Tuesday, April 7, 2009

The AIG CDS Unwind Investigation Begins

As Zero Hedge reported first, strange things happened in January and February when AIG was allegedly unwinding CDS trades with its trading counterparties. As we reported, the taxpayer funded loss that AIG presumably experienced on wholesale CDS unwinds may have well been the reason for the banks' reported trading profitability in the first 2 months of the year.

Today Neil Barofsky, special inspector general for the TARP, has taken our assumption a step further and has launched a full blown probe into just what may have happened into those two fateful months.
Legislators want to know if AIG offered less to retire the contracts and whether there was any review about banks’ ability to sustain losses on the derivatives.

“To what extent did AIG pay counterparty claims at 100 percent of face value and was any attempt made to renegotiate and close out these claims with ‘haircuts?’” Barofsky wrote. “Questions concerning whether AIG paid more than necessary to counterparties and whether Treasury adequately monitored such payments are clearly relevant.”
It will be interesting to see whether an affirmative outcome of the probe will lead to the banks forfeiting any above normal trading profits due to unethical trading practices.

Zero Hedge will continue to strive to provide light into those opaque situations that allow the "sophisticated" financial professionals to take advantage of all known loopholes at the expense of U.S. taxpayers. We are happy to have been beneficial in this endeavour. Sphere: Related Content
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14 comments:

jg said...

Way to go, keep up the good work, sir!

Anonymous said...

From teh link, it appears to me that he is looking at the original payments made last year to settle CDSs, not any trading of securities at below market that occurred in the last two months. Are you confident that he is really investigating JAnuary and Febraury trades.

HazeNYC said...

what abt the Lehman unwinds? Bear? WaMu? Merrill? Wachovia? ... ?! I'm certain that not only banks but certain hedge funds who took the firesale prices made out like bandits..

Daniel said...

Wait, firesales? Aren't these assets worth much more than the market will pay? Has Timmy Geithner lied to me? Also, JPM bought Bear, WaMu is suing the FDIC, Merrill is destroying BoA, and Wachovia ended up at Wells Fargo. I think other than how Lehman's valuable parts were gifted away, it's been pretty hit and miss in the absorption of other big financials.

(I know the difference between toxic assets and real asset firesales, just playing around.)

Anonymous said...

bid ask spread cost sure can add up

Danny said...

Glad to see your awesome detective work having an impact. great stuff, thanks for reporting.

goose said...

TD, great stuff, the blogs are killing mainstream media. Mainstream is too advertising and PC worried. In addition, they are clueless about finance, regulations and anything to do with money. Good riddance. Long live the blogs.
Plus you guys are real time.

Clotario said...

I'm beginning the think that it's a shame the financial world didn't come to and end on 9/18/08 after all...

Anonymous said...

“Questions concerning whether AIG paid more than necessary to counterparties and whether Treasury adequately monitored such payments are clearly relevant.”

gs and ms mk collateral on a daily basis. if aig fails, that means gs and ms liquidate collateral, presumably close to their marks as they aren't but a day old. if the fed comes in and says "we'll give you 80% of the value of the collateral instead of the full value...ms and gs say, "no thanks" and go into the open market and liquidate there.

yet another example of how ridiculously unaware our regulators (and readers of this blog) are...and its no wonder that we're in this mess. people focusing on the things that don't matter.

Anonymous said...

to anonymous who said readers were "ridicously unaware": As someone who is in fact idiculously unaware, perhaps you could enlighten me on the following points: 1) weren't there a lot of counterparties that did not mark to market their colalateral; 2) was every counterparty fully collateralized, and did this collateral consist of liquid securites that could be sold at the marks; 3) does your disdain for the post address the specific aassertion that the major comercial banks, c, bac and jpm had great trading months in January and February because AIG was selling them stuff (again, I am not sure exxactly what they wre selling) that was below market value, which was the point Tyler initially raised? I am genuinely interseted in what is going on, aould appreciate a serious response. Thanks.

tippy canoe said...

"I'm beginning the think that it's a shame the financial world didn't come to and end on 9/18/08 after all..."

indeed, it's watching the towers fall down one floor a week.

good thing though is we get to figure out a lot easier who was really complicit in the destruction.

whether or not they will be brought to 'justice' is another matter entirely.

then again, justice, she works in mysterious ways.

Anonymous said...

The whole point is that most of AIG's counterparties did NOT make daily collateral calls.

That's why AIG considered themselves to have "no mark-to-market exposure risk"!!!!

Anonymous said...

From reading the article, it is pretty clear they are not wondering whether AIG paid *above* market for their unwinds; they are wondering why AIG did not insist on a default discount, AKA a "haircut".

From the story:

"“To what extent did AIG pay counterparty claims at 100 percent of face value and was any attempt made to renegotiate and close out these claims with ‘haircuts?’” Barofsky wrote. “Questions concerning whether AIG paid more than necessary to counterparties and whether Treasury adequately monitored such payments are clearly relevant.”

"More than necessary" means they could have tried to pay less than 100 cents on the dollar. This is made clear later:

"Competing insurers including Ambac Financial Group Inc. and the predecessor of Syncora Holdings Ltd. reached agreements with banks such as Citigroup Inc. and Merrill Lynch & Co. to cancel similar contracts at discounts to their expected losses. "

Seems clear enough - why didn't Goldman, Deutcshe, Soc Gen, et al get 90 cents on the dollar and share the pain?

Bonus puzzle - *IF* Goldman had negotiated a discount, could they still collect on their credit default swaps written by third parties protecting Goldman from an AIG default?

If a negotiated discount is *not* a protected default event, then Goldman had a strong financial incentive to insist on 100 cents on the dollar. And since a default never occured, the third party insurers who otherwise would have owed Goldman were the real beneficiaries of the AIG bailout.

Tom Maguire

Valonia said...

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