Posted on 11/04/2009 11:31:13 AM PST by FromLori
As if $22 billion in bonuses were not enough, Goldman Sachs would now like to obtain another $1 billion in tax benefits from the federal government.
As with the $12.9 billion that Goldman Sachs received from the U.S. government via payments made to the American International Group, Goldman Sachs would obtain an indirect federal benefit by using tax credits the government provided to Fannie Mae to offset its own profits and thus its federal tax payments. As the Wall Street Journal reported, Goldman Sachs might be purchasing up to $1 billion of Fannie Mae's tax credits. However, the tax credits, which are designed to encourage additional investment in low-income housing, are useful only if the company claiming them is profitable. And, with Fannie Mae currently a very unprofitable company, it does not have much use for the credits. But, after obtaining a $10 billion bailout from the federal government last fall, Goldman Sachs is on pace to earn record profits this year and could use these credits to reduce its tax liability.
This deal does not seem to the taxpayer's advantage, however. The Treasury Department's purchase of nearly $46 billion of Fannie Mae's preferred stock made U.S. taxpayers major owners of the government-sponsored enterprise. This investment so far has not been very profitable for the taxpayer --- Fannie Mae lost just under $40 billion in the first six months of this year. The government has already spent $91 billion propping up Fannie Mae and Freddie Mac.
The Treasury Department has the ability to decide whether to allow this transaction to take place. Unfortunately, it looks like Congress and the administration have given up on collecting much revenue from the corporate income tax, where revenues have fallen to just $139 billion this year. Latest reports show that Congress will allow corporations to further reduce their tax bill through the Worker, Homeownership, and Business Assistance Act of 2009. The Joint Committee on Taxation estimates that businesses will claim $33.2 billion of tax refunds next year if all corporations, not just small businesses, are allowed to use their losses to obtain refunds of taxes paid in the past five years.
Rather than allowing Goldman Sachs to reduce its tax liability by using Fannie Mae's tax credits, the U.S. government might consider just taking the tax credits off of Fannie Mae's books. U.S. taxpayers are likely to view this direct assistance to Main Street as preferable to once again providing indirect assistance to one of the most profitable Wall Street firms.
Now there's a shocker.
She only posts articles that begin with lies showing authors' true colors: "As with the $12.9 billion that Goldman Sachs received from the U.S. government via payments made to the American International Group"
It's a lie: Goldman did not receive the money from the government. It received money owned it from another company (AIG).
Suppose a friend owes you $100 but cannot pay it back. His aunt bails him out (by an agreement, say, that your friend would pay her back from the next paycheck) and gives him the money. He returns $100 to you.
Would you say that you received this money from the friend's aunt? Of course not. What happens between your friend and his aunt is irrelevant; you received $100 from a friend and gained nothing: it was your money that a friend returned to you.
The same is true for Goldman: it only got back its own money from another company.
The consistency of Lori's anti-capitalist propaganda is noteworthy. With "conservatives" like this it is no wonder that we have a socialist president.
G S stands for.........
Your example is ok except
I’m paying the granny.
"Goldman Sachs might be purchasing up to $1 billion of Fannie Mae's tax credits."
They are buying an asset belonging to another company. From the standpoint of taxpayers or anybody else this transaction is the same as if they were buying a building, accounts receivable, or any other asset.
The author makes it look, however, as if taxpayers are somehow in a disadvantage here.
Pure garbage. Unsurprisingly, it's coming from Lori who consistently posts articles that would make DU proud.
Of course it is: falsehoods are always surprising.
I’ve got a friend inside Goldman who says Goldman is about capitalism not socialism (in a nutshell).
No. Please reread the post.
As a taxpayer, you are the "aunt" in that example. Whether she should or should not bail out her nephew is between her and him. Similarly, whether we should or should not have bailed out AIG is between us and AIG; this has nothing to do with GS.
http://www.freerepublic.com/focus/f-news/2378227/posts
She only posts garbage that criticizes capitalism by means of blatant lies.
Bullcrap.
GS got 13 billion of the AIG bailout money. And didn't take any kind of haircut, thanks to their connections to Paulsen, Geithner and other Fed officials.
Now, let's say you are holding a gun on the aunt to give your friend the $100 dollars. That is the difference. Government, which is force, bailed out AIG. At taxpayer expense. And it wasn't auntie's money. It was ours.
And in our Wall St Byzantium Goldman Sachs appears to be its own Grandma.
I’ll be the first to say that I believe that the money my friend is making at Goldman has clouded his judgement to the point that only his math intelligence remains and he just keeps cranking out the equations that make billions for Goldman.
I love the free market. If I have the influence and integration into the Federal Government that Goldman has would I take the billions, probably. Have they grown into a criminal monster, absolutely. They will die shortly, as will much of the remainder of our financial system, and for the same reason. They jumped into bed with the US Federal Government and caught something fatal. What is unforgivable is the suffering they are and will continue to inflict on our nation. We the people depended on these mighty institutions to guard our interests - out of common decency. Instead they are engaged in unimaginable theft.
Goldman Sachs is buying the tax credits from Fannie Mae. The cash it pays for them will go to Fannie Mae and therefore, back to the Government to whom Fannie owes money.
This is why capitalism works. You have a worthless "asset" which one company can't use but another can. The latter buys it from the former, providing them with useful cash, while they get the tax benefits they need. In fact, it makes me believe even more in the American model of government our founding fathers setup. This sort of efficiency doesn't exist in any socialist or communist country.
God bless Goldman Sachs. I've said it before and I'll say it again: When the Detroit automakers ran their companies into the ground and banks like Wachovia teetered on the edge of collapse, Goldman Sachs made money for its owners, owes the government no bailout money, and pays its employees record bonuses. Everyone who is involved with Goldman wins. The management team there avoided all of the problems the other firms on Wall Street had and now everyone's mad because they were successful. Pitiful.
And as for the $1 billion in fees Goldman earned on the AIG placement? Right, we should have told them they had to work for free, even though they needed no assistance and were profitable. Just like you would let the government show up to your small business or office and tell you that you had to work for them without payment.
Goldman has been a paradigm of capitalistic excellence throughout the crash. When you make record profits, you pay your employees record bonuses, and you tell the government, "We don't need your help because unlike everyone else, we managed our affairs prudently," and then you're demonized for it in the press, something is wrong with the citizenry.
All sounds good until you get to the part about how WE had to pay to bail them out with AIG at 100% on the dollar. Government Sachs socialized their losses something a real capitalist would never do.
The AIG credit default swaps almost all worked out to be fantastically, unbelievably profitable. They, however, required cash collateral posting to the equivalent of an "escrow" account upon certain conditions. When AIG couldn't meet these, the government had no choice but to step in and temporarily pony up the escrow cash for the counterparties. Had they not, farmers in Kansas would have suddenly found out that the "futures" they had used to sell their grain to Cargill six months down the road were worthless and gone bankrupt in the event of a bad harvest. You may have found your local bank had failed because its interest rate hedges collapsed. The consequences would have been horrific, but that's not even the point because ...
None of that money was a "gift" or a "transfer". It was temporary cash collateral to secure against promises AIG made. Goldman profited in the same way that both you and I did if our bank failed and the FDIC temporarily stepped in to cover the losses. Only, in Goldman's case, the government wasn't out any money and ended up making a PROFIT on the AIG deal.
Yes, the government and tax payer have actually MADE money on AIG.
So, let's recap. Goldman Sachs:
What I want to know is what - specifically - on that list of its actions, do you think they did wrong?
I think this is nothing more than a case of envy. Someone does really well in a capitalistic society as someone else hurts and you want them punished for it. If you study the actual transaction, Goldman got no government bailout and made the tax payer money instead of costing it money like nearly every other financial firm on Wall Street (a few other exceptions are companies such as U.S. Bancorp).
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
Food: Let's take a small farmer in Kansas, like I mentioned in my previous post. He goes to the local co-op or companies like Cargill to sell this grain ahead of the harvest so he and his family aren't on the hook in case grain prices collapse. Those counterparties (the people who buy his grain for him at a predetermined price), do it by approaching Goldman Sachs or JP Morgan Chase and playing trades on the commodities and futures exchange. If high finance didn't exist, we'd go back to 200 years ago when farmers constantly faced a boom and bust cycle that resulted in terrible family bankruptcies and poverty. You would find food prices becoming unbelievable volatile, if you could buy certain crops at all. Our ancestors lived with this madness and history is filled with records of "good" years and "bad" years on the farm.
Your Community Bank: Your local community bank offers you a fixed rate loan. Yet, they may not want to take the risk of "shorting money" (which is what lending currency is on long-term debt) so they go to Goldman Sachs or JP Morgan to find investors who are willing to take away that risk in exchange for a fee. That way, if interest rates go above a certain amount, they have to cut your local community bank a check for the difference over a threshhold, say 10% interest, to keep them from going bankrupt. If this wasn't an option, you wouldn't be able to get a 30 year fixed rate loan for a home! Banking runs and panics were common place even into the very early 1900's. A bank's ability to lay off some of the interest rate risk is extremely important.
Retail Stores and Shops: Almost all retail shops build their inventory levels before the Christmas shopping season, as well as hire seasonal workers, creating jobs. Most of this is done through trade receivables or lines of credit. Most of this credit is provided, one or two layers removed, by firms like GE Money, JP Morgan Chase, or Goldman Sachs, who take their investors cash and agree to lend it back to banks, who then lend it to you.
The point is, even if you are debt-free, pay cash for everything you buy, and self-employed, if Wall Street ceased to exist, your standard of living as you know it would be gone. Most community banks can't handle loans bigger than several million dollars. Who do you think arranges for $5 or $10 million commercial equipment finance packages? $30 million to build new factories? For new restaurants like Chipotle to raise private equity money or get sold to a business like McDonald's?
Firms like Goldman Sachs make a lot of money because they provide a lot of service to the overall economy. They must exist. If they failed, we'd be no different than some areas of Mexico or Nigeria where the lack of capital markets makes it virtually impossible for anyone to ever grow beyond a single cart and their children as employees. For the average person, who can't even balance their checkbook, to criticize firms like Goldman is like a kindergarten teacher complaining about neurosurgery techniques. They have no idea what they are talking about nor how the job is done.
The way to fix what happened on Wall Street is simple: You make every trader's personal finances tied to the health of the firm. That is, they become personally liable for trades made by the company. That's how it used to be in the old days. Every partner at Goldman was on the hook for everything if it failed. If we had followed that model, there is no way the meltdown would have occurred because coworkers would be looking over each others' shoulders scrutinizing each and every deal.
But you - the taxpayer - made BILLIONS in profit on the bailout! The government’s return on AIG was huge. How is that a problem?
Of course it did! Anyone in finance knows that and only the small American on the street has a problem with it. I figure that if they were the ones pumping money into our economy for our debt-fueled binge (half of the private label credit cards in the United States are provided by European HSBC), they would have benefited from any temporary support the government offered.
The point remains: Everyone made money on the AIG deal, including the government and taxpayer. The only people who were punished were the AIG shareholders and management, who lost 99% of their life savings. Since they caused the problem, that is fair. The taxpayer made billions in profit, they have no reason to complain. Goldman's owners made billions in profit. Goldman's employees made billions in profit. Anyone who has a problem with this is simply jealous of the payday; there's no other rational explanation if they understand the mechanics of the transactions.
The issue we have is most people don't understand that posting requirements on credit default swaps are not free money or transfers and that $10 billion in coverage may have only been $500 million in CDS value because there were no requirements that you actually owned the underlying, nominal bond values (which is a problem - like buying insurance on a house you don't actually own).
The reason you don't see anyone in economics or finance upset about these transactions is because anyone who understands them knows that Goldman acted perfectly rationally. Common sense tells you they'd omit the international banking list because 1.) everyone who'd ever read Goldman's disclosure notes to the SEC knew this, and 2.) the average American, working in a factory, isn't going to be interested enough to actually find out that the government was indirectly and temporarily lending cash collateral to European banks and that it would get all of the money back plus a huge return. All they are going to think is that we're giving money to Europe. Why? Because the average American is stupid. It's not politically correct but it's true.
Please document where the $180 billion that the fedgov has sunk into AIG has been paid back, let alone paid back with interest or increased valuation.
The government gave the 180 billion to Acorn.
I realize that I am a big windbag. The question I would put to you is this, doesn’t the notion of 22 billion in profit to be distributed to brilliant worker bees strike you as strange, this at anytime much less while in the trough of a recession.
Isn’t there a little voice that says, “something is amiss’.
Here: http://finance.yahoo.com/q/sec?s=AIG
You are interested in three types of documents: 10K (annual filings), 10Q (quarterly filings), and 8K (major event).
The United States Government (and thus taxpayer) now owns AIG. The earnings for the tax payer consists of three components: 1.) money (actual principal) paid back to the government that was loaned to AIG, 2.) interest paid on all of these loans (which amounted to billions upon billions of dollars), and 3.) gains in the value of AIG shares, which the government now owns both outright and through stock options and warrants. The Federal Reserve set up several companies (I think they were limited liability companies, but I don’t remember; they were managed through the NY Fed office) to hold the taxpayers holdings.
To really understand it from the beginning, start with the 10K filed in 2007 and then work your way through all of the filings up through today. Every penny that moved in and out of the firm is documented there, by law. Most Americans don’t want to read it (since my job is primarily investing the money my Internet companies generate, this is all I do all day, so I can’t blame them - I like doing it, most people don’t).
If you take the time to go through the 1,000+ pages of disclosures and add it up, the taxpayer is now RICHER because of the AIG transaction as a result of the interest payments, return of principal and equity stake. One also has to consider that when all of the interest to the government is removed, and the losses cleared out of the books, the value of the equity the government holds both directly and through options and warrants, should be worth at least tens of billions of dollars. (To compare: Imagine you owned GM, which had no value before its bankruptcy, but suddenly had the power to wipe away all of the debt and union benefits - the stock that had been worth nothing is now worth huge amounts because the earning power is immediate).
When all of this has passed, the Fed and Treasury will likely sell off the government’s AIG position at an auction. They did it with Chrysler several decades ago and make a killing for the taxpayer. They’ll do the same thing here.
Why of course. How else are they going to keep good people? /s
So, in other words, the money has not been paid back - and you are making a prediction about the government being able to recoup those assets in the face of the worst financial crisis since the Great Depression.
In other words, you're just blowing smoke. Why am I not surprised?
No because you must remember that recessions are industry specific. Case in point: Bankruptcy lawyers are making a killing right now. Manufacturing plants are hurting. Credit counseling agencies are minting money. Credit card companies are losing cash daily.
My companies are Internet based and extremely profitable. Despite the recession, we’ve made a ton of money over the past two years and will continue to use the opportunity to buy up asset and take market share from competitors. Goldman Sachs was in the same position. In finance, activity equals money and fees (just like economic growth means jobs in construction). So much money is moving around that there are only a few firms that have the skills to handle the transaction. Goldman is one of them.
The problem is, in the age before real-time network television, the average American had no idea what Wall Street did. Now, they see their jobs going and get angry that these guys in suits are making a lot of money. Yet, their industry (finance) is booming right now. It’s no different than Texas oil minting billionaires when the rest of the nation was in a horrible recession three or four decades ago. Because of the news, you can see it every night and it makes people angry.
A common human mistake is to assume that everyone is like you or your family. If your pocket book, job, and retirement accounts are hurting, and the same is true of all of your friends, you’re going to assume that’s how the whole nation is. The fact of the matter is it’s simply not true. In my case (again, it’s not politically correct to say this but I’m trying to explain the concept), this recession will have probably been the time that set me up for life. We were able to buy massive amounts of US Bancorp and Wells Fargo, at $10 or $12 per share. We bought call options on GE when it was at $6 per share that have now gone up 500%+. We bought real estate and some gold ETFs to trade as people were scared of the dollar. And we grew our Internet retail sites because we could pour money into them as everyone else was hurting.
Most of history’s great fortunes were made during recession. Go back and look at Rockefeller and Carnegie. They always gained market share and profitability during collapse, when their neighbors were going bankrupt.
I’ll bet a lot of money than 5 or 10 years from now, Berkshire Hathaway will be at $200,000 to $300,000 per Class A share because of the Burlington Northern Santa Fe deal Buffett just closed. He did it during a recession when there was no money in it and everything thinks he’s crazy. It’s not a coincidence. If you act like everyone else, you’ll get the results of everyone else. To be a leader, you have to be willing to do things others aren’t, even if that means risking looking foolish.
Dear God, yes it has: Read the documents I sent you. I gave you the SEC filings, I’m not going to do the work for you. I’m pointing out that by the time it’s over, there should be ANOTHER $20 or $30 billion in profit in the deal on TOP of what they tax payer has already earned.
This goes to prove exactly what I posted earlier: The average American is too lazy to actually read or do research. I literally sent you the link to the documents yet you won’t print them and go through them. This is why I’m scared for the future of capitalism.
That money will never come back to AIG or the fedgov, it represented reserve requirements that AIG failed to maintain to back up its CDS commitments and that the fedgov had to provide. It was a zero-sum game for the fedgov.
The credit default swap securities are now expired as a result.
Yet you claim the fedgov can recoup said securities at auction in the future - along with tens of billions of other such securities that were held by other large banks.
Do you really think you can pawn this nonsense off on us? Or are you a graduate of the federal government school of accounting?
As opposed to the tens of billions in CDS payments already issued, never to be recouped?
I fear for capitalism because folks like you are now in charge of it. And you live in rosy scenario land but then go yelping to the taxpayers for backup when Rosy goes home.
If Fannie (ie. TAXPAYERS) sells the $1B in credits for lets say $50M to GS ,, GS saves $950B in taxes which is just repayment to us TAXPAYERS ... The tax credits should just be wiped off the books .. net loss to taxpayers $950M ... and don’t get me started on how GS’s friends in government slipped them $13B via AIG instead of directly so they wouldn’t be subject to the pay commisars whims. I think 90% of GS’s profits should have to go toward repaying the $13B until it is paid in full ... after all we paid them in full for crapola that wasn’t worth 0.10 on the dollar.
You strike me as the type of person who doesn’t realize that most of the “assets” on a construction companies balance sheet actually consists of INTEREST PAID ON DEBT because of GAAP rules. Yet, you’d buy the homebuilders stock, and then wonder how the “crooks” on Wall Street ripped you off because common sense tells you that interest expense can’t be an asset. Then you’d want to burn the accountants. All because you didn’t bother to read or understand the material in the prospectus or 10K.
I make two assumptions:
#1) I assume people are educated enough to read at a 12th grade level, can pour through the financial statements themselves, and understand GAAP accounting. Any sophomore level college accounting course would provide enough background for someone to be able to do this.
#2) I assume if someone doesn’t have the skills necessary to do this, they would be wise enough not to comment on the matter. Just as I don’t have an opinion about engineering techniques or how to improve aerodynamics on an automobile because I have absolutely zero understanding of the science behind it.
Most people now suffer from tabloid news syndrome: They think they need to have an opinion on anything and everything, even if they have no clue what it is about which they are talking.
Read the SEC documents yourself and stop being lazy. I sent you the link. Take a few hours, go through them, and map out where we are. I’m not doing your homework for you. If you don’t understand a term, use Google. There are millions of free tutorials on how to read financial statements out there.
I just don’t think there’s any excuse for sloth when it comes to money. Educate yourself. Read the documents. And once you have, then post something. You, and the Republic, will be better for it.
The problem you'd have is this: Going forward, if you changed the rules in the middle of the game, companies wouldn't be willing to go after tax credits because they'd know they wouldn't be worth anything if they got into trouble.
This tax credit game has been played for 80+ years. If I remember correctly, Perlman or one of the other cosmetic investors bought an old shell company will millions in tax losses, contributed enough money to it to buy out L'oreal or Estee Lauder or one of them (I don't remember - you'd have to Google it), and then used the tax credits to offset the profits from the company. It allowed him to earn huge amounts of profit simple because he knew how to structure the deal. I'm not sure I'd vote for it, but if you wanted to alter the tax law going forward, I think that would be a valid discussion. I don't think it's fair to change the rules for companies that exist now, but the law itself could be modified.
I think what bothers me is Goldman is acting in its own self interest, enriching shareholders and employees without breaking the law. Yet, Americans are just as angry at it as they are with General Motors, which destroyed everything it touched. I just think it's class envy.
Sorry, but you are making the claims here about the taxpayer coming out ahead. And you have provided NO specifics. No cut-and-paste from the 1,000 pages you linked to. You sound just like a Wall Street version of Mary Mapes with your whining about me not doing my homework. It is your job to prove YOUR claims, and not just provide a link with no support from that link.
Meanwhile, I asked you a very simple, straightforward question. $12.9 billion was paid to GS through AIG to make good on AIG's credit default swap commitments to AIG. Tens of billions were paid to other banks as well.
Those credit default swaps are no longer marketable securities, they have no value, just as an insurance policy on a boat that has sunk has no value once the claim is paid.
So tell us again how the government is going to recoup those tens of billions paid out for credit default swaps by selling its AIG stakes. This doesn't take a knowledge of GAAP. Please tell us how the fedgov is going to profit from selling something that no longer exists. You made the claim. YOU back it up.
“Yet you claim the fedgov can recoup said securities at auction in the future - along with tens of billions of other such securities that were held by other large banks.”
No - I said the Government will be able to auction off the 79.9% equity and derivative interest it has in AIG itself - the parent company - that it received as part of the bailout. That has nothing to do with the credit default swaps which were temporary contracts that expired, most of which turned out to widely profitable.
The more I read your responses, I’m not entirely sure you know anything about the AIG deal, how it was structured, or how the accounting rules work.
I think it is clear that the federal government is not going to profit...Goldman will profit. My friend at Goldman would be working for the federal government if that is where the money was.
Yeah, sure. Tens of billions were paid out to AIG and other banks, but on the whole, they were wildly profitable. That makes boatloads of sense.
The more I read your responses, I’m not entirely sure you know anything about the AIG deal, how it was structured, or how the accounting rules work.
The more I read your responses, the more I think you are just some two bit Wall Street PR hack.
From the 2007 AIG Annual Report:
Shareholders’ equity also declined to $95.80 billion from $101.68 billion at the end of 2006.
So shareholder equity at the end of 2006 was just over $100 billion before the financial meltdown - yet you claim the goverment can recoup $180 billion sunk into AIG by selling off those assets, AFTER the financial meltdown.
BTW, that is how you are supposed to substantiate your claims - provide both the link AND the relevant text. Posting just a link to a thousand page document is chickensh**.
How Credit Default Swaps Work
A credit default swap isn't like other types of assets. In effect, it's a promise that one company makes to an investor to protect them in case another company (third party) goes bankrupt.
Imagine you own a small pension fund with only one asset: You have $10,000,000 worth of General Electric bonds. You can't afford to take a risk with these bonds because your pensioners need the money they generate. As the world fell apart, AIG offered to sell you insurance on these bonds.
The terms of this "insurance" were as follows: For one year, AIG would cover the full $10,000,000 in loss less anything you recovered in receivership if General Electric declared bankruptcy.
In exchange for this promise, you had to pay AIG an insurance premium of, say, $200,000.
If the deadline one year from now passes, and GE hasn't declared bankruptcy, the contract evaporates into thin air, you are out the $200,000 which then gets counted as profit to AIG, and they are off the hook.
Now, AIG made one fatal mistake that people like Warren Buffett did not, even though they sold credit default swaps, too. AIG had a provision in all of its contracts that said if AIG's credit was downgraded, or the value of the bonds dropped by a certain percentage, they would post cash collateral in what amounted to an escrow account. None of that money would belong to you (remember - you ONLY get the money if GE declares bankruptcy before the 1 year deadline), but that way you wouldn't have to worry about AIG being unable to pay its bills.
After Lehman Brothers failed, companies and investors panicked and sold off assets en masse. This drove bond prices down to unbelievably cheap levels. This included your $10,000,000 in GE bonds.
AIG, according to your contract, now needs to post cash collateral as a good faith payment to you.
The drop following Lehman was so rapid, that AIG needed to come up with $20 billion in posting requirements within a few days.
The moment the credit rating agencies found this out, they downgraded AIG from AAA because, obviously, there would be $20 billion less in cash at headquarters, even though the company would still "own" that money.
The downgrade caused another round of cash collateral requirements because, remember, your contract allowed you to demand it even though none of the money belonged to you unless GE declares bankruptcy within the 1 year deadline.
This led to another downgrade. The cycle repeated and within 24 hours, AIG was looking at cash collateral demands of between $60 and $80 billion, conservatively.
Now, the moment the credit default swaps expire, they cease to exist, the collateral goes back to AIG, and you have no more insurance on your GE bonds.
When the government stepped in, only a handful of companies AIG had insured through credit default swaps actually went bankrupt at this point. Every day that went buy, the deadline for which AIG was off the hook got closer and closer.
The government provided the money to post for cash collateral, and through a series of transactions, was entitled to several billion dollars a year in interest, plus the equivalent of 79.9% of the company.
Now, as you pointed out, most of the credit default swaps ceased to exist. In some cases, the government sold them off to other firms, in others, they allowed the contracts to stay on the books. The last time I checked, somewhere between $60 billion and $80 billion had unwound, the cash collateral came back to AIG, and been paid back to the government.
At this moment, the government's total exposure to AIG was somewhere around $180 billion. When the remaining credit default swaps expired, the cash collateral came BACK to AIG, which was then paid back to the government. This lowered the total exposure to somewhere around $120 billion, which consisted of additional support provided to the firm to avoid a further downgrade by the credit rating agencies, which could cause the insurance subsidiaries to have problems. This is often referred to as the "propping up" money - it's what's allowing the rating to stay stable. Only $38+/- billion was actually lent to AIG (give or take 10%, I don't recall). The rest is implicit guarantees on other related products issued by the firm.
Ironically, it's also what is causing the reported profits to remain low. As it is returned through asset sales and regular profitability, the interest owed to the government drops. This causes reported profits to increase, resulting in huge gains in the 79.9% equity stake the Government holds in AIG.
So, when you actually bother to take the time to read through the SEC filings and add up where we are as a taxpayer, you see that right now we have come out ahead about $1 billion. In theory, someone who doesn't understand the economics could argue we still have $120 billion in "exposure" to AIG, but that comes from the money provided to maintain the stability of the credit ratings because the CDS no longer exist; they have expired or wound down in most cases. The two issues are no longer related. The risk of loss is extremely remote unless we fall into a Great Depression era meltdown, which isn't going to happen.
The moment that AIG's management and the Federal Reserve decide the market has calmed down enough that it can either sell off assets at full price or earnings go through the roof and profits can be distributed, the equity value is going to skyrocket, even at a dirt cheap valuation of, say, 10x earnings because AIG's insurance operations mint money. In this case, the moment the government says, "Okay, we don't need the 'propping up' money anymore," the 79.9% equity stake is going to be worth an additional $20 to $30 billion in profit. This will be on top of the net $1 billion we've already made (plus, depending upon the time period, any additional interest earned).
This deal is remarkably similar to the one taxpayers got with the Chrysler turnaround 20 or 30 years ago. We made a tremendous amount of money on it and we will make it on AIG, as well.
There, I've now wasted half an hour explaining the detailed AIG SEC filings to someone who won't bother to read them. I don't know why I was compelled to do it, but for heavens sake, at least study the information so you understand what it means. If there is still something you don't understand, I give up because you probably are unteachable.
Shareholder equity declines were a result of mark to market accounting on the CDS that existed at the time. This included goodwill writeoffs and other non-cash charges, as well. I explained everything, including the government transaction, in a post I sent you about 30 seconds ago. It’s all in there.
Yeah, you Wall Street rocket scientists believed systemic risk was a thing of the past a couple of years ago. Look where that got us.
Sorry, but the numbers I have seen are that tens of billions went to GS and other banks. They did not come back, and are not coming back. So your spiel is pure bunkum. And my point about the net shareholder equity of AIG was not to discuss the 2006 to 2007 decline, but to point out that shareholder equity BEFORE the crisis was nowhere near $180 billion, or even the $120 billion figure you are bandying about now. No one trusts you guys any longer, and for good reason. What passes for soundness in your world almost destroyed the global financial system.
Speak for yourself. I didn’t believe systematic risk was a thing of the past and so had no exposure to it or the firms that did. Warren Buffett laid out a detailed argument 3 or 4 years ago in the Berkshire Hathaway shareholder letters explaining what was happening, the risks derivatives posed, and why everyone should unwind their exposure.
No one has to trust my judgment - my companies aren’t publicly traded and I control a majority of the stock. We own Internet business that generate profits, that are then paid up to me to invest in anything I want - from stocks, bonds, and mutual funds to real estate or art. So, the only people that make or lose money are me, my family, and the small group of shareholders that were smart enough to back me when we launched several years ago out of college.
You are perfectly welcome to maintain your (incorrect) understanding of the securities market. And I will be perfectly happy to take your money when you, your mutual funds, or your pension plan place stupid bets based on presumptions such as the ones you have made about AIG. If you look at the call option activity, during the midst of the meltdown, traders made a killing because they knew that the AIG equity would eventually be worth more than it was valued at on the open market. Although I never dabbled in AIG directly, I was able to do this on the financial I already mentioned - Wells Fargo, US Bancorp, and General Electric.
Who paid these traders? People like you that sold off the stock believing that it was some underlying problem with AIG’s businesses. That’s fine. The world needs more people like that and I’m happy to benefit from it.
The idea that you can regulate out of existence mankind’s desire to profit from his neighbor’s folly is wishful thinking. It’s also shortsighted to think that everyone who disagrees with you benefited from the government bailout; no, we were just smart enough to figure out what was going to happen and then position ourselves to make money off it, just like an entrepreneur who places his hot dog cart across the street from a busy church on Sunday morning.
It took me awhile to find your BS. The credit default swaps that went south were NOT insurance against corporate bankruptcy, but as insurance against securities - and a LOT of those went south. AIG was on the hook for $67 billion in subprime mortagage-backed securities, just for starters.
As you noted, some of that money has been coming back - Goldman Sachs paid $1 billion back to AIG in the 2nd quarter as financial markets improved. However, that was only for swaps that were still open. Most were closed out, and that money is gone.
So let's do real math instead of your Wall Street math. $12.9 billion went to GS. $1 billion has come back. That still means an $11.9 billion hit to taxpayers.
EXCERPT Today, in these tumultuous times of bailouts and meltdowns when the investment banking leviathan needs Washington more than ever before, Goldman Sachs can leverage its most valuable asset yet White House chief of staff Rahm Emanuel.
Traditionally a Democratic booster, and one of Barack Obama’s top sources of funds in this past election, Goldman has always had particularly strong allies in government.
Rahm Emanuel is one such ally. An interesting early chapter in the Goldman-Emanuel relationship took place in the setting of Bill Clinton’s 1992 campaign for the White House. Clinton hired Emanuel as his chief fundraiser.At the same time, however, Emanuel was on the payroll of Goldman Sachs, receiving $3,000 per month from the firm to “introduce us to people,” in the words of one Goldman partner at the time. This is certainly a noteworthy relationship, but it’s one that has almost entirely escaped scrutiny. (snip)
In his four terms in Congress, Emanuel raised $74,750 from Goldman, making the firm his number four source of funds. Goldman has helped Emanuel. How has Emanuel helped Goldman? The most obvious answer, as mentioned in this column two weeks ago, is in Emanuel’s lead role in shepherding the “$700 billion” bailout—first proposed by former a Goldman CEO, Bush Treasury Secretary Henry Paulson—through the skeptical House.
Of course, back in the Clinton days, Goldman benefited from NAFTA and the bailout of the Mexican currency, with Emanuel pushing NAFTA through Congress, and Rubin hammering out the peso bailout.
Did Goldman improperly funnel money to the Clinton campaign by subsidizing Emanuel’s salary in 1992? Did Goldman’s help to Clinton spur the Democratic president to push NAFTA and the Mexican bailout?
The answers to these questions are opaque, and with Emanuel burrowed deep within the Obama White House, the continued relationship between Goldman Sachs and Obama’s right hand man won’t be easy to follow.
Watch which regulations of Wall Street Obama fights for. Watch where the bailout money goes.
SOURCE http://www.washingtonexaminer.com/opinion/columns/TimothyCarney/ Goldman_Sach_Will_Be_Sitting_Pretty_With_Emanuel_in_the_Obama_White_House_112108.html
THINGS WE DO NOT KNOW ABOUT RAHM EMANUEL Did Rahm reveal all of his ties to financial institutions involved in Obama's trillion dollar federal bailout of financials?
The notion that taxpayers will bail out Wall Street's folly, however, is quite in vogue. As well as the profound annoyance of having pinheads like you come to FR and tell us the bailouts are doing us all a big favor and the taxpayers are gonna get all that money back and then some.
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