Bernanke is Testy: AIG is FUBAR

Let's be honest, most of us have only a vague notion of what the Federal Reserve actually does. When Alan Greenspan started doing mea culpa's on television, however, I got a stronger sensation that the Federal Reserve Chairman really is an important guy. Since then, I have greatly appreciated Ben Bernanke's stoic anti-charisma. I can't tell if what he's saying makes any sense, but he seems so calm and competent when he speaks that I feel like a real adult is on the case.

So I was a little taken aback today to watch him get testy with the Senate Budget Committee. He said, "AIG exploited a huge gap in the regulatory system; there was no oversight of the financial products division. This was a hedge fund basically that was attached to a large and stable insurance company, made huge numbers of irresponsible bets, took huge losses." He seemed almost emotional as he spoke. And then it occurred to me that he was trying to remind Congress that a lot of the fault for this could be placed squarely placed at their feet.

Democrats, you inherited a mess from the Republicans, but you also didn't do much between in the time that you regained control of the Senate and the financial crisis erupted. Then, you passed TARP with insufficient oversight criteria in cooperation with a lame-duck president. So please be aware that the "not my fault" card will only take you so far.

Republicans, you made a lot of this possible while you controlled both houses of Congress for over a decade. That "huge gap in the regulatory system" is one that you allowed to be made in the name of libertarianism and fiscal conservatism. Of course, your motives are somewhat suspect since you also okayed the largest deficit in US history (just prior to this current mess) and managed to roll back more civil liberties then the left-leaning boogey men of your own political rhetoric. So, Senator Jim Bunning don't act like the new sheriff in town: you've been in the Senate since 1998 and no doubt voted for much of the relaxed financial posture that helped make this fiasco possible.

Of course, Bernanke might also just be angry at an administration that would allow $30 billion of taxpayer money to be dispersed to unnamed "counter parties." This is simply wrong and an abuse of the public trust more fitting of the Bush administration than the Obama era. The other option, of course, is that there was simply no choice, because the economy is FUBAR. (For those of you who are not familiar with the term, I'll give you a hint. It's an acronym ending in "..."Up Beyond All Repair.)

Under any circumstance, let's all try to be a little nicer to Chairman Bernanke who appears to be we earnestly bent on trying to save all our butts, blue and red alike.

Comments

[Erdgeist]

AIG is a binary company. Part of it, the insurance part, is regulated by the state of New York. The other part is regulated by the OTS this being the federal Office of Thrift Supervision. This part is the AIG Federal Savings Bank.

With regard to the CDS (credit default swaps) which are like an insurance policy against default, AIG sold lots of them. But something was really wrong. There was an impending risk factor. It was in the housing market! Should the housing market start to turn south, AIG didn't have the dough on hand to make good on its insurance policies, that is, on all the CDS it sold.

Federal Reserve Chair Ben Bernanke saw the problem and just how AIG gamed the system.

"AIG exploited a huge gap in the regulatory system.... This was a hedge fund, basically, that was attached to a large and stable insurance company, made huge numbers of irresponsible bets-- took huge losses. There was no regulatory oversight because there was a gap in the system."

Now the question is this, did AIG know the risk beforehand as well as its counterparties (i.e. those who bought the CDS) but went ahead anyway, knowing full well the government would bail out their greedy asses?

This brings up the issues of the moral hazard we are probably creating. Let's be honest, there has to be some brutal punishment involved (short of GITMO). AIG should be broken up -- and no bonuses.

[research]

Of Course AIG folks knew that "insurance" Swaps with Zero Reserve is a guaranteed disaster.

JPMorgan invented the idea to get around the reserve requirement. Phil Grahm loved the idea.

These Swaps and short they insure are now 90% of the "stock" market value!

Why have they not been Banned?

http://www.huffingtonpost.com/users/profile/research?action=profile

[Sundialsvc4]

Ultimately, Michael, "the Congress is the 'decider', and the sole implemento­r." As you observe, they've had their hands filthy with this thing for a generation. And now, yeah, it's absolutely FUBAR.

When I watch Obama and Biden at work, admittedly from a distance, I'm observing that they continually lay whatever blame needs to be laid right back at the proper feet ... the Congress. Facilitate the discussions, resolve the log-jams that come up on the issues, sort-out and propose the priorities, and above all else, hold Congress' feet to the fire where it properly belongs.

What's got to come out of this is much more than "money." There has got to be financial regulation. A grand swindle has literally become the order of the day, literally treated as a legitimate thing, while the people of the United States founder in unemployment and usury ... as mere bargaining-chips in this game.

This is not an "economy." This is a GHOST of what the United States of America could be ... and, once was. So as for me, "this is not acceptable­."

[mtdon]

NATIONALIZE THE FEDERAL RESERVE!!!! AND while we are at it - fire bernanke..­.....Berni­e Sanders had it right when he grilled Bernanke this week. If bernanke were sincere he would level w/ congress when they asked him where the money went.

Class warfare is here and the sooner the middle and lower class realizes it the better!!!!!!!!

[williambanzai7]

CONFIDENTIAL: FOR YOUR EYES ONLY

AIG: THE RISK IS SYSTEMATIC

TIME: DOOMSDAY MINUS 72 hours

TO: MEMBERS OF CONGRESS, BENJI BERNANKE, TIMMY GEITHNER

CC: Lloyd Blankfein, Goldman Sachs & Co.

AS YOU ARE AWARE THERE HAVE BEEN NUMEROUS PRESS REPORTS THAT A.I.G. (hereinafter branded the "Outfit") will be reporting a combined quarterly loss somewhere North of $60 Billion (yes SIXTY BILLION). This is a rough cut number. It could easily be higher should we decide it to be. In addition our current burn rate for legal expenses, public relations advisers, clandestine junkets and cash retention bonuses has been estimated to exceed $400,000 per second. We have a black hole that is getting bigger by the second. Moreover, our massive global financial services flea market has not delivered the proceeds we projected to you during the immediately preceding TARP crisis.

Rumors have been circulating that the Outfit has amassed enough weapons grade
credit default SWAP material to build a financial doomsday device. Make no mistake, these rumours are not unfounded. Our handler's led by Gabathon Kekst et al have been quietly disseminating this information on our behalf.

con't on WilliamBanzai7 Blog

[PhilipTaylor]

The Casino Betting was done using Credit Default Swaps (CDS) offered by AIG!

AIG is continuing downward despite $100+ Billion Bailouts because of this Casino Scam!

Banks and Hedge Funds knew that "SURE FAIL" mortgages were being made to poor Americans because the Banks were doing it through their own companies!

So what does AIG do but provide CDSs to allow Casino Betting that the SURE FAIL loans/derivatives would FAIL. AIG Executives had to have lost their minds giving away Trillions to the Hedge Funds and Banksters!

The solution is to declare these Bets illegal due to insider information the Banks and Hedge Funds had, and make them NULL and VOID. It is the Taxpayer who is continuing to pay off these illegal bets to the corrupt Hedge Funds, Banks, and inside traders!

We are Bailing Out the Banks and AIG Management that RUINED their COMPANIES! WHY?

For example, AIG sells at $0.45 per share and taxpayers should own them!

We have given them close to $100 Billion in Bailouts and the Taxpayers should own the company!
__________­__________­__________­__________­__________­__________­___

Lets clear out the Bad Management and cancel the ILLEGAL BETS and use the Bailout Money to capitalize them instead of paying-off illegal Bets to crooked Bankers and Hedge Fund Managers. Then sell them back into the Market!

[joebhed]

I think Bernanke knows the truth and he is holding it off as long as he can, hoping to make it a little less worse for a bunch of friends who are going to get hurt real bad.
At the expense of the American taxpayers. Remember, he works for the banks.

In this country, there is this debt-money system.
It creates all the money as debt.
Repayable with interest.
Which is never created.
So it comes out of new debt-money.
Which is repayable with interest.
Which is never created.
As long as you keep MAKING new debt-money fast enough to make all those interest payments, hey, no problem.
But when the money needed to make those interest payments exceeds the ability to create new debt-money, well, then the entire debt-money system goes broke.
We cannot make our debt-service payments.
This is what is known as the insolvency of the debt-money system.
Plain and simple.
What we need is a new DEBT-FREE money system.
To replace the debt-money system of the private bankers.
Plain and simple.

We have no obligations to those banks beyond what we now contractually owe.
Bernanke wants us to sign on to some NEW way of getting taxpayer money to pay some of those debt-service payments for the banks.
It is unnecessary.

All those in favor, say Aye.
Opposed, No.

[leftLibertarian]

The top AIG executives should be treated as economic terrorists.

[ridah1o1]

Let's just let AIG fail and get over it. We would all be better off. Here's a little analysis on the issue:

http://www.ricoexplainsitall.com/politcs-economy/2009/3/4/the-irrational-aig-bailout.html

[jsarets]

AIG as the world's largest property-casualty insurer isn't FUBAR as long as its financial services division is amputated and left to die.

Problem is, the default of AIG's credit default swaps would tank the bond market to an extent that would make Lehman Brothers look like Linens-N-Things.

Those bonds form the backbone of bank reserve capital and individual wealth management. A generation of graying baby boomers would never recover.

So we have a three options:

1) The insurance industry collapses.

2) The banking industry collapses.

3) The government bails out the bondholders and hopefully doesn't collapse itself.

We're going with option 3.

[Raven]

And when you consider who those bondholders really are, option 3 is the only choice we have.

[Michael B. Laskoff - Huffpost Blogger]

Your logic is hard to dispute, but I would still like to know who got all the cash. Moreover, the whole thing glosses over a small problem: the risk management system does not work in reality. We should have figured this out when Long Term Capital Management, run by the goes who literally wrote the book and got the Nobel Prize, exploded. Hopefully, the steaming carcass of the American Economy will remind us of the limits of human intelligence and the capacity of complexity to get beyond it faster than you can say CDO.

[dnpvd51]

Bernanke happened to be lying when he made the comment you referenced as Denninger points out at his market ticker site.

http://market-ticker.denninger.net/archives/847-Bernankes-Lies,-Part-4,232,123-AIG.html

[jsarets]

Great comment.

[Michael B. Laskoff - Huffpost Blogger]

I will take your word for it. The question is, "So what?" My first hope is for stability and then growth. Somewhere far down the line, I'll ask for honesty, but I'm not certain that I would trust a politician that claimed to tell the truth. (They don't mean to lie, but that's what liars do.)

[magibrotherhood]

ah---ben is part of the reason we are in the mess----he`s not the savior----not by any means.

[Michael B. Laskoff - Huffpost Blogger]

Same comment as below. I'm not saying that Ben is the savior, but he's what we've got for right now. I'd very much like to lean the names and identities of the people who actually know how to fix this mess.

I'm not in the let the historians work this all out camp: I'm in the let's save the patient (economy) first and then prosecute the attackers (whoever exactly they turn out to be). So please, send in the pros from Dover, or the clowns or anyone else that you think can make good things happen.

[ILibertine]

All of these clowns look serious. It's a mask for clueless. Bernanke, Geithner and their ilk have presided over the most phenominal wreck of the economy in generations and they ought to look serious - from behind bars. It is fine for Bernanke to suggest regulatory failures allowed this - as they did to an extent. Yet I believe he was at the FED, as he and Geithner were voting memebers that promulgated the policy of easy money for so long that hated things up to irrational extents. They are partners in crime. Looking serious just isn't enough. This is not TV, this is millions of folk's retirement, and health care, and education, et al. We need to clean house of these collusive "experts".

[Michael B. Laskoff - Huffpost Blogger]

Here's my issue: who do you replace them with? Who are the people who know what to do in these sorts of situations? The Depression Era experts are all dead, and there is a serious debate about whether or not their policies worked half as well as WWII, which harnessed are full industrial infrastructure. Before we bum rush all the experts, we need to have some other people to replace them with.

[lightningbolt]

We should not be letting the same people run the economy. They committed crimes and messed up our economy. They clearly do not know what to do in this situation, since their policies are the ones which caused the collapse. I'm sure there are plenty of economists and economics professors who would do a much better job. Unfortunately, nobody listens to the real experts because the people in power prefer to act on their short term gain at the expense of the long term future of the entire economy. But seriously, I could think of many people who would do a much better job than the criminals who are currently running the banks and the economy.

[cam]

The only people who believe it is debatable are Republican ideologues, who cannot bring themselves to admit that social policies have economic merit. WWII did stimulate innovation and industry, but most significantly it motivated the massive deficit spending that was needed to get us out of the economic doldrums.

We know how to get ourselves out of this mess - we just need to spend a lot of money very well. If we can't grow our economy fast enough we're doomed. That seems to be lost on the Republicans, who think only they have the right to deficit spending.

[ILibertine]

You pose an excellent question, and one is certainly not well advised to merely rant without having a constructive alternative. I would look to a Volcker or Buffett or some others(Reich) that have demonstrated at least a modicum of conscience; and if they are not personally willing, given age & etc., are the leaders giving their input enough clout ,or just deferring to perceived experts with a very poor track record? Bottom line: don't keep the same foxes in the chicken coup. It's time to get outside the box. It's time to trickle UP.

[ramblingjohnny]

It sure is a major Cluster Fu--!

[plebeianswillrevolt]

"taken aback". That is not the proper reaction when you have just been slugged in the mouth. It is about time that some of the few start expressing just how pissed off we all are. Not just mouthing politically correct platitudes. I hope it becomes contageous. I read tonight the the former theives of Countrywide are raking in new millions be renegotiating interest rates on Government bought loans. ARE WE FOOLS?

By the way - it is FU--- beyond all recognition.

It you are going to use Marine Corps jargon, have the courtesy to look it up first.

[Michael B. Laskoff - Huffpost Blogger]

I assure that I have the utmost respect for the Marine Corps jargon. Apologies for that.

I read the NYT article this morning and it seems that the Country Wide buyers are actually doing some good, while making a fortune off the misery that they helped cause. I'm not sure what to make of this. Retribution is always satisfying, but so is a functioning economy.

[Raven]

Actually, Michael, I think taken aback is just fine as jargon goes.

There's plenty enough crazy anger out there already and it's only going to get worse.

Keeping things on the level of rational discourse is not a bad thing right now.