Transfer of Wealth - Taxpayer TO Banks via AIG
A: Tyler Durden is not just the founder of Fight Club, he is also the founder of ZeroHedge.com and quickly becoming the must read blog out there in the financial world. Bookmark it. The latest post gets into a correlation desk trader email, and if proven accurate, spills the details of the largest transfer of wealth this country has seen to date from you, the taxpayer, to the banking system. And it was only 5 days ago that I remarked, "...for what its worth, I am hearing that the banks are having a great quarter", when trying to put the recent rally into perspective. Could AIG be the vehicle to transfer taxpayer funds to the banks as part of a larger re-capitalization plan?
I am begging for some reader participation here to help verify if this claim is fully accurate, partially accurate, or just a rumor? It is NOT news that the AIG counterparties got bailed out in this mess, but this takes it one step further.
From ZeroHedge.com's, "AIG Was Responsible For The Banks' Januray & February Profitability":
"During Jan/Feb AIG would call up and just ask for complete unwind prices from the credit desk in the relevant jurisdiction. These were not single deal unwinds as are typically more price transparent - these were whole portfolio unwinds. The size of these unwinds were enormous, the quotes I have heard were "we have never done as big or as profitable trades - ever".Tyler offers his layman translation of this:
As these trades are unwound, the correlation desk needs to unwind the single name risk through the single name desks - effectively the AIG-FP unwinds caused massive single name protection buying. This caused single name credit to massively underperform equities - run a chart from say last September to current of say S&P 500 and Itraxx - credit has underperformed massively. This is largely due to AIG-FP unwinds.
I can only guess/extrapolate what sort of PnL this put into the major global banks (both correlation and single names desks) during this period. Allowing for significant reserve release and trade PnL, I think for the big correlation players this could have easily been US$1-2bn per bank in this period."
"In simple terms think of it as an auto dealer, which knows that U.S. taxpayers will provide for an infinite amount of money to fund its ongoing sales of horrendous vehicles (think Pontiac Azteks): the company decides to sell all the cars currently in contract, to lessors at far below the amortized market value, thereby generating huge profits for these lessors, as these turn around and sell the cars at a major profit, funded exclusively by U.S. taxpayers (readers should feel free to provide more gripping allegories).All I know is, the banks were big time under capitalized, marks were way off, AIG was on the wrong side of huge CDS trades and had to be bailed out by the government, AIG counterparties were made whole, and during this period of chaos it's hard to imagine no scams taking place as firms fight for survival. When the government takes taxpayer money to bail out the banks, this kind of behavior happens. The average Joe usually doesn't learn about the scam until much later, but in this new virtual world with so many attentive and capable bloggers feeding off of inside tips, scams are harder to get away with in regards to the unknowing public. I am still digesting this and must admit that this is something I know very little about (I assume AIG is unwinding whole portfolios of issued CDS positions at vast discounts funded by taxpayer rescue funds, but the article gets into corporate synthetic and asset backed CDO positions too), but I am not shocked at all to learn that there in fact was a transfer of wealth from the taxpayer to the banks. Does anyone really believe they will make out well with these investments; if you can call them that anymore?
What this all means is that the statements by major banks, i.e. JPM, Citi, and BofA, regarding abnormal profitability in January and February were true, however these profits were:
a) one-time in nature due to wholesale unwinds of AIG portfolios,
b) entirely at the expense of AIG, and thus taxpayers,
c) executed with Tim Geithner's (and thus the administration's) full knowledge and intent,
d) were basically a transfer of money from taxpayers to banks (in yet another form) using AIG as an intermediary.
For banks to proclaim their profitability in January and February is about as close to criminal hypocrisy as is possible. And again, the taxpayers fund this "one time profit", which causes a market rally, thus allowing the banks to promptly turn around and start selling more expensive equity, also funded by taxpayers' money flows into the market."
I would have liked to believe that the banks claim on recent profitability was a result of a pickup in traditional banking operations; mainly due to the fed's actions and ZIRP policy in place during this period of bank repair. I did NOT want to hear that the bulk of banks' profits to start the year came from taxpayer rescue funds that allowed AIG to unwind trades to the benefit of the counterparty; AIG received $182.5Bln in rescue funds to date.
Oh what a tangled web we weave! I knew the plan was to recapitalize the banks, but if this is the preferred path to achieve that, well, we may see chaos yet again. If we see a new round of share dilution to raise capital from the major banks left standing, well then we know there is some truth to this.
Posted by MeekSheep
Sun Mar 29th, 2009 07:47 PM
Just read it myself and then came here. Was thinking of buying up some BoA junior debt seeing as it's trading at .50-.60 cents on the dollar. I figured after last quarter my scenarios were a) BoA makes it through and I pick up a nice 15% yield or b) BoA gets nationalized and I make an instant 100% profit. Not too shabby until I read it.
This changes everything. With what you have been going on about CRE linked debt I dunno if this is such a good idea. After reading this and with your knowledge of the commercial real estate world would you even touch anything but senior debt?
Posted by Noah
Sun Mar 29th, 2009 08:11 PM
well the way this administration is headed, nobody will take a haircut. But I agree, this may change things if it gets out to mass media.
On one hand, I think the market THINKS that commercial is priced in already, and on the other, I dont think the depth of it is. Sure they may get the severity of this crisis right, but Im not sure they got the length of it right.
Posted by Fred
Sun Mar 29th, 2009 10:11 PM
every pension fund out there is upside down. the ONLY way they can fund the boomers retirement is to refloat the entire stock market.
Posted by James
Sun Mar 29th, 2009 11:00 PM
I think I remember Ken Lewis mentioning that the trading portfolio wasn't doing as well as the previous two months during his interview...does anyone else remember that? If so this is with out a doubt true
Posted by jeff
Mon Mar 30th, 2009 09:31 AM
During the stock market crash of 1987 a funny thing happened. While the entire market system was imploding due to the extreme volume of selling and the bottom was falling out of the market, a rally started in the value line market index pit in Chicago. This market index was lightly traded and nowhere near as important as the NYSE (Knife I think they called them) or S&P (Spooz). No one knew who was buying, but the value line index rally appeared to have sparked the rebound that put a floor under the market.....som say an invisible hand was at work. There have been other times when enough capital applied to the right leverage point in markets has had a huge impact and I wouldn't be surprised if this was one of those cases. George Soros had an awesome op ed piece in the Journal last week describing how CDS are the only short bet that can be made that dosn't carry the assymetric risk of loss that all other shorts do (you are actually going long the chance of a failure) and why this factor attracted a massive bear raid on financial institutions, whose cost of funds could be manipulated by CDS bets, thereby becoming a self fulfilling prophecy. A squeeze in this sector could do just the opposite....lower bank funding costs, push their equity values higher and relieve counter-party obligation risks.....nifty.
Posted by jeff
Mon Mar 30th, 2009 09:31 AM
During the stock market crash of 1987 a funny thing happened. While the entire market system was imploding due to the extreme volume of selling and the bottom was falling out of the market, a rally started in the value line market index pit in Chicago. This market index was lightly traded and nowhere near as important as the NYSE (Knife I think they called them) or S&P (Spooz). No one knew who was buying, but the value line index rally appeared to have sparked the rebound that put a floor under the market.....som say an invisible hand was at work. There have been other times when enough capital applied to the right leverage point in markets has had a huge impact and I wouldn't be surprised if this was one of those cases. George Soros had an awesome op ed piece in the Journal last week describing how CDS are the only short bet that can be made that dosn't carry the assymetric risk of loss that all other shorts do (you are actually going long the chance of a failure) and why this factor attracted a massive bear raid on financial institutions, whose cost of funds could be manipulated by CDS bets, thereby becoming a self fulfilling prophecy. A squeeze in this sector could do just the opposite....lower bank funding costs, push their equity values higher and relieve counter-party obligation risks.....nifty.