterparty that sold the securities to Maiden Lane III," the Financial Times reporters observed. In other words, not only did Deutsche Bank know what they were buying, they originally sold them a few years ago for a profit.

Nice work if you can get it.

Great Recession Scorecard

The New York Times, which had the hubris to declare the Great Recession kaput, does demonstrate occasional spasms of intent to inform. A case in point is via its "Dealbook" section, which created a funny, and informative, diagram of financiers prominent during the "slippage" of 2008-2009. (In case you've forgotten, the cast of corporate characters barely or no longer with us includes Bear Stearns, Lehman Brothers, Citicorp, AIG, WaMu, Wachovia, Fannie Mae, Freddie Mac, Merrill Lynch, Countrywide Financial, etc.)

Use Zero Hedge's link to take you directly to the action.

PS. In case you use your NY Times/3-D recession-proof reading glasses on a regular basis, please consider this story from Bloomberg. It reports Meredith Whitney's latest oracular statement: many states will need a federal bailout within the next 12 months. Warren Buffett expressed a similar sentiment earlier this year. Of course, the Great Recession is over. Isn't it?

Extra credit: Bloomberg also has a video segment with Jim Grant, a man with a very interesting, highly independent mind.

The furtive fellow in the photograph is Joseph Cassano, former capo of AIG Financial Products, who gained considerable experience with Drexel Burnham Lambert during Michael Milken's heyday. The Department of Justice earlier this year decided not to pursue criminal charges against Mr. Cassano. Roughly a month after the DOJ announcement, Cassano testified before a House committee investigating various issues impacting the near-collapse of the American financial marketplace in 2008-2009.

Three Hearings

Three hearings were held today that revealed some curious things about the state of the United States. I'll provide links for each of them.

First up -- Joe Cassano, former master of the universe/AIG derivatives division. Best part was Cassano's $280 million compensation over an eight-year period, plus $1 million/month salary paid by AIG for his "consultant" work for the firm after he was no longer on AIG staff. Bloomberg story is best of the bunch; NY Times' is by far the weakest.

Next up -- Porn stars testified in a Los Angeles hearing that using condoms during filming would cramp their style. According to the LA Times story, one porn actor said "If you're worried or paranoid, you should not be in this industry."

And then -- Elena Kagan in a genuinely funny moment at her Senate committee confirmation hearings. The Talking Points Memo story includes the relevant dialogue between Senator Lindsay Graham and Supreme Court nominee Kagan.

AIG Beats the Rap

With all the fuss on BP and the Fed sting on small-fry mortgage loan sharks, the SEC quietly dropped its probe on AIG's Joseph Cassano.

Not so long ago, although it seems like a decade ago, AIG was bailed out by the US government. The cost? $128 billion. The principal reason for AIG's dramatic fall from financial grace was its profound involvement in highly leveraged, mortgage-backed financial instruments that weren't worth a damn. The architect of this fiscal catastrophe was Joseph Cassano.

At the time of AIG's collapse, Cassano was based in London and, consequently, difficult to bring to effective prosecution. I understand Cassano and his team were among those paid handsome "retention bonuses".

The looting of American household wealth has largely gone unprosecuted and unpunished. I think that's a crime.