Darrell Issa's Letter To The NY Fed's Bill Dudley Demanding AIG Bailout Disclosure

Following on previous posts by Janet Tavakoli and Dylan Ratigan, which both reference the need to uncover how and why it is that AIG counterparties received such generous taxpayer funded bailout terms, it is critical to present the letter penned by California Congressman Darrell Issa to New York Fed President Bill Dudley, demanding much more information on the Fed's decision regarding AIG. Issa's quote that "behind closed doors and with no approval from Congress, the FRBNY may have added an additional $13 billion of debt on the backs of taxpayers. These allegations, if true, amount to nothing less than a backdoor bailout of AIG’s creditors, including Goldman Sachs, Merrill Lynch, Société Générale and Deutsche Bank" leaves many open questions as to the true motives of the NY Fed and the Federal Reserve system overall.

To our New York Fed readers, we would like to remind them that we still have to hear an update of the status of Zero Hedge's FOIA request (which we were supposed to get a definitive answer by September 30th and somehow the Fed believes if it were to ignore the issue it will simply go away - we are currently evaluating legal options to pursue this investigation further), demanding:

"all documentation that was part of the discussions between the Federal Reserve and Davis Polk with regard to the AIG bankruptcy. Furthermore, I would like to see all prepared materials by either Davis Polk or Morgan Stanley and presented to the Federal Reserve, as well as any documents indicating how and why the Fed decided to bailout AIG instead of pursuing a bankruptcy option for the company," As a reminder, the preliminary response by the New York Fed was that "Staff searched Board records and located a large volume of potentially responsive documents." We, together with Congressman Issa, can not wait to uncover just what the advice of David Polk and Morgan Stanley was to the NY Fed vis-a-vis AIG, and also any and all internal memos that were prepared that determined it was in everyone's best interests to keep Goldman Sachs alive at what would end up being a taxpayer bailout totalling in the hundreds of billions (to date).

Zero Hedge wholeheartedly supports Darrell Issa's observation that the Fed's continuous pro-Wall Street stance begs the question:

"why the FRBNY would not drive a better bargain for the American taxpayer. If the FRBNY thought it was necessary to provide another taxpayer bailout of AIG’s counterparties, it should have come to Congress and made its case that this action was necessary. However, if the FRBNY simply paid AIG’s counterparties at par out of expediency, it raises serious questions about its judgment and motives." We look forward to Mr. Dudley's stumbling attempts at a reply on how his actions were as equitable to the hundreds of millions of taxpayers as they were to the several thousand employees of Goldman Sachs.

AIG Bailout Not Only Bailed Out Goldman, But Goldman’s International Bank Client List
A much clearer picture is developing of what went on during the middle of the financial crisis, when AIG was bailed out by the government and Goldman Sachs ended up receiving 100 cents on the dollar from AIG on various instruments.

The clearer picture is the result of Janet Tavakoli’s provocative article, Goldman’s Lies of Omission. In the article, she claims that GS CFO David Viniar lied when he said GS’s exposure to AIG would be insignificant.

A anonymous Goldman apologist who writes at Economics of Contempt responded to Tavakoli’s article, calling the article part of a, “ridiculous conspiracy about Goldman and AIG [that] just won’t die.”

As you will see by the end of this post, the GS apologist does not only not prove his point, but he sets up the opportunity for an observer to point out that the conspiracy was much grander. The commenter points out that not only was GS bailed out, but so was GS’s international bank client list.

The GS apologist essentially says that GS had insurance with AIG that cost $10 billion, but that GS had collateral against that cost of $7.5 billion (and it hedged away the other $2.5 billion in risk by buying CDS insurance against an AIG failure). Thus, the GS apologist says they would have gotten their $10 billion back to buy insurance somewhere else. Of course, at such time the markets would have been in a panic and there is no way GS would have been able to get the same insurance for $10 billion, if at all. As a number of commenters to the post point out, it would be like trying to buy fire insurance for your house while the house is on fire. So this pretty much blows the “Goldman is a saint” anonymous blogger out of the water.

But there is a comment at the Economics of Contempt post that I find fascinating:

GS sold a product to the European commercial banks, that enabled them to meet BASELII reserve requirements. It was, is essence, a piece of US mortgage paper, supported by an AIG insurance policy wrapped with a AAA-rating. At AIG’s failure, French banks would have become severely capital constrained. Christine Legarde personally called Paulson to ask that AIG be saved. The reputational risk to GS of near-bankrupting all of Europe’s major banks would have been devastating. Read the list of banks who received $ 10s of billions from the FED. Its the GS client list.
I’m not sure that anyone else has put this piece of the puzzle together in such a clear fashion:

European banks would have been destroyed by an AIG bankruptcy because of a product sold by Goldman Sachs. The Fed money that went to European banks, through the AIG bailout, was Goldman’s international banker client list!

In other words, the AIG bailout that benefited Goldman was much greater than the billions that went directly to Goldman. A large chunk of the rest of the tens of billions went to Goldman’s international bank clients. Here’s WSJ initial report on who received government AIG bailout money, indeed a huge chunk went to European banks:

Goldman Sachs

Deutsche Bank

Merrill Lynch

Société Générale

Calyon

Barclays

Rabobank

Danske

HSBC

Royal Bank of Scotland

Banco Santander

Morgan Stanley

Wachovia

A quick call to a friend, who is in a position to know such things ,tells me that, off the top of his head, the international banks do all sound like important GS clients.

So here is the new expanded conspiracy theory: Without a bailout of Goldman international bank clients that were sold the drek by Goldman, Goldman would have lost all international credibility and business. The bailout, on the other hand, has strengthened Goldman’s hand internationally. International banks dealing with Goldman know that when push comes to shove Goldman can get them all bailed out.

In other words, the Goldman bailout was even of much greater benefit to Goldman than most have already suspected.

http://www.economicpolicyjournal.com/2009/11/aig-bailout-not-only-bailed-out-goldman.html

We are in Deep Capture the banks own obama and the democrats and now they have gutted the Audit the Fed bill too! We should END THE FED!

http://www.businessinsider.com/henry-blodget-geithner-burned-billions-and-shafted-taxpayers-again-in-cit-2009-11

http://www.washingtonsblog.com/2009/10/politicans-are-not-prostitutes-they-are.html

MORE COVERAGE
Story | Mortgage crisis shows why financial regulation is needed
Story | Mystery: Why did Goldman stop scrutinizing loans it bought?
Story | How Moody’s sold its ratings - and sold out investors
Graphic | Goldman’s revolving door with government
Video | One couple stands up to Goldman Sachs
Video | Goldman Sachs’ secret bets
On the Web | State-by-state data on troubled mortgages
On the Web | See our complete Goldman report

http://www.mcclatchydc.com/

http://www.bloomberg.com/apps/news?

http://www.bloomberg.com/apps/news?pid=20601103&sid=atc2o1ijLRnopid=20601109&sid=a7T5HaOgYHpE

http://www.economicpolicyjournal.com/2009/11/federal-reserve-policy-audit.html

http://www.zerohedge.com/article/less-opaque-look-mel-watts-motivations-kill-audit-fed-bill

How does this fit in -

AIG and Fed Government: Constitutional Challenge of AIG Bailout Allowed to Proceed May 27, 2009

Posted on 05/27/2009 11:12:24 PM PDT by GoreNoMore

Trouble Brewing for AIG and Federal Government: Constitutional Challenge of AIG Bailout Allowed to Proceed Wednesday, May 27, 2009

ANN ARBOR, MI – Proclaiming that times of crisis do not justify departure from the Constitution, Federal District Court Judge Lawrence P. Zatkoff allowed the lawsuit against Treasury Secretary Timothy Geithner and the Federal Reserve Board challenging the AIG bailout to proceed. The lawsuit was filed last December by the Thomas More Law Center, a national public interest law firm based in Ann Arbor, Michigan, and attorney David Yerushalmi, an expert in security transactions and Shariah-compliant financing.

(Is this good news where the bad guys get caught or another jump into a dark rabbit hole?)

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