Wall Street to Clean Up in AIG Mess

By Andrew Jeffery Aug 06, 2009 8:50 am
Banks raking in millions for disaster they created is appalling.
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Just when we thought the American International Group (AIG) nightmare had slinked off into the shadows, it’s come roaring back for more.

As AIG management labors to spin off divisions, cut costs, and overhaul what was once the world’s biggest insurance company, Wall Street banks are lining up to collect huge advisory fees. According to the Wall Street Journal, when the dust settles, the Federal Reserve Bank of New York and AIG could shell out nearly $1 billion in fees to banks and law firms.

That's, however, less than 1% of the taxpayer money put on the line to bail out AIG.

The task of unwinding the complex web of derivatives and shady investments that doomed AIG is, to say the least, no easy task. Teams of bankers, analysts, and attorneys are required to complete the job -- none of whom come cheap. The Journal reports that Morgan Stanley (MS) stands to be the largest benefactor from dismantling AIG, and could reap as much as $250 million in fees. Goldman Sachs (GS), Bank of America (BAC) and JPMorgan (JPM) have also been tapped for various roles, putting them in line for big payouts.

For example, part of AIG’s reorganization plan calls for 2 initial public offerings, which will aim to raise $5 billion by offering investors the chance to buy into an Asian life insurance unit and American International Assurance Co. -- a wealth-management and retirement-planning division. Morgan Stanley and Deutsche Bank (DB) could each take home as much as $45 million in fees after being named as lead underwriters for the deals.

At first blush, the very notion of Wall Street banks raking in hundreds of millions of dollars in fees for cleaning up the AIG mess -- one which they were certainly complicit in creating -- is somewhere between nauseating and infuriating. But on the other hand, is there another option?

Sure, the government could demand that Morgan Stanley, Goldman, and the like offer up their services for free, honoring their civic duty to fix the mess they helped create. But right or wrong, the chances of that happening are exactly nil. The problems are complex enough that there are only a handful of people in the financial-services industry with the knowledge and experience to even begin to tackle the problem, so there just aren't many alternatives.

But more important than the icy reality that some of taxpayers’ $100 billion “investment” into AIG is going to pay off Wall Street, is how the country handles the news. As many a Minyanville Professor is apt to say, “The reaction to news is more important than the news itself.” Indeed.

This spring, when news broke that AIG would be paying billions to Goldman Sachs and other trading partners, there were literally riots in the street. So if the streets are quiet this morning, does that mean the latest payments are less despicable, or that social mood has shifted such that these blatant abuses of taxpayer trust are now commonplace?

And, to take it a step further -- if the latter is true, has the country simply rolled over, content to let Washington and Wall Street rape Main Street in the interest of some amorphous concept of "stability" or "economic recovery"? Truly then, we must ask the question Professor Kevin Depew asked a couple weeks back:

Where is the outrage?

Join Hoofy & Boo as they take you through what happened with AIG, from start to finish:

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(12)
2009-08-06 07:04:33
Collusion from the get-go
Read Chris Whelan (Risk Analytics) on fraudulent "side letters" and their migration into CDO's. When investigators started to sniff around that crime, insurers saw a loophole- insurance that required no reserves and could be leveraged. Turns out the Citizens were the reserve. The "mis-pricing" was part of the Fraud, and both sides of the trade knew it when the deals were made. When AIG management starts squealing, heads will roll at all their counter-party banks.
And even if Goldman et al were not criminally complicit, why should taxpayers bail them out for mis-judging counter-party risk? Instead of reducing exposures, Goldman has INCREASED its risk, with you and me as their backstop to the tune of perhaps a Trillion or so.
2009-08-06 08:57:41
appalling behavior -
- and it's been going on, fleecing the public, since before the tulip mania...

reading "Devil Take the Hindmost: A History of Financial Speculation" by Edward Chancellor has been a sad eye opener

to answer the question, where is the outrage, it always, eventually, appeared, after all the damage and the monies have been carted away...

it may be, if in the near future (my lifetime) this pattern changed, minyanville's goal of financial education will have been an important part of the work that makes this happen
2009-08-06 09:02:28
"Wall Street banks are lining up to collect huge advisory fees"
Up to a billion dollars.

Absolutely obscene and that's all there is to it.
They should do it for nothing!
2009-08-06 09:09:42
Collusion from the get-go
David, If you google "side letters Chris Whalen" you can find article, as well as his recent congressional testimony July 22nd ( which I have not read yet).
Essentially, and potentially explosively, he hints that there probably exists e-mails confirming the existence of "side letters" which are (illegal) agreements that the terms of a contract will not be enforced. Insurance companies can then do sham transactions which appear to strengthen their balance sheets.
While I avoid conspiracies too, by definition, any crime involving more than one criminal is a conspiracy. And most timely, Mr. Greenburg today paid a 15 million dollar fine for his part in a "conspiracy". And One of Buffetts minions is spending years in jail for General RE's participation in another side-letter conspiracy.
I always enjoy your posts, just think you are mis-guided in your defense of Goldman lately.
2009-08-06 09:22:51
Bad Actors
Also, David, Goldman's CURRENT counter-party losses are not theoretical- they have over 1,000 times their risk based capital vulnerable, have increased their risk profile over past few months, and were exempted from the "Market Risk rules" which all other banks have to abide by.

"" Do not trade the markets, trade the interventions"
2009-08-06 09:33:00
thank you! thank you! thank you!
I, as well as most people with a brain cell, try all we can to ignore the non-stop bullshit coming from the east coast. I couldnt agree more and I hate to get into it cause it takes me hours to get over it but it is the beginning of the end. How long can this happen?

I think the days of the good ole USA are numbered.

Human nature is the only thing in the universe that doesn't change!
2009-08-06 10:00:14
Infuriating
Govt involvement in nearly everything.

Bailouts to keep the same people in charge who created the mess... both govt and private. We are even bigger losers then they are.
2009-08-06 10:33:22
bargain price !!
I have it on good authority that AIG's collapse was caused, first and foremost, by their egregious mis-pricing of certain CDSs, which they sold in imprudent size.

Stipulate that, please.. now, are their counter-parties in that trade somehow culpable ? I don't think so; as a consumer, I am never so happy as when I can buy something at a great value (I especially love below cost - and it does happen, however rarely). Should I feel guilty, somehow ? Are the cases not parallel ?

I think there is no guilt in trading - the true trader is shameless.
2009-08-06 11:25:10
What up AIG
How about AIG?

Crazy. Crazy.

So, what is happening? Here is my take. We had some good news on Monday with the CEO coming out, and the company is starting to price in earnings. But that wouldn't be more than at top 4-5% on a normal stock. Well, enter the big guns...With this good news and the earnings coming up, we see a lot of big sellers start to cover shorts, which sets an upward swing.Then, that makes more and more short squeezes occur. At this point, the little guy starts to buy up on small 2-3% upward movements and sells off, pushing it even higher. The stock is sooooooo underbought for so long that this movement and process that should happen over several months, is happening all at once.

My take.

David Ristau
President, The Oxen Group
Oxen Newsletter Editor, Phil's Stock World

http://www.philstockworld.com
2009-08-06 11:54:01
Collusion from the get-go
Agreed, the (now-theoretical) counter-party risk losses shouldn't have been wiped clean. In a perfect world.

If you could provide a link to the "Side letter" issue, I'd like to read about it. In general, I'm inclined to discount conspiracy theories, however.
2009-08-06 14:06:22
Collusion from the get-go
Well, here's the thing... I did google up the Congressional testimony. I observe Mr. Whalen say that the language in some side letters "may be interpreted as" nullifying the basic transaction. I am curious to learn what other interpretations might be attached.

Specifically, I see the one stipulation cited I might interpret as a European-versus-American style option specification. The kicker is, I am not a lawyer; and legalese is (regrettably) opaque to the non-practicioner. Therefore, I see no answers, just questions.

I'd assume the lawyer who drafted the legalese would be liable if it were fraudulent, wouldn't you ? Let's set the hounds on that trail, and see just what gets spooked.
2009-08-07 03:08:41
Release the Hounds!
Sounds good to me!
I will read that testimony. I wonder if the very existence of a side letter is illegal- it would exist separate from the contract which a "regulator" (always in quotes now) could audit.
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