AIG and the Hedge Funds
The biggest story of the next week will be when we find out just how much of our taxpayer money has flowed through AIG into the pockets of Hedge Fund Billionaires who were speculating in Credit Default Swaps. As Ben Stein notes this morning.
Allowing speculators to buy C.D.S.'s merely to bet against a firm in difficulty just blasts the prices of bonds, kills the balance sheets of banks, insurers and hedge funds, and throws fear into the system.
My guess is the same guys who are running the Bear Raid on Bank Stocks are cashing in on the AIG bailout at par. The Treasury is going to have to surrender the name of every counter-party, not just the big names surrendered yesterday.
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Its the management of these companies that are the blame for the mess we're in, not the hedge funds who have rightly profited from their mistakes.
Jonathan -- you're focusing on the wrong villains here. I much prefer the hedge fund managers out there to the board room suits who made all the mistakes.
March 8, 2009 6:53 PM | Reply | Permalink
But only as long as the speculators get paid by their counterparties (ha! ha! ha!) and not by the taxpayers.
Right, destor23?
March 8, 2009 7:01 PM | Reply | Permalink
Totally agree. But admonishing them for shorting bank stocks and securitized loans seems silly to me. That's what rational investors should be doing!
March 8, 2009 7:07 PM | Reply | Permalink
No, short sellers are not investors, rational or not ... again.
Gambling is different from investing, and market manipulation should be a criminal offense.
March 9, 2009 1:10 AM | Reply | Permalink
eds... you seem to keep posting as if you've somehow justified your characterization of a short sale as "gambling" but... going short is no different from going long!
Market going up doesn't equal good. We shouldn't be biased against short investors.
March 9, 2009 2:14 AM | Reply | Permalink
In agreement with the Federal Reserve Governors and Chairman Bernanke, who fear that the naming of A.I.G.'s counterparties will cause them great harm (mainly through short selling); short selling isn't always a good thing.
Abusive and collusive short selling is definitely not good. Also, I strongly suspect that Christopher Cox, et al removed the uptick rule at the urging of people who wanted to game the short selling system. Short and long market procedures, when controlled by abusive and collusive market players, can be equally harmful to capital markets - that is why strong regulation of the financial sector is urgently needed.
Looking forward to seeing some "masters of the universe" and their regulatory enablers frog-walked to prison.
March 9, 2009 9:19 AM | Reply | Permalink
There is nothing wrong with honest short sales - they have a stabilizing effect on stocks that are ballooning out of control. The naked short selling, however, should be outlawed
March 9, 2009 1:41 PM | Reply | Permalink
No, even non-naked short selling is problematic.
March 9, 2009 3:01 PM | Reply | Permalink
'going short' and 'going long' can both be gambling.
destor, you seem to be using only one half of your brain on this issue!
March 9, 2009 2:59 PM | Reply | Permalink
And Jonathan... this is something I'd like for you to address if you have a moment -- did you have some sort of bad experience with hedge fund managers or outside investors? I know you're an entrepreneur and you really seem to have some dislike for the hedgies. One of the reasons I defend them is that I think they serve as a check on the power of the executives at public companies. David Einhorn is a hero.
March 8, 2009 7:01 PM | Reply | Permalink
Let's suppose that you own CDSs whose value is related to the price of a particular stock (or the price of a CDO or a MBS or an ABS associated with your CDSs).
And suppose that you have a trading desk with billions of dollars behind you.
Okay to drive the price of the stock (CDO, MBS, or ABS) down in order to benefit from your ownership of the associated CDSs?
March 8, 2009 8:02 PM | Reply | Permalink
Okay to use this strategy a couple of days before taxpayer money supplied to pay off AIG's counterparties (one of whom is you) comes into AIG's hands?
March 8, 2009 9:50 PM | Reply | Permalink
Look, the error was the government's here. We should have just let AIG fail.
March 8, 2009 10:40 PM | Reply | Permalink
That the government might have erred there does not excuse the wrongs done before then.
March 9, 2009 3:02 PM | Reply | Permalink
Uh, Jonathan... you answered one post on this thread. Why not my well meant question? You're obviously on the executive side of this debate. What's your problem with hedge funds and with shorts?
I think that lefty commentators who criticize the hedgies are really misguided. The ones who go short do more to reign in the excesses of corporate execs than the SEC ever will. Dump Geithner and give me some Einhorn!
March 8, 2009 10:42 PM | Reply | Permalink
destor-Never invested in a hedge fund. I find the Bear raids and all the moves are CDS speculation have nothing to do with the operation of a free market. There is nothing natural or free when Billions of dollars (coordinated or not) jump into a stock on the short side. It is what is called a "self fulfilling prophecy".
March 8, 2009 11:18 PM | Reply | Permalink
But... why should the market be biased in favor of long investments?
If you can buy without much restriction, why should you be able to short under the same rules?
And... never thought you'd invested in a hedge fund. Just wonder if you've ever been associated with a company that was victim of a "bear raid." I don't mean to be rude or accusatory about this but your anti-short sentiment reminds me a lot of the complaints of CEOs like Prem Watsa of Fairfax or Patrick Byrne from Overstock -- people who hate shorts because they've been shorted.
Buyers of stock, even if they're not coordinated, can create a self fulfilling prophecy as well. We don't regulate that.
March 8, 2009 11:31 PM | Reply | Permalink
Get a moral compass, it will help answer your questions.
March 9, 2009 1:29 AM | Reply | Permalink
"Up is good" is no moral compass. Let markets go both ways.
March 9, 2009 2:23 AM | Reply | Permalink
Hey, Destor.
I'm with you in general that there is nothing morally wrong with shorting. But it is a different process, and there ought to be some different rules.
Let me start by saying that I've never actually shorted a stock. So forgive me if I don't know all the details.
The main difference, as I understand it, is that when you short a stock you are selling shares that you do not own. You have to "borrow" these shares from someone who does own them (with the promise to give the shares back later, after you "buy", that is, cover your short position).
In the modern world, I don't think you actually have to seek out someone and ask their permission to borrow their shares. (But if you did, why would they want to lend them to you?) Still, there seems that some amount of cooperation (willing or not) is required among those long the stock in order to facilitate your short position.
So it is reasonable to have some rules for taking a short position, in my opinion. I guess that's my only point.
-- ARG
March 9, 2009 10:19 AM | Reply | Permalink
People lend the shares because they get paid to do it. Well, the broker does, anyway. You can actually tell your broker that you don't want your shares lent out for shorting if you want.
And I'm fine with having rules on both the long and short sides of the market. What I object to is the tendency for people on both the left and the right to demonize short sellers. Company managers with something to hide tend to hate shorts the most.
Americas financial companies aren't victims of short sellers. They've been shorted because they're terribly mismanaged.
March 9, 2009 12:13 PM | Reply | Permalink
market manipulators, up or down, are evil, they are not "demonized" they ARE demons (since you invoked them). But not all short selling is mere market manipulation, so not all short sellers are necessarily demons.
It's one thing to protest errant demonization, another to ask, as if naively, why attacks on value should not be treated the same as appreciation. Asking that way is a defense of evil, however ignorant the question.
Gambling is not investment. When you lose sight of core values, it's easy to wonder which way is up. That's the essence of what turns a market into a casino.
Of course I'm not saying that Up is always good. And some people choose to invest in losing causes... like arguing on the internet!
March 9, 2009 2:54 PM | Reply | Permalink
It would seem to me, because of the unregulated nature of hedge funds, that it would be next to impossible for the general public to know if a hedge fund "rightly profited" from their actions or not.
Could hedge fund managers have colluded to affect the prices of underlying financial instruments for which they own credit-default swaps? The answer is unknown since they are unregulated and have nominal reporting requirements - Congress and the Obama Administration should consider the possibility of financial conspiracy.
Looking forward to Congress and the Obama Administration shining some light on the credit-default market and hedge funds. They can begin by forcing the release of the names of A.I.G.'s counterparties - all the names.
March 8, 2009 8:30 PM | Reply | Permalink
The answer is, Yes they could have.
March 9, 2009 2:57 PM | Reply | Permalink
So the free market cannot regulate itself. To preclude the possibility of collusion in markets, it appears government regulation is necessary.
We learn anew an old lesson about unregulated markets and human behavior; and this relearned lesson raises the following question.
Do you think there was a nexus of collusion between unregulated credit-default swaps and the unregulated home mortgage market?
Surely bankers/mortgage investors would not have made loans to people who obviously could not repay them, unless they expected repayment via some other means - for example, loan repayment via A.I.G.'s credit-default swaps. The link between CDS and the home mortgage market bubble needs thorough investigation. (Suggest reading Joseph E. Stiglitz's writings on real estate bubbles and economic crashes in "Globalization and Its Discontents.")
March 9, 2009 5:27 PM | Reply | Permalink
I don't have enough evidence to lay out a prima facie case of criminal conspiracy. I think there may have been some problems within Citi, close friends one who was responsible for monitoring the derivatives of the other, things like that.
So while it could have been widespread, I don't yet believe it was so.
March 10, 2009 3:20 AM | Reply | Permalink
The Treasury . . . surrender[ed] . . . the big names . . . yesterday.
I missed this announcement by Treasury.
Does anyone have a link to an article mentioning it?
March 8, 2009 6:58 PM | Reply | Permalink
Ellen- I assume the leak came from Treasury
http://online.wsj.com/article/SB123638394500958141.html#mod=testMod
March 8, 2009 7:43 PM | Reply | Permalink
Are you guys familiar with the whole naked short selling scandal? I'm just learning about it this weekend:
http://www.dailykos.com/storyonly/2009/3/5/16720/74815/703/705113
Click on the link in the first paragraph called "story of deep capture" for an excellent slide show explaining the process, how they brought down Bear Sterns, and how the founder of Wikipedia was involved in a Wikipedia censoring operation designed to discredit those who exposed the scheme, like the CEO of Overstock.com.
March 8, 2009 7:45 PM | Reply | Permalink
Keeping AIG alive is very ugly indeed. If the cds market was completely transparent, then most of us probably agree the American people would insist on letting AIG die. This secrecy and the huge sums the feds are willing to spend raises the possibility that letting AIG fail could be even uglier. My guess is that it could lead to the bankrupcy of multiple countries starting in Eastern Europe and ending in Austria.
March 8, 2009 10:13 PM | Reply | Permalink
freeze contracts which violate the public interest.
March 9, 2009 1:13 AM | Reply | Permalink
"[President Obama] said he did not find blogs to be reliable, citing the economy as one example."
Right! No Paul Krugman; no Willem Buiter; no Martin Wolf; no calculatedrisk.
Just memos from guys like Summers and Geithner who have been wrong from day one.
March 8, 2009 10:40 PM | Reply | Permalink
LaRouche was right, and everyone else was wrong!
March 8, 2009 11:31 PM | Reply | Permalink
“Part of the reason we don’t spend a lot of time looking at blogs,” he said, “is because if you haven’t looked at it very carefully, then you may be under the impression that somehow there’s a clean answer one way or another — well, you just nationalize all the banks, or you just leave them alone and they’ll be fine.”
That's the rest of the local context of Obama's remark. Krugman is a decent critic. If Obama cannot take criticism, I'd be surprised.
March 9, 2009 3:17 PM | Reply | Permalink
". . . you just nationalize all the banks, or you just leave them alone and they’ll be fine.” Barack Obama
No responsible blogger is arguing for either the first solution or the second conclusion. So ---
Is it that Obama's stupid or just arrogant?
March 9, 2009 7:49 PM | Reply | Permalink
Is it that Obama's stupid or just arrogant
Not Prez.
But the American populace? Oy.
Nothing for it, then, but rig up the old Wicker Man.
Burn it, bludgeon it, whatever.
So, ok, he is a graduate of the George W. Bush school of rhetorical oversimplification; rather like you offering us only the two above options to explain Prez's ostensible intellectual dishonesty...
March 9, 2009 10:42 PM | Reply | Permalink
And I thought I'd covered the waterfront!
March 10, 2009 1:40 AM | Reply | Permalink
covered the waterfront
Just around the corner from the Bridge, at the end of Baker Beach, there's Deniability Cove.
Aside from the fact that it is the only nude beach within the limits of any American city it is also home to politicians who don't want to get jacked up at every press conference with a thousand blog quotes to "renounce and reject" or, alternatively, "embrace and endorse".
Hence, "I don't read blogs"
Kinda like G-Dub's "I don't read the newspaper-Rove tells me about it" , but with less potential to cause anal puckering in the reader.
March 10, 2009 2:26 AM | Reply | Permalink
Neither, but it seems you object to his simplistic outline of what he's not into. Notice how he frames the important issues differently.
March 10, 2009 3:16 AM | Reply | Permalink
Paulson Sold You the Busted Holding Company AIG, and Took the Proceeds
March 8, 2009 (LPAC)--As American taxpayers, you all now own the world's largest insurance company--or rather, its now-broken down holding company--for a mere $173 billion (and counting) in taxpayer dollars. Bankrupt, it was sold to you without your permission or even that of Nancy Pelosi's and Barney Frank's corrupt Congress, by your agent, the Goldman Sachs CEO Hank Paulson who posed as U.S. Treasury Secretary for several years. Now, it is revealed, Paulson's "Goldman Sucks" has gotten the biggest share of that money, trailed by two dozen other international banks and hedge funds.
It has been known for months that the ever-growing bailout/takeover of AIG was vaporizing trillions of dollars in the notorious London-run market for "credit default" derivatives contracts. This has been accompanied by AIG's payout of effectively all of the taxpayer bailout money--now at $180 billion committed--to its "counterparties" on these derivatives. These had to be banks and hedge funds, and it has been rumored that Goldman Sucks was the head pig at the trough.
That's now confirmed. Just two days after a Federal Reserve official was pummeled at the Senate Banking Committee--particularly, by Sen. Richard Shelby--for refusing to name AIG's lucky "counterparties," Fed sources have leaked them to both the Wall St. Journal and New York Times. Of the first $50 billion AIG payouts with Treasury money, which the Journal has learned of, $7 billion went directly to Paulson's and Tim Geithner's Goldman Sachs; $6 billion went to Deutsche Bank; other beneficiaries were HSBC, RBS, Morgan Stanley, Merrill Lynch, Bank of America, Societe General.
The Times' sources told the paper that this $50 billion is probably only about one-quarter of the story of AIG's "pass-through" of taxpayer bailout funds to banks and hedge funds.
Call out the new Pecora Commission. Here's pure political corruption by the former Treasury Secretary, carried out in plain sight, and accomplished by a complicit congress, lead by "Miss Leadership" Nancy Pelosi and Barney "Bailout" Frank. Paulson, meanwhile, was melting down the gold at Goldman Sachs.
LPACTV: Weekly Update 03.07.09
http://www.larouchepac.com/node/9433
March 8, 2009 11:36 PM | Reply | Permalink
When a bank bought a "securitized" mortgage group (as 1 security), it was a claim on their capital base. It limited how much they could lend. In order to avoid a claim on their capital, banks (Investment Banks), created a "hedge" against the default of the mortgage security. These sold at an enormous discount to the value of the security. Therefore, their real value is much greater than the security. AIG bought most of these "credit default swaps," under the theory that foreclosures would be very limited as a risk to the mortgage securities-which were bundled with pieces of mortgages. But when you pass a few percentage points of foreclosure, it telescopes at 1,000's of times the value of the security. So if the holder of these hedges goes down (AIG), the risk goes back on the banks books and eats up it's capital base. No lending. Bank Failures.
Until the Federal Government can stop foreclosures these hedge funds will keep eating negative ink as "speculators" drive the value of the hedges down. Keep in mind the value of these "swaps" is many times the value of our GDP. The banks are all paralyzed by the assumption that there may be no value in many of these hedge funds. But no one knows. And they won't know until we reach a bottom in the real estate market.
March 10, 2009 12:08 AM | Reply | Permalink
This description confuses me -- perhaps because it itself is confused.
AIG didn't buy CDSs; they wrote and sold them.
It is probably true that if AIG welshes on their CDS contracts, the banks ability to lend will be reduced (whether that's a good or bad result is another question).
The reason, as far as I know, that the banks bought these CDSs was to convert their MBSs into "better" (less risky) investments*. The less risky a bank asset, the greater the permissible lending leverage the bank is allowed.**
AIG welshes; the banks' MBSs sink back to their pre-CDS risk level and the leverage ratio must be adjusted downward.
* Investment banks, also, bought CDSs to protect them from losses if the MBSs and ABSs they sold failed (went into default) during the short window (three, six months) when they'd have to buy them back if they defaulted. Not presently, a problem.
** None of this applies to Goldman Sachs, Morgan Stanley, Merrill Lynch, Blackstone Group, and a hundred other private equity and hedge funds. Why are we bailing these toads out?
March 10, 2009 1:34 AM | Reply | Permalink
Why are we bailing these toads out
Was it not Bob Reich who called them "too connected to fail"?
Or was that Krugman.
Anyway, whoever it was, he was correct.
March 10, 2009 2:10 AM | Reply | Permalink
Being 'too connected to fail' may be a good description of the banks, but blindly bailing out these 'critters' at par value with taxpayer dollars is not a good prescription - it is just another form of corporate welfare.
During a Senate Budget Committee hearing last week, Senator Mark Warner (D-VA) asked a very fitting question. Paraphrasing, he asked why the holders of credit-default swaps were being bailed out at par value rather than taking haircuts?
My vote would be for a buzz-cut.
March 10, 2009 9:52 AM | Reply | Permalink