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The report is out on the behaviour of the Federal Reserve Bank of New York, led at the time by Timothy Geitner, when it came to discussing how much of a haircut Goldman Sachs, Soc Gen, Deutsche Bank and others should take on the CDS deals they had with AIG.
Neil Barofsky, the special inspector for the Troubled Asset Relief Program (TARP) concluded that the NY Fed only made "limited efforts" to negotiate discounts.
Apparently the French regulator would accept no discount at all unless AIG went bankrupt. Goldman Sachs took the same line. UBS said that it would take 98%, provided all the other counterparties did the same.
The problem, as Barofsky astutely observes, was that you can only get counterparties to take a haircut if the possible alternative is that they will get even less -- and that possibility only remains if bankruptcy is not ruled out. But the NY Fed had already committed to not letting AIG fail. Once that fact was publicly stated, the counterparties said "oh, good, then we'll take 100%, please".
AIG had been negotiating, with the "strength" of a threatened general default (i.e. Chapter 11, or even a fully fledged "going bust"), for haircuts in the region of 40%.
In essence this was a fine display of the massive difference between the private sector and the public sector and the attitudes intrinsic to each.
Of course, there's no reason for us on this side of the Atlantic to moan -- the US taxpayer effectively bailed out Europe to the tune of six or seven billion dollars. TYVM, guys. But if I were a US voter I'd be vaguely curious how people at the top of the US regulatory tree could be so hopeless when it comes to playing hardball in negotiations.
Bob Benmosche, still the Birks nomination for Time Man of the Year, seems to be showing the regulators what for, although even Benmoscge seems to be having his patience tried by Feinberg.
But Feinberg's line (as well as that of Darling and others in the UK) is less of a "this will get us out of the mess" and more of a "we need a symbolic sacrifice". It's a lot easier (or, rather, it was, until Benmosche arrived) to slap massive restrictions on payments than it is to get to grips with real solutions. As I've written before, the vast bonuses that banking executives and ( a very few) AIG executives (the ones at AIG Financial Products, plus the guys at the very top) pocketed were commissions on debt. In other words, they had to hand out $10m to make $500,000 in bonus on the loan. So, while the executive profited to the tune of half a million, someone "out there" who didn't repay the loan, benefited to the tune of $10m. Many of us are, in effect, still walking around with that cash in our pocket, as it trickled down to us via huge asset inflation.
But that doesn't make for comfortable headlines. So, blame the lender, not the borrower who failed to repay.
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Neil Barofsky, the special inspector for the Troubled Asset Relief Program (TARP) concluded that the NY Fed only made "limited efforts" to negotiate discounts.
Apparently the French regulator would accept no discount at all unless AIG went bankrupt. Goldman Sachs took the same line. UBS said that it would take 98%, provided all the other counterparties did the same.
The problem, as Barofsky astutely observes, was that you can only get counterparties to take a haircut if the possible alternative is that they will get even less -- and that possibility only remains if bankruptcy is not ruled out. But the NY Fed had already committed to not letting AIG fail. Once that fact was publicly stated, the counterparties said "oh, good, then we'll take 100%, please".
AIG had been negotiating, with the "strength" of a threatened general default (i.e. Chapter 11, or even a fully fledged "going bust"), for haircuts in the region of 40%.
In essence this was a fine display of the massive difference between the private sector and the public sector and the attitudes intrinsic to each.
Of course, there's no reason for us on this side of the Atlantic to moan -- the US taxpayer effectively bailed out Europe to the tune of six or seven billion dollars. TYVM, guys. But if I were a US voter I'd be vaguely curious how people at the top of the US regulatory tree could be so hopeless when it comes to playing hardball in negotiations.
Bob Benmosche, still the Birks nomination for Time Man of the Year, seems to be showing the regulators what for, although even Benmoscge seems to be having his patience tried by Feinberg.
But Feinberg's line (as well as that of Darling and others in the UK) is less of a "this will get us out of the mess" and more of a "we need a symbolic sacrifice". It's a lot easier (or, rather, it was, until Benmosche arrived) to slap massive restrictions on payments than it is to get to grips with real solutions. As I've written before, the vast bonuses that banking executives and ( a very few) AIG executives (the ones at AIG Financial Products, plus the guys at the very top) pocketed were commissions on debt. In other words, they had to hand out $10m to make $500,000 in bonus on the loan. So, while the executive profited to the tune of half a million, someone "out there" who didn't repay the loan, benefited to the tune of $10m. Many of us are, in effect, still walking around with that cash in our pocket, as it trickled down to us via huge asset inflation.
But that doesn't make for comfortable headlines. So, blame the lender, not the borrower who failed to repay.
____________________
