Karl Denninger quotes AIG investigators:
“In fact, our investigation suggests that by the time AIG had entered the CDS fray in a serious way more than five years ago, the firm was already doomed. No longer able to prop up its earnings using reinsurance because of growing scrutiny from state insurance regulators and federal law enforcement agencies, AIG’s foray into CDS was really the grand finale. AIG was a Ponzi scheme plain and simple, yet the Obama Administration still thinks of AIG as a real company that simply took excessive risks. No, to us what the fraud Bernard Madoff is to individual investors, AIG is to the global financial community.As with the phony reinsurance contracts that AIG and other insurers wrote for decades, when AIG wrote hundreds of billions of dollars in CDS contracts, neither AIG nor the counterparties believed that the CDS would ever be paid. Indeed, one source with personal knowledge of the matter suggests that there may be emails and actual side letters between AIG and its counterparties that could prove conclusively that AIG never intended to pay out on any of its CDS contracts.
(Karl Denninger talking) Read that folks. Then read it again. Then read it AGAIN. More excerpts:
There are two basic problems with side letters. First, they are a criminal act, a fraud that usually carries the full weight of an “A” felony in many jurisdictions. Second, once the side letter is discovered by a persistent auditor or regulator examining the buyer of protection, the transaction becomes worthless. You paid $6 million to AIG to shift risk via the reinsurance, but the side letter makes clear that the transaction is a fraud and you lose any benefit that the apparent risk shifting might have provided.
(Denninger) And finally, the last nail in the coffin:
The key point is that neither the public, the Fed nor the Treasury seem to understand is that the CDS contracts written by AIG with these various non-insurers around the world were shams – with no correlation between “fees” paid and the risk assumed. These were not valid contracts as Fed Chairman Ben Bernanke, Treasury Secretary Geithner and Economic policy guru Larry Summers claim, but rather acts of criminal fraud meant to manipulate the capital positions and earnings of financial companies around the world.
Indeed, our sources as well as press reports suggest that the CDS contracts written by AIG may have included side letters, often in the form of emails rather than formal letters, that essentially violated the ISDA agreements and show that the true, economic reality of these contracts was fraud plain and simple. Unfortunately, by not moving to seize AIG immediately last year when the scandal broke, the Fed and Treasury may have given the AIG managers time to destroy much of the evidence of criminal wrongdoing.
Only when we understand how AIG came to be involved in CDS and the fact that this seemingly illegal activity was simply an extension of the reinsurance/side letter shell game scam that AIG, Gen Re and others conducted for many years before will we understand what needs to be done with AIG, namely liquidation. Seen in this context, the payments made to AIG by the Fed and Treasury, which were then passed-through to dealers such as Goldman Sachs (NYSE:GS), can only be viewed as an illegal taking that must be reversed once the US Trustee for the Federal Bankruptcy Court for the Southern District of New York is in control of AIG’s operations….”
That’s a post by Karl Denninger, citing comments by AIG investigators
My Comment
Well.. finally some people are catching on. It’s ALL a scam, folks. One gigantic ball of criminality. Told you so.
All this high falutin’ stuff about who’s going to fix what when is nothing more than jive talk to cover up for crime. I’ve always said that. Here in June 2006, here in July 2006 On September 19 2008 and September 30, 2008 and this year again, and again and again.
These folks live in each other’s pockets, buy each other’s businesses, swap each other’s debts…. and crimes….. We have a mafia in power. All this talk about fixing this and fixing that is beside the point…and misleading. There’s a fix alright. It’s the fix cooked up by the regulators, the bankers, and the politicians.
What we really need now is the FBI busting in and handcuffing people and dragging them off to sticky little jail cells where they can be subjected to all forms of inquiry within the law.
We’ve been saying this till our throat hurts.
But, of course, we weren’t the right sort (well-connected Wall Street money manager), and no one paid any attention…and now it’s a bit late. The paper trail has probably gone cold.
But atta boy, anyway, Karl.
Update: Apparently, this post confused a number of people.
James Klicker writes to let me know that Ritholz’s post is what Denninger is riffing off.
Let me clarify. The post above is Karl Denninger’s commentary on a post by Barry Ritholz (of The Big Picture). However, my interest was not in the fact of AIG’s criminality (Ritholz’s post), but in Denninger’s forthright reaction.
Compare it to the wussy cover-up for AIG’s chief executives, especially Hank Greenberg, which a lot of people seem to favor.
AIG’s criminality has been known for a long time. I wrote about it on September 19, 2008, purely on what I’d gathered from skimming off-shore newsletters, which had been documenting the criminality in the company since the 1980s. My interest is less in AIG’s criminality (which is so obvious you’d have to be wilfully blind not to notice) but why it is that so many people rushed to claim niceties of contract law for a company whose contracts were obviously fraudulent to begin with. Sounds like the usual media deflection…
“We need the FBI busting in and handcuffing people and dragging them off to sticky little jail cells where they will be subjected to all forms of inquiry within the law.”
WHAT??? I was with you right up to that point. You think that the FBI is not just another tool in the belt? “Authorities” are not the answer, personal integrity and individual choice and responsiblity is.
“Authorities” equates to power, and we all know what Lord Acton suggested that leads to. It is the belief in power (and “authority”) which creates the problems.
– NonE
Of course. But you’re not suggesting that in a civil society with laws, crime should remain unpunished, because, what, some of the victims were flawed?/>
Don’t relyon the FBI doing anything, yes. But the FBI ught to defend life and property. That’s the single purest function of state power – if any.
The police powers of the state are perfectly valid powers.
Can they be done better by private groups. Probably. But right now, that’s what we have and that’s what we will have to use. We won’t get that protection, of course. Because of corruption.
But that’s another issue.
BTW, I am not against authority or power….whatever that should mean (not being cute – I really don’t know in what sense you meant it?)
Authority exists. The authority of knowledge, skill, ownership, hierarchy, superiority, class position, function…
I don’t think it can be dodged…and I don’t see why it should be.
The question is how it’s used or abused…so it seems to me. What it’s limits should be.
So yes, power corrupts. But the FBI’s power doesn’t exist in a vacuum. We have laws and procedure (another power) checking it. And we have public opinion (another power). And we have the Supreme Court (another power) and we have the self-interest of each person in their career advancement checking the other. There is legitimate power and there is illegitimate power. But the beauty of the republican form of government (not that that’s what we have any more) is we don’t discard power. We reign it in (in theory) and put it to use.
Because we abandoned republican government for imperialism, the central government’s power is out of control. But my sense from my studies over the years is that the FBI has elements in it that haven’t been completely corrupted.
I doubt they will prevail but no harm hoping they will.
The CEOs who boss the huge Wall Street firms invariably took huge risks with other people’s money in order to get obscenely high bonuses after 2000. It was their lobbying for de-regulation and then their over-leveraging that caused the bubble and crash. Investment bankers like Goldman Sachs knew that they were commiting fraud when they sold packages of “liars’ loans” as triple “AAA” investments.
Not only did Goldman sell more of these bundles of “toxic assets” than anyone else, they also bought more credit default swaps from AIG as insurance against the mortgages and the banks who held them failing. Such large purchases of insurance from AIG prove that Goldman knew they were not grade “AAA” and thereby was guilty of fraud and misrepentation.
Besides, Goldman, many economists also saw this coming. Even TigerSoft got the essentials exactly right. But among those who ran Wall Street and ran the country, there was only a complete and reckless disregard about the consequences of their greed, fraud and corruption as the housing boom developed and peaked.
Despite their responsibilities as leaders of finance and government, bank CEOs at Goldman (for example), US Treasury officials from Goldman, Geithner at the NY Fed and key Congressmen, all let the boom get bigger and bigger, pushing home prices higher and highall. Goldman Sachs’ CEO Paulson even successfully lobbied the SEC to further reduce controls on investment bankers in 2004 and 2005 while permitting them to use even more leverage. With no real oversight, Bear Stearns, Lehman Brothers, Merrill Lynch, CitiGroup and dozens of other banks became houses of cards to make their CEOs rich. Criminal fraud of epoch proportions as been committed, but Obama, who is in their pay,
says no crime has been committed without even conducting an investigation and allows the CEOs at the banks getting billions in bailouts.
The eventual collapse was easily foreseen by cynical Wall Street insiders, like ex-GS CEO Robert Rubin who sold out at the top. See TigerSoft Blogs. Rubin knew the risks. He and
Larry Summers (who got $7.8 Million from Wall Street and Goldman Sachs in 2008) had long promoted the de-regulation of banks and the non-regulation of derivatives like those that bankrupted AIG within the Clinton Aministration. At CitiGroup, it was Rubin after 2002, more than anyone else, who had urged that big bank to
maximize their use of leverage all the way up, making more and more ridiculous loans to increase short-term profits to get higher and higher bonuses. These corrupt anti-regulation ideologues just didn’t care about the consequences
of their policies. They completely disregarded the lessons of the 1920s-1930s.
How could such smart and learned men do this? Simply put, their loyalty had been richly bought and paid for by Wall Street..
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It is significant that Goldman Sachs avoided the worst of the 2008-2009 Crash. Most of their profits after 2007 came from buying credit default swaps and selling stocks short. To that end, because they understood the dynamics of the boom they had helped create, they set up a huge $10 Billion short selling Hedge Fund in December 2007. This was done at the perfect time. Goldman thus sold short all the way down.
But that’s only a small part of the story. Goldman Sachs got a TARP- I taxpayer
bailout of $20 billion from their ex-CEO, Henry Paulson as Treasury Secretary. And never ones to lose an opportunity to steal from the taxpayer, Goldman got $13 billion more when the American taxpayer bailed out AIG. Goldman was apparently
owed that much by AIG. If the taxpayers had not bailed AIG out, Goldman would have lost the money. To arrange this, a secret meeting took place in September 2008 between the current Goldman Sachs CEO, Lloyd Blankfein, and Henry Paulson, Bush’s Treasury Secretary and the previous CEO of Goldman Sachs.
More on our TigerSoft Blog by William Schmidt, Ph.D.
AIG and other insurers wrote for decades, when AIG wrote hundreds of billions of dollars in CDS contracts, neither AIG nor the counterparties believed that the CDS would ever be paid.