Posts tagged andrew ross sorkin
Sorkin, Dealbook, and linking out
Aug 31st
On Friday, Dan Loeb released his second-quarter investor letter, which was immediately published by Dealbreaker. It’s a very political document, kicking off with a full page of quotations from various presidents (and, for some reason, Chinese general Liu Yazhou). It’s easy to see why Andrew Ross Sorkin uses it as the jumping-off point for his column today, headlined “Why Wall St Is Deserting Obama.” And as ever, the column is reposted at Sorkin’s Dealbook blog.
Now Sorkin and Dealbook are the exemplars, at the NYT, when it comes to the journalistic virtue of putting primary documents online. Their Scribd account has over 100,000 subscribers and has had over 2 million visits; it’s much more active than the parallel documents.nytimes.com format used by much of the rest of the paper.
But anybody reading Sorkin’s column today simply has to take him at his word when he says that Loeb’s letter “sounded as if he were preparing to join Glenn Beck in Washington over the weekend.”
If I wanted, I could paint I different picture of the letter. I could point out that there are no fewer than three quotes from Barack Obama on its first page, talking about the importance of helping others and spreading wealth across the whole American population. I could note that Loeb is just as harsh on capitalists as he is on the government.
Many people see the collapse of the sub-prime markets, along with the failure and subsequent rescue of many banks, as failures of capitalism rather than a result of a vile stew of inept management, unaccountable boards of directors, and overmatched regulators not just asleep, but comatose, at the proverbial switch.
And he also sees new government rules being helpful on this front:
Many of the boards we have come across are populated by individuals who rely on the stipends they receive from numerous corporate boards and thus appear motivated primarily to ensure continuing board fees, first-class air travel and accommodations, and a steady diet of free corned beef sandwiches until they reach their mandatory retirement age. We are therefore encouraged by the recently finalized proxy rules, which will ease the nomination and election of directors by shareholders.
He’s even pulling with the government when it comes to cracking down on sleazy for-profit colleges:
Our perspective on the government’s increased willingness to use its regulatory muscle enhanced our short positions in the for-profit education space. Indeed, this summer certain government actions taken regarding these companies served to accelerate the unfolding of our thesis on these names.
So, who has the more accurate view of Loeb’s letter, me or Sorkin? The answer is Sorkin: I’ve been quoting very selectively. But in one crucial respect I’m being much more open and transparent about the letter than he is: I’m linking to it. He’s not.
There’s no legal or journalistic reason why Sorkin shouldn’t link prominently to the letter. When I spoke to Richard Samson, the NYT’s top lawyer on such matters, he was clear that although there are copyright reasons why the NYT might not post the letter itself, there’s absolutely nothing to stop the paper from linking to where the letter is posted elsewhere. And in general, Sorkin’s Dealbook blog is pretty good when it comes to external links.
I see a few possible reasons why Sorkin might not link to the letter, none of them good.
First, he might be moving Dealbook away from the blog concept (and it was always more of an email newsletter than a blog to begin with) to something much more self-contained. Dealbook has been hiring aggressively, and is clearly setting itself up in opposition to, and in competition with, other online sources of financial news. Maybe that makes Sorkin more hesitant to link out than he was in the past.
Alternatively, maybe Sorkin is happy to link out in theory, but he has problems linking specifically to the relatively juvenile and tabloid Dealbreaker. I don’t think that’s true: Dealbook does link to Deabreaker on a semi-regular basis.
There’s a couple of other possibilities, too, which are more worrying. Perhaps Sorkin got the letter directly from Loeb himself, on the condition that he not publish it, and he felt that linking to it would violate the spirit of that agreement. Or maybe there was no formal agreement at all, but Sorkin just felt that linking to the letter would annoy Loeb, and therefore decided not to do so in order to help maintain his relations with a source.
Or maybe it was just an oversight, further evidence that linking to primary sources simply isn’t very important at the NYT.
My hope, as Dealbook beefs up, is that it’s going to become more, rather than less, bloggish — that it’s going to spend as much effort on aggregating and curating news and information from around the web as it is on breaking that news itself. Indeed, one would expect Dealbook to have linked to Loeb’s letter before Sorkin’s column appeared.
Of course, the coming NYT paywall is going to make such bloggishness difficult, but difficult need not mean impossible. Let’s hope Sorkin hasn’t given up on many of the possibilities of the online medium before he’s even really got going.
Deals wrap: Who’s tuning into RadioShack?
Jul 20th
Blackstone Group and TPG Capital are unlikely to continue to pursue a possible bid for RadioShack, two sources familiar with the situation said. The electronics company had a handful of private equity firms circling but interest appears to be waning. * View article
Private equity firms have incentives both to buy and sell right now. Pressure is on to invest billions of dollars raised in 2006-2008 as the end of those funds’ investment periods approach, while funds are also keen to sell or take public existing investments to reward under-pressure investors. * View article
Hedge funds have cut back their bets over a volatile summer for financial markets, worried that big swings in investor sentiment are playing havoc with their carefully-researched trades. * View article
Andrew Ross Sorkin takes a closer look at Playboy and asks, Why should Hefner have all the fun? * View NYT article
In giving its Asia chief executive the chop, AIG may have unlocked two deals. First, the flotation of its AIA division in Hong Kong, which should now go ahead after a false start. Second, an eventual merger between AIA and the Asian portion of its big rival — and recent failed suitor — the UK’s Prudential. * View article
Raymond J. Learsy: The New York Times’ Timely Whitewash of Goldman Sachs
Jun 18th
At this critical moment while the House and Senate are merging the final measure of the most significant changes to financial regulation since the Great Depression, Goldman Sachs is fighting tooth and nail to water down Congress’ Financial Regulatory Reform Bill before it comes to a vote in the next days. It is a moment for the ‘old boy’ network to go into high gear.
Goldman’s objective is to protect its massive proprietary trading desks, the source of much of its profits and the focus of the new bill. The bill reportedly incorporates a tough ‘Volcker Rule’ (please see “As Banks Win, We Lose Twice: The Urgent Need for a Tough Volcker Rule” 06.04.10) prohibiting banks engaged in commercial lending and thereby having access to federally insured deposits, access to myriad federal programs and bountiful Federal Reserve funds at the Fed window to engage in naked trading (placing bets on commodities and financial instruments in which they or their clients have no business interest- i.e. taking out fire insurance on someone elses house, as a grim hypothetical).
It is , what Goldman, once having been a classic investment bank, helping to finance businesses and grow the economy, now does most profitably. In other realms its known as playing casino with the house’s money, and the Volcker Rule would bring it to a stop. It would cause them to move their ‘proprietary’ trading activities to other entities where they no longer have preferred access to the banking system and implied federal guarantees thereby placing the entire system at risk as was the case with much of Wall Street during the recent meltdown.
So just this week along comes a great whitewash orchestrated by the New York Times and their star financial reporter, Andrew Ross Sorkin author of the best seller, “Too Big to Fail: The Inside Story of How Wall Street and Washington Fought to Save the Financial System — and Themselves “
In a column published earlier this week in the New York Times “One Crowd Still Loyal to Goldman Sachs” 06.14.10 Mr. Sorkin begins “Despite all the bad headlines-…” and then goes on to regale us with all the big names singing hosannas to Goldman. “We trust them” rings forth Jeffrey Immelt the CEO of General Electric. “Goldman has been politicized, and its important to look beyond the demagogy…” he quotes the chief financial officer of Aetna, Joseph M. Zubretsky . Not left out is Warren Buffett “who has invested billions” in Goldman and has come to the defense of Goldman’s actions (please see “A Tale of Two Companies–Goldman Sachs and BP ) in a curious application of ‘caveat emptor’ as in the now infamous ‘Abacus’ deal. Here Buffet instructs us, in effect, that if Goldman was selling you a used car with faulty brakes under the banner of a ‘Moody’s Triple A’ rating and the imprimatur of what once was one of the most hallowed names on Wall Street, it is the buyers fault if he/she didn’t check out the brakes by examining the underside of the car before the smash up. Sadly, that is what much of Wall Street has come to.
And then Mr. Sorkin, treating us as though we were all sitting in the corner with a dunce cap on, tries to smooth over “accusations that Goldman sometimes wore multiple, seemingly conflicting hats”. He cites Hyatt Hotels and its chairman Mr. Thomas J. Pritzker. It seems that when Goldman was advising Hyatt Hotels about selling a stake in its hotel chain and an investor dropped out, “Goldman’s own private equity arm swooped in. Did Goldman profit? Probably. But Mr Prizker was just glad the deal got done”. Sorkin thereby leaves us with the impression that Goldman’s multi-tasking is just fine. Gainfully leaving the reader confused between Goldman’s function as an investment banker and its proprietary trading, thereby bringing succor to those who would do away with the Volcker rule in the new Financial Reform Legislation .
Oh yes, and by the way, Goldman Sachs advises the New York Times Company.
More on The Fed
The Goldman defenders
May 4th
Is it just me, or are the defenders of Goldman Sachs becoming more vocal and more numerous these days? Andrew Ross Sorkin today seems to come down squarely on the side of Warren Buffett and Bill Ackman, defending Buffett from accusations that his stance on Goldman is self-serving (”his stake in Goldman is more a loan than an investment, so he’ll no doubt be paid no matter what happens with the Abacus suit”) and agreeing with Buffett that there seems to be something of a witch-hunt going on:
With so many easy targets of the financial crisis — Fannie Mae, Freddie Mac, A.I.G., Bear Stearns, Lehman Brothers — it does seem odd that the government, and the public, has chosen to vilify one of only a couple of firms that made fewer mistakes than the rest.
The problem is that this makes no sense. Does Sorkin really believe for one moment that the other firms on his list haven’t been vilified? After all, he himself wrote a column last year explaining that that the vilification at AIG was so bad that you wouldn’t want to work there for less than $3 million a year.
More invidiously, Sorkin twice plays the cunning game of stating the SEC case against Goldman in ways that makes it easy to criticize. “The S.E.C. has accused Goldman of not disclosing that the Abacus instrument was devised in part by a short-seller, John Paulson, who stood to gain by betting against it,” he writes, accurately enough, and then lays out the opposite case:
“For the life of me, I don’t see whether it makes any difference whether it was John Paulson on the other side of the deal, or whether it was Goldman Sachs on the other side of the deal, or whether it was Berkshire Hathaway on the other side of the deal,” Mr. Buffett said…
One Berkshire shareholder who has been a regular in Omaha is Bill Ackman…
In recent days, he has gone even further than Mr. Buffett in his defense of Goldman, suggesting it would have been unethical for the firm to disclose Mr. Paulson’s position in the Abacus deal. He says that Goldman, as the market maker, had a duty to protect the identity of both sides of the transaction.
He agrees with Mr. Buffett that as an investor, he would not have considered it necessary to know that Mr. Paulson had helped select the securities.
But this is a bit of a straw man, as Sorkin well knows. The heart of the SEC case is not that Goldman failed to disclose Paulson’s name. It’s that Goldman failed to disclose the fact that the sponsor of the deal, the fund which was paying Goldman $15 million to put it together, was going short the entire thing. The Magnetar disclosure, for instance, which the SEC presented to Goldman as an example of what the bank should have done, never actually reveals Magnetar’s name or identity. But it does make it clear that the Initial Preferred Securityholder might be shorting the deal and that its interests are not necessarily aligned with those of the investors.
What’s more, Buffett and Ackman have made their careers, and become extremely wealthy, by analyzing and picking individual securities. That’s what they’re especially good at. Neither of them in a million years would invest in a CDO managed by someone else, like ACA: they compete with the likes of ACA. IKB, by contrast, specifically asked for an independent CDO manager, and said that it would not be happy with Goldman itself selecting the contents of the CDO. That’s not the kind of action that you’d expect from someone who thinks that a simple list of reference securities comprises “all the relevant facts that any investor would need”, in Sorkin’s words.
ACA, here, is a bit like a mutual fund manager, and IKB was an investor in that fund. The argument from Buffett and Ackman is essentially that so long as fund investors know what their fund manager is investing in, they shouldn’t really care who that manager is. It’s silly, especially coming as it does from two men who have made a fortune by setting themselves up as great stewards of other people’s money.
John Gapper is much more sensible on the whole affair, throwing prior Buffett statements back at him, especially the one from 2002 where he complains that derivatives are nearly always mispriced until it’s far too late. He says that “the shareholders of Berkshire Hathaway were disappointed by Warren Buffett’s defence of Goldman Sachs”, while Sorkin prefers to say that “by the end of Berkshire’s annual meeting, at least some of the 40,000 shareholders in attendance who had been skeptical of Goldman” had come around to Buffett’s way of thinking. I suspect that Gapper’s characterization is the more accurate.
But it seems that Goldman is drumming up a certain amount of what it likes to think of as “third-party validators” these days, including this astonishing statement from law professor Richard Epstein:
At the time of the ill-fated Goldman transaction, no one in the CDO market thought they were governed by any full disclosure regime. It was everyone for himself, and for good reason.
Hm. I wonder, in that case, why there was a 196-page prospectus for the deal, full of dense, disclosure-filled legalese.
Linking would have prevented Sorkin’s errors
Apr 13th
Joe Weisenthal is right to adjudicate the beef between Paul Krugman and Andrew Ross Sorkin in favor of Krugman, who clearly never said what Sorkin says he said. And that’s not the only error in Sorkin’s column. For instance:
Every couple of months the Treasury Department takes a moment to strategically leak some good news about the bailouts. It happened again on Monday, when a Treasury official told The Wall Street Journal that America’s coffers would be only $89 billion lighter after all accounts were settled from the rescues, down from an earlier estimate of $250 billion…
Of course, there’s a small problem with all this happy Washington math: it doesn’t take into account the piles of cash we’re likely to lose on Fannie Mae and Freddie Mac, the huge mortgage finance companies.
But look at the WSJ story that Sorkin references:
Treasury Department officials say the tab is likely to reach $89 billion, which includes the Troubled Asset Relief Program, capital injections into Fannie Mae and Freddie Mac, loan guarantees by the Federal Housing Administration and Federal Reserve moves such as buying mortgage-backed securities and propping up the commercial-paper market.
The lesson here, I think, is simple: link! If Sorkin had simply provided a link to the WSJ story, it would have been much more obvious that the new estimate includes Frannie bailout monies. And if he had felt the need to link to Roubini and Krugman when characterizing their opinions, he would probably never have ended up so far off base.
Linking isn’t just being polite: it makes you a better journalist. And it should be compulsory in any article or column which mentions material easily available on the internet.
Update: My bad: Sorkin was right and I was wrong, the $89 billion does not include most of the Frannie losses, as the WSJ story (which Sorkin still should have linked to) finally gets around to saying at some point after I’d stopped reading it. But my point about linking stands! Not least because it was easy to follow my link and find my error.
Yves Smith: SEC, Fed Alerted By Merrill of Lehman Balance Sheet Games in March 2008
Mar 19th
So which theory is it: stunning bureaucratic incompetence, wishful thinking and denial, or a cover up? Or a combination of the above?
No matter which theory or theories you subscribe to, the continuing revelations of how the SEC — and perhaps more importantly, the New York Fed — conducted themselves in the months before Lehman’s collapse, paint an increasingly damning picture.
The Valukas report shows both regulators were monitoring Lehman on a day-to-day basis shortly after Bear’s failure. They recognized that it had a massive hole in its balance sheet, yet took an inertial course of action. They pressured a clearly in-denial Fuld to raise capital (and Andrew Ross Sorkin’s accounts of those efforts make it clear they were likely to fail) and did not take steps towards any other remedy until the firm was on the brink of collapse (the effort to force a private sector bailout as part of a good bank/bad bank resolution).
One of the possible excuses for the failure to do more was that the officialdom did not recognize how badly impaired Lehman was until too late in the game to do much more than flail about. But that argument is undercut by a story in tonight’s Financial Times.
Merrill warned both the SEC and the Fed in March 2008 that Lehman was engaging in balance sheet window dressing of a serious enough nature for it to put pressure on Merrill (as in it was making Merrill look worse relative to the obviously impaired Lehman).
When a company under stress makes fraudulent statements about its financial condition, it is a sign of desperation, and possibly imminent collapse. The fact that Merrill, with a little digging, could see that Lehman’s assertions about its financial health were bogus says other firms were likely to figure it out sooner rather than later. That in turn meant that the Lehman was extremely vulnerable to a run. Bear was brought down in a mere ten days. Having just been through the Bear implosion, the warning should have put the authorities in emergency preparedness overdrive. Instead, they went into “Mission Accomplished” mode.
This Financial Times‘ story provides yet more confirmation that Geithner is not fit to serve as a regulator and should resign as Treasury Secretary. But it may take Congress forcing a release of the Lehman-related e-mails and other correspondence by the New York Fed to bring about that outcome.
From the Financial Times:
Former Merrill Lynch officials said they contacted regulators about the way Lehman measured its liquidity position for competitive reasons. The Merrill officials said they were coming under pressure from their trading partners and investors, who feared that Merrill was less Âliquid then Lehman…
In the account given by the Merrill officials, the SEC, the lead regulator, and the New York Federal Reserve were given warnings about Lehman’s balance sheet calculations as far back as March 2008.
Former and current Fed officials say even in the competitive world of Wall Street, it is unÂusual for rival bankers to relay such concerns to the Fed.
The former Merrill officials said they contacted the regulators after Lehman released an estimate of its liquidity position in the first quarter of 2008. Lehman touted its results to its counterparties and its investors as proof that it was sounder than some of its rivals, including Merrill, these people said…
“We started getting calls from our counterparties and investors in our debt. Since we didn’t believe the Lehman numbers and thought their calculations were aggressive, we called the regulators,” says one former Merrill banker, now at another big bank…
Merrill officials said their calculations led them to believe that Lehman included what is known as regulatory capital in its calculation of excess liquidity. Executives at other banks say that is improper…
Mr Valukas said in his report that the banks interacting with Lehman may have suspected Lehman was incorrectly calculating its liquidity. In September 2008, days before it collapsed, Lehman maintained that it had about $50bn in readily accessible funds, though at the end it had nothing like that amount.
More on Lehman Brothers
Huff TV: Arianna On ‘Real Time’: The Middle Class Is Crumbling
Mar 6th
Arianna weighed in on the state of the American middle class Friday during an appearance on “Real Time With Bill Maher.” Andrew Ross Sorkin was also a guest.
While Maher railed against the show “Undercover Boss” for its condescending prince-and-the-pauper approach, Arianna argued that there’s a reason that people connect with the show: it shows people working hard and not being rewarded.
“Thirty years ago, the CEOs that are in ‘Undercover Boss’ were making 30 times as much as their working people. Now, they’re making 300 times as much! We’re about to become Venezuela, or Brazil, you know where the people at the top are basically behind they’re gates with guards to protect their kids from kidnapping. The middle class is crumbling and that’s the country we’re going to become… if we don’t fundamentally change where we’re going.”
Arianna explained that the anger driving Michael Moore is the same as the anger felt by those in the Tea Party movement. “It’s the anger about that fact that what is happening is not fair, that the fix is in, that the system is rigged, and that people who are working hard are not really getting rewarded. And the people at the top who brought us to the financial brink were actually bailed out by the taxpayers.”
WATCH:
WATCH: More of the discussion
More on Tax Day Tea Parties
On Monday’s NewsHour …
Mar 2nd
On the PBS NewsHour this Monday night:
CHILE LATEST | Full coverage of the latest developments in Chile, following the weekend’s earthquake. The death toll has now risen above 700, and the world is offering aid to assist in rescue and relief efforts. Gwen Ifill reports, then talks to Pascale Bonnefoy of Global Post in Santiago. Then, Judy Woodruff talks to Nan Buzzard of the American Red Cross; and David Applegate of the U.S. Geological Survey.
AIG SALE | Part of insurance giant AIG was sold today to Prudential, one of Britain’s largest financial institutions. Andrew Ross Sorkin of the New York Times analyzes the deal, and tells us what it means for U.S. taxpayers, who invested $180 billion in AIG to prevent the company from falling apart.
COLORADO BUDGET | With many states around the country experiencing very tough budgetary times, Tom Bearden reports tonight from Colorado on the impact on one community: the state’s homeless.
SUPREME COURT | Marcia Coyle of the National Law Journal will have the latest from Monday’s Supreme Court session.
O, CANADA | With the Olympic Games over, we look at their impact on Canada’s national psyche. Our guest: Ian Hanomansing of the Canadian Broadcasting Corporation.
Gwen Ifill and Judy Woodruff anchor the broadcast tonight. And Kwame Holman will have the rest of the day’s news from our newsroom. He’ll also detail some of the features on our site including links to GlobalPost’s Chilean quake coverage and an interview about a new Pew Research Center study on the changing demands of news consumers.
We hope you’ll join us.
David Fiderer: How Paulson’s People Colluded With Goldman to Destoy AIG And Get A Backdoor Bailout
Jan 25th
Too Big To Fail is revelatory, though not in the way Andrew Ross Sorkin intended. The book offers startling evidence that Hank Paulson and his deputies colluded with Goldman to create a liquidity crisis at AIG, and to manipulate the government funding a backdoor bailout of AIG’s CDO counterparties, most notably Goldman. It’s not that Sorkin’s sources recounted the truth. Quite the opposite. Rather, they told him stories that were so transparently dishonest that the truth emerges by way of negative implication.
To understand what happened, you need to remember that the top guys at Goldman are really, really smart. They are like champion chess players who anticipate the possible moves of their opponent. The guys at Goldman can quickly grasp how pieces of a financial transaction work together, like the pieces on a chessboard, to game out different scenarios. This attribute is not unique to the guys at Goldman; it’s an essential quality of every good banker. But it does mean that the guys at Goldman cannot credibly profess to being oblivious.
The other thing that you must remember is that the dagger hanging over AIG and Goldman – the eventual payout to the CDO counterparties – was a zero-sum game between the two financial giants. On June 30, 2008, AIG’s net worth was $79 billion and its CDO obligations totaled $62 billion. On August 27, 2008 Goldman’s net worth was $42 billion and its share of the infamous CDO portfolio was $22 billion. The stakes were huge.
Also, none of the critical elements that led to AIG’s demise were obscure. In retrospect they seem quite obvious. Unfortunately, few in the financial media have attempted to understand those critical elements.
Before we get to the liquidity crisis at AIG, we need to go back to that special relationship between Goldman and AIG…
Goldman bought credit protection exclusively from AIG because:
Like its peers, Goldman underwrote billions of dollars of toxic securities known as subprime collateralized debt objections, or CDOs, and simultaneously bought credit protection on those CDOs in the form of credit default swaps. But Goldman was unique in that it only bought protection from AIG Financial Products, or AIGFP, and no one else. Under normal standards of risk management, this approach is imprudent; a bank should diversify its risk exposures whenever it can. Given that AIG was Goldman’s biggest client, and that the CDO exposure at AIG was a huge part of Goldman’s equity base, it’s inconceivable that Hank Paulson, Goldman’s CEO until June 2006, would not have been regularly briefed on this matter. The same goes for Goldman’s board of directors. It’s a very basic and essential part of any bank’s risk management and corporate governance.
It’s also a basic tenet of risk management to game out the different scenarios under which Goldman might seek recovery under its credit default swaps. Based on that analysis, the choice to deal exclusively AIG, in retrospect, seems very obvious, for four reasons set forth below.
1) AIG Financial Products was not regulated, whereas the monolines were;
This is one of those really basic things that few in the media seems to grasp. The other large companies offering credit protection on the CDOs were the monoline insurance companies, names like MBIA or AMBAC. AIGFP was not regulated, whereas the monolines were. A regulator can order an insurer to withhold any payout that might impair that company’s ability to service its other policyholders. That’s precisely what the New York State Insurance Department did last April, when it ordered Syncora, the monoline formerly known as XL Capital Assurance, to suspend payments. This state’s regulatory authority to interfere with the terms of a contract proved to be a powerful hammer. It incentivized the CDO banks to negotiate haircuts on their claims throughout 2008.
A lot of people compare the settlements with the monolines with those at AIGFP and wonder why the monolines negotiated better deals. But in fact, they are comparing apples and oranges. The only government entity legally authorized to interfere with AIGFP’s contracts was a bankruptcy court. But even that authority had been seriously curtailed.
2) AIGFP was willing to post cash collateral, which was outside the grasp of a bankruptcy judge;
Here’s another very basic thing. The credit protection sold by the monolines included financial guarantees as well as credit default swaps, whereas AIGFP extended only credit default swaps. A credit default swap is a financial derivative. One of the common, and insidious, attributes of financial derivatives is that a counterparty may need to post margin, or cash collateral, whenever the spot value of its contractual claim turns negative. Here’s an overly simple example: Suppose AIG promised to sell Goldman one barrel of oil on January 25, 2011 for $80, and then on June 25, 2010 spot price is $100 (i.e. an implicit $20 loss). AIG would post $20 in collateral with Goldman. If the spot price falls to $65 on July 25, then AIG would get its $20 collateral returned, and also receive $15 in collateral deposited by Goldman.
As a rule the monolines were unwilling to sign any contract that required them to post collateral. They accrue insurance reserves and, again, insurance regulation is predicated on the idea that one policyholder ‘s recovery should leapfrog ahead of all the others. But that’s precisely the idea behind posting collateral on a derivative. If AIGFP filed for bankruptcy, Goldman would be entitled to immediately liquidate the credit default swap and permanently keep its cash collateral; a bankruptcy judge could not touch it. The recently amended bankruptcy code clarified the special priority given to derivative counterparties over other creditors.
So, as you would expect, It wasn’t simply the support of the regulators that gave the monolines the upper hand in negotiating with the CDO counterparties; it was also the fact they they held the cash.
3) AIGFP would have been wiped out by a bankruptcy filing, because it was active in financial trading;
There’s another reason why the monolines had the upper hand, whereas AIGFP did not. Bankruptcy was always a viable option for the monolines, whereas it was not for AIGFP. Aside from its book of business providing credit support for CDOs, AIGFP was very active in all sorts of financial trading of all sorts of derivatives. The monolines were not really involved in that business.
The vast bulk of business done by financial traders is hedged, meaning there are always two back-to-back contracts. Another overly simple example: If AIG promised to sell Goldman one barrel of oil on January 25, 2011 for $80, AIG would simultaneously contract with Morgan Stanley to buy one barrel of oil on January 25, 2011 for $78, and lock in the $2 profit. Throughout the next 12 months, any profit from one contract would correspond to the loss on the other. But if AIG filed for bankruptcy on June 25, 2010, Goldman could choose to liquidate its contract and hold on to its collateral, whereas Morgan Stanley might still insist of selling the oil on the later delivery date. The hedge would then become unwound, and suddenly expose AIG to a huge trading loss.
The preferential treatment given to derivatives subverts the entire purpose of a bankruptcy filing, which is to buy time for an orderly restructuring. For AIGFP, the downside risk of a bankruptcy filing was vast and unknown, which was not the case for the monolines.
Because Goldman is very savvy about trading risk, it must have mapped out an endgame enabling it to declare “checkmate” once AIG were backed into a corner.
4) AIG did not understand what it was doing; it relied on the rating agencies.
But if Goldman was so smart, how could AIG be so dumb? There’s a short answer and a long answer. The short answer is three little letters: AAA. The long answer gets to the same result; it just takes a longer while to get there.
According to Michael Lewis’s reporting in Vanity Fair, the guys at AIGFP were clueless:
Toward the end of 2005, Cassano [the head of AIGFP] promoted Al Frost, then went looking for someone to replace him as the ambassador to Wall Street’s subprime-mortgage-bond desks. As a smart quant who understood abstruse securities, Gene Park was a likely candidate. That’s when Park decided to examine more closely the loans that A.I.G. F.P. had insured. He suspected Joe Cassano didn’t understand what he had done, but even so Park was shocked by the magnitude of the misunderstanding: these piles of consumer loans were now 95 percent U.S. subprime mortgages. Park then conducted a little survey, asking the people around A.I.G. F.P. most directly involved in insuring them how much subprime was in them. He asked Gary Gorton, a Yale professor who had helped build the model Cassano used to price the credit-default swaps. Gorton guessed that the piles were no more than 10 percent subprime. He asked a risk analyst in London, who guessed 20 percent. He asked Al Frost, who had no clue, but then, his job was to sell, not to trade. “None of them knew,” says one trader. Which sounds, in retrospect, incredible. But an entire financial system was premised on their not knowing–and paying them for their talent! [Emphasis added.]
It seems less shocking if you understand how these CDOs were put together and sold. Take a few minutes and glance over the prospectus for Davis Square Funding VI, one of the dozens of CDOs structured by Goldman before the risk was laid off on AIG. You could spend all day studying the document, but you will never be able to answer the question, “What am I buying?” The document doesn’t tell you. That’s the point. It’s evident in every aspect of this document and the offering circulars for most of the other CDOs. The business purpose, the essence of the deal, can be summarized in one word: obfuscation.
Goldman argued that these CDOs were put together to meet market demand, but demand for what? These subprime CDOs were not financing anything (the underlying mortgages and mortgage securities had already been financed), nor were they promoting liquidity in the marketplace (they couldn’t be traded because nobody knew what was in them).
If you wanted to invest in a diversified pool of subprime mortgages, there was no reason to waste hours and hours studying the impenetrable documentation of a CDO. Instead, you could look into any subprime mortgage deal, like MASTR Asset Backed Securities Trust 2005-NC2. Skim the prospectus for five minutes, and you know that the deal is comprised of 3,380 subprime mortgages, all of which were originated by New Century Financial, 55% of which were in California, 100% of which are interest only, 60% of which closed with second liens, 58% of which relied on “stated documentation,” and 83% of which had prepayment penalties. If you don’t like MASTR 2005-NC2, you can easily compare it with hundreds of other stellar transactions.
Remember, AIGFP only assumed risk exposure on the “super senior” classes, or tranches, of these CDOs. They only assumed the risk on paper that was rated AAA. Therein lies the faulty assumption that AIG and almost everyone else made before they ever started slogging through the impenetrable documentation. It’s rated AAA so you don’t need to worry about the details. The offering circular for Davis Square Funding VI is just like the offering circular for Davis Square Funding VII and countless other CDOs. It tells you Moody’s Expected Loss Rate on a credit rated Aaa. After 20 years, the cumulative loss is 0.02 percent. It doesn’t tell you that the deal was structured to make a sham of the due diligence process.
People who bought these CDOs looked at the ratings and almost nothing else. They relied on Goldman and the rating agencies to make sure that everything was OK.
Which again brings us to the issue of posting collateral. As a matter of policy, financial institutions rated AAA or AA almost never agree to post collateral on their derivative trades. (That’s one reason why big banks find trading to be so profitable.) The only reason why the guys at AIGFP would have ever agreed to post collateral back in 2005 or 2006 is because they thought there was no way in hell that these CDO tranches rated AAA would never be valued at anything below par.
But Goldman’s credit default swaps would not trigger a bankruptcy, because there was no way to figure out their market value.
Goldman started harassing AIGFP to start posting cash collateral as early as August 2007, when the matter went to the “highest levels” at Goldman Sachs.
But Goldman met with limited success, for obvious reasons. The idea that these CDOs could be marked to market is a joke. There never was any real market of buyers and sellers of these things. AIG’s auditor, PricewaterhouseCoopers, and the Fed’s auditor, Delloite & Touche, determined under fair value accounting rules that there was no way that the CDO obligations could be valued according to any market benchmark.
AIG and Goldman had spirited talks over the amount of posted collateral for over a year, but those talks had remained at an impasse. No one could agree on the CDOs’ “market value.” So long as AIG was solvent, the inability to quickly ascertain the CDOs’ value worked in AIG’s favor. Later, when AIG faced a liquidity crisis, the inability to quickly ascertain the CDOs’ value worked against AIG.
Various side deals mask the true magnitude of Goldman’s participation in AIG’s CDO portfolio.
According to the AIG memo on CDO exposures, dated November 27, 2007, obtained by CBS News, Goldman’s CDOs represented about a third of the $67 billion total. But that may have been understating Goldman’s role in building up the portfolio. About 16 of Societe Generale’s trading positions were for CDOs that were arranged by Goldman. Apparently, one way that Goldman would offload CDOs would be to sell them, along with credit protection from AIG, as a package deal. In other words, some of the banks never seriously intended to hold the CDOs in the first place. But Goldman used them as a front for its own syndicating efforts.
Later, around the time Tim Geithner was brought in to settle the CDO matter, Goldman pulled another stunt to make it appear as if its CDO exposure to AIG was smaller than it actually was. The transaction is alluded to in a couple of obfuscatory paragraphs (pages 16 and 17) in Neil Barofsky’s SIGTARP report on the AIG bailouts. It appears as if Goldman suddenly sold $8 billion in CDOs to Deutsche Bank, so that it would appear as if Goldman’s share of the total would look smaller. But the only way that Deutsche Bank would have bought the stuff is if there were no risk involved.
On September 15, 2008, the rating agencies thought that AIG’s CDO portfolio looked just fine.
The Washington Post printed a 2,700-word article about AIG’s internal e-mails during 2007, when the guys at AIGFP kept insisting that the CDOs did not present any kind of troublesome risk. But the Post left out a critical element in the narrative. At that time, virtually all of the 148 CDO trades, listed in a November 27, 2007 memo obtained by CBS, were still rated AAA.
In fact, most of these CDOs were first downgraded in May 2008, the same month that AIG was downgraded from Aa2 to Aa3. At the time, the CDO downgrades were fairly insignificant. Of course we don’t know why the CDO downgrades occurred when they did, because we don’t really know what’s inside of them. But consider how bad the damage was by May 2008. Among the subprime bonds that comprised the ABX 2006-1 index, the average foreclosure rate was already 25%.
Was AIG really too big to fail? Maybe if you worked for Goldman.
The party line, expressed in Too Big To Fail and elsewhere, is that an AIG bankruptcy posed a greater systemic risk than a Lehman bankruptcy, because AIG was so much bigger. But that analysis is highly superficial and very misleading. AIG itself was a holding company, which guaranteed the debt of its unregulated financial subsidiary, AIGFP. The lion’s share of AIG’s revenues and profits, and about 80% of its consolidated assets, were concentrated among its different insurance company subsidiaries. Those insurance companies were solvent. They did not pose any systemic risk. In fact, it’s quite likely that they would have continued to operate outside of bankruptcy.
The only subsidiary with major problems was AIGFP, whose financial obligations were guaranteed by the parent. But AIGFP was only about one-third the size of Lehman. It’s almost impossible to see how AIGFP ever posed a systemic risk, unless everyone’s intention to provide a backdoor bailout to the banks. Put another way, it seems that the only reason that the government needed to step in for AIG was to provide a backdoor bailout to its banks.
Goldman’s scheme to create a liquidity crisis at AIG, in order to manipulate the government into paying CDO counterparties 100 cents on the dollar
Because of laws that emasculated regulatory oversight, Goldman’s trading positions in credit derivatives with AIG had escaped the scrutiny of the Fed until September 11 or 12, 2008, when AIG told the New York Fed that it would soon run out of cash. The CDOs did not trigger a liquidity crisis at AIG, at least, not directly. Rather, it was the imminent cash drain from anticipated downgrades, from AA- to A-, which would trigger $30 billion in new collateral postings on AIGFP’s trading positions. In addition, someone at the company had screwed up. They had invested billions in cash collateral, intended for someone else, in highly rated mortgage securities, for which there was suddenly no liquid market. So AIG needed to come up with the cash right away.
Simultaneously, of course, Lehman Brothers was imploring the government for support, and Paulson’s position, at least on September 12, 2008, was that the Federal government would provide no support of any kind to bail out a private company like Lehman or AIG. Private bankers must come up with a private solution on their own.
On September 15, 2008, the same morning that Lehman’s bankruptcy sent shockwaves, Geithner had convened a meeting with JPMorgan Chase and Goldman to work on an emergency bridge financing for AIG. Why include Goldman? Traditionally, the bank with the largest credit exposure to distressed borrower helps arrange the debt restructuring. Geithner opened the meeting, and left soon thereafter, leaving Paulson’s deputy, Dan Jester, in charge. Jester was a former Goldman banker whom Paulson had plucked in July 2008 to work on matters that concerned Paulson.
September 15, 2008: Paulson’s deputy sabotages efforts to negotiate a private bank deal.
Sorkin describes the opening of the Monday morning meeting:
“Look, we’d like to see if it’s possible to find a private-sector solution,” Geithner said addressing the group. “What do we need to do to make this happen?”
For the next ten minutes the meeting turned into a cacophony of competing voices as the banks tossed out their suggestions: Can we get the rating agencies to hold off on the downgrade? Can we get other state regulators of AIG’s insurance subsidiaries to allow the firm to use those assets as collateral?
Geithner soon got up to leave, saying, “I’ll leave you with Dan,” and pointed to Jester, who was Hank Paulson’s eyes and ears on the ground. “I want a status report as soon as you come up with a plan.”
A critical point here is that Pauslon’s deputy, not Geithner, sat at the table to lead government negotiations.
Job 1 was to persuade the rating agencies to forestall their anticipated downgrades, which would have burned up billions because of increased calls to post collateral. This task was assigned to the government’s representative, Dan Jester.
“He was as useless as tits on a bull.” [AIG CEO] Bill Willumstad, normally a calm man, was in an uncharacteristic rage as he railed about Dan Jester of Treasury, while telling Jamie Gamble[a lawyer at Simpson Thatcher] and Michael Wiseman [a lawyer at Sullivan & Cromwell] about his and Jester’s call to Moody’s to try to persuade them to hold off on downgrading AIG.
Willlumstad had hoped that Jester, using the authority of the government and his powers of persuasion as a former banker, would have been able to finesse the task easily.
Willumstad explained that the original plan “was that the Fed was going to try to intimidate these guys to buy us some time.” Instead, when Jester finally got on the phone, “he didn’t want to tell them.” Clearly uncomfortable with playing the heavy, Willumstad told them that Jester could only bring himself to say, “We’re all here, and, you know, we got a big team of people working and we need an extra day or two.”
If Jester spoke to Moody’s the way Willumstad said he did, then there is no doubt in my mind that Jester intended to sabotage the deal. No other explanation is plausible. The importance of the phone call was not unlike that of a death row lawyer seeking a last minute stay of execution. Jester had been the Deputy CFO at Goldman. It would have been his job to deal with the rating agencies regularly. There is no way that he would not have known what to say. All he would need to say is that since AIG’s last meeting with Moody’s, the situation is evolving in a way so Treasury and the Federal Reserve are feeling increasingly confident that the deal being hammered out will significantly ameliorate the company’s liquidity issues. Everyone knows that the rating agencies do not like to abruptly pull the trigger when a situation is still evolving. Everyone also knows that the rating agencies are acutely aware of their chicken/egg role they play in determining a firm’s liquidity situation. (A company has access to the capital markets because of its rating, but its rating reflects its access to the capital markets.) Also, as Janet Tavekoli once mentioned, investment banks train their analysts about how to place pressure on the rating agencies. Finally, it would not have been indelicate to allude to the agencies’ no-so-clean hands in building up the AAA pyramid scheme known as AIGP’s CDO portfolio.
An in case there were any doubt that Jester’s refusal to act as an advocate for AIG made the critical the difference, here’s how Jimmy Lee, of JPMorgan Chase, tallied the numbers on the morning following the downgrades. “They [AIG] have $50 billion in collateral and they need $80 to $90 billion. I don’t know how we can bridge the gap.” Because of the ratings downgrades, AIG posted an additional $32 billion by quarter’s end. In other words, they would have needed about $32 billion less if the downgrades had not taken place.
Minutes after Jimmy Lee briefed his boss, Jamie Dimon. Geithner, Jester Lee and the people from Goldman sat down to figure out what to do next.
September 16, 2008: Paulson installs a CEO at AIG who will favor Goldman.
And a few minutes after Goldman, JPMorgan Chase and the government tried to figure out what was next, at 9:40 a.m., September 16, Goldman CEO Lloyd Blankfein placed a call to Hank Paulson, which Paulson took, even though such communication was illegal. According to Sorkin’s sources, they discussed Lehman and not AIG. Just at the moment when the government was deciding whether to step in and save AIG, Blankfein never mentioned that an AIG collapse could have easily wiped out $15 billion in Goldman’s equity and caused everyone to scrutinize the dodgy CDOs underwritten during Paulson’s tenure. Do you think they just forgot?
As it happened, a few minutes after Paulson got done speaking with Blankfein, Geithner briefed Paulson about a tentative proposal for the government to extend AIG an $85 billion facility. The conversation with Geithner ended at 10:30 a.m.
Sorkin’s sources fabricated a tall tale about what took place afterward:
However resistant Hank Paulson had been to the idea of a bailout, after getting off the phone with Geithner, who had walked him through the latest plan, he could see where the markets were headed and that it scared him. Foreign governments had already been calling Treasury to express their anxiety about AIG’s failing.
Jim Wilkinson [Paulson's deputy, formerly of the White House Communications office] asked incredulously,” are you really going to rescue an insurance company?”
Paulson just stared at him as if to say only a madman would stand by and do nothing.
Ken Wilson, his special advisor, raised an issue they had yet to consider. “Hank, how the hell can we put $85 billion into this entity without new management?”– a euphemism for how the government could fund this amount of money without firing the current CEO and installing its own. Without a new CEO, it would seem as if the government was backing the same inept management that had created this mess.
“You’re right. You’ve got to find me a CEO. Drop every other thing you are doing,” Paulson told him. “Get me a CEO.”
Their choice: Ed Liddy, the former CEO of Allstate and Goldman board member.
The “same inept management that had created this mess”? It’s impossible to overstate the mendacity embedded in that brief passage from Sorkin’s book. If Paulson actually spoke what was on his mind at the time, the words would have been something like this:
“So if we don’t bail out AIG, then Goldman takes a $15 billion hit to its equity and faces shareholder lawsuits for actions taken under my watch. And Willumstad, the new AIG CEO who joined management after all these toxic CDOs were booked, will find it very convenient to also point the finger of blame at Goldman. [Willumstad joined AIG's board in April 2006, and became CEO in June 2008.] The AIG bankruptcy trustee might even sue Goldman for making fraudulent claims about the CDOs, the same way that HSH Nordbank sued UBS and M&T Bank sued Merrill.
“But if we bail out the company, there’s still no guarantee that Goldman can recover on the CDOs. And Willumstad can still point the finger at Goldman. So before we agree to anything we’ve got to get rid of Willumstad ASAP and replace him with someone who will make sure that Goldman’s interests are being looked after. Let’s use Ed Liddy. He’s a Goldman board member, so he will never disclose anything that makes Goldman look bad. If he wants to preserve the value of his Goldman stock, he’ll discreetly pay off the CDOs before anyone figures out what’s happening. So I decided Willumstad’s replacement will be Liddy, beginning tomorrow, and I don’t give a damn that my unilateral decision to change CEOs overnight is a complete travesty of corporate governance or government accountability. Our story will be that we are replacing the management that created this mess.”
How do I know that this was on Paulson’s mind and that these were his motivations? As noted at the beginning, the guys at Goldman are very smart, and they knew that the CDO settlement was a zero-sum game. Remember, AIG was Goldman’s biggest client and the issue of collateral postings had been in dispute for over a year. Up until June 2008, Ken Wilson was CEO of Goldman’s Financial Institutions Group. There is absolutely no way that Wilson did not know what was going on with AIG’s management, and that Goldman, not Willumstad was primarily culpable for building up the CDO portfolio.
Also, I’ve been a round the block a few times. Whenever faced with a crisis, senior people immediately think about how the situation will reflect on them. And they promptly think about damage control. And like many people who rise to the top, Paulson knows how to avoid leaving fingerprints. He probably learned his lesson decades earlier, working as John Erlichman’s assistant. Like those other famous CEOs, Bernie Madoff and Donald Rumsfeld, Paulson never used e-mail at work. The day after he fired Willumstad, Paulson spoke on the phone with Blankfein five times.
Whoever bore the blame for creating the mess at AIG, it’s extraordinarily reckless, during the middle of a crisis, to immediately install a CEO with no prior experience at the company, which is a huge sprawling conglomerate. That’s especially true when that new CEO has a conflict of interest the size of the Grand Canyon.
Sorkin also makes clear that it was Jester, not Geithner, who took control in structuring AIG;s bailout facility. Before Geithner gets on a conference call with Bernanke:
Jester and [Paulson's assistant Jeremiah] Norton were poring over all the terms. They had just learned that Ed Liddy had tentatively accepted the job of AIG’s CEO and was planning to fly to New York from Chicago that night. To draft a rescue deal on such short notice, the government needed help, preferably from someone who already understood AIG and its extraordinary circumstances. Jester knew just the man: Marshall Huebner, the co-head of insolvency and restructuring at David Polk & Wardell who was already working on AIG for JP Morgan and who happened to be just downstairs.
Months later, Paulson’s spokesman told The New York Times that, “Federal Reserve officials, not Mr. Paulson, played the lead role in shaping and financing the A.I.G. bailout.”
October 7, 2008: Paulson’s appointee unnecessarily pays out $18.7 billion to the CDO counterparties in exchange for nothing.
Actions speak louder than words, and AIG’s new CEO acted in a way that removed any doubt that he would make decisions in favor of Goldman. Remember, there was no need to hand over anything to the CDO counterparties, because there was no agreed-upon market value for the CDOs, which were all still highly rated. On October 7, 2008, AIG paid out $18.7 in cash in exchange for nothing. Before that October 7, only 26% of the CDOs’ face value had been paid out as cash collateral. Immediately afterward, counterparties hold cash for 56% of the CDOs’ face value of $62.1 billion. All of a sudden, the banks, not AIG, had the upper hand.
November 6, 2008: Only at the point when AIG is once again running out of cash and running out of time, and the CDO banks now hold the upper hand, Geithner is brought in to settle a matter when the government is backed into a corner. (Checkmate anyone?)
On November 5, 2008 only $24 billion remained available under the government’s revolving credit facility, though that cash could have been used up overnight if AIG were downgraded below A-. But, as S&P said, “if mortgage-related losses continue to worsen, then we could lower the ratings into the ‘BBB’ category.”
The CDOs, (which would all be downgraded into the CCC category in a few months), remained a dagger hanging over AIG’s liquidity situation. The only way to restore confidence in the company would be to remove that risk.
But the banks now had the upper hand, since they held most of the cash. Time was not on Geithner’s side, and protracted negotiations over the CDOs’ underlying value could have taken forever. Also, 29% of the remaining CDO exposure belonged to two French banks, whose regulator advised Geithner that it was illegal for them to settle at less than par. Challenging another country’s bank regulator would have opened up a whole can of worms at a point when the risk of global financial panic was very real.
Geithner’s attempts to drive a harder bargain would have created a crisis in confidence that could have likely triggered a further ratings downgrade. The $27 billion to remove the CDO albatross off of AIG’s books was only 15% of the entire $180 billion bailout package.
November 12, 2008: Following public disclosure of the backdoor bailout, Paulson announces his big bait-and-switch: his refusal to use TARP funds to stabilize the mortgage markets.
The collective amnesia of mainstream media notwithstanding, there was full contemporaneous public disclosure of the backdoor bailout of the banks at the time the deal was cut. The bailout package had a lot of moving parts, so it took The Wall Street Journal a day or so before it figured out precisely hat was going on. “New AIG Rescue Is Bank Blessing,” printed on page C1, explained that banks “will be compensated for the securities’ full, or par, value in exchange for allowing AIG to unwind the credit-default swaps.” And for anyone who was slow on the uptake, the Journal printed a picture:
Once the public learned that the CDOs no longer posed a risk to AIG, Paulson announced his his big bait-and-switch: his refusal to use TARP funds to stabilize the mortgage markets. This about face causes the value of all mortgage securities to plummet, imposing an additional loss on Maiden Lane III (and triggering the insolvency of Merrill Lynch).
But Paulson’s coup de grace was to use one of his appointees to fabricate a false history of the backdoor bailout. But that’s for another piece.
More on AIG
Who values big banks?
Jan 23rd
The Epicurean Dealmaker has some stern words for those — Andrew Ross Sorkin springs to mind — who would say that there are some things only big banks can do:
The assertion that large, multi-line financial conglomerates provide customers with services no smaller institutions can deliver is pure poppycock… Wholesale institutional clients make a point of using more than one investment or commercial bank for virtually all their financial transactions, no matter what they are. In fact, the bigger the deal, the more banks the customer usually uses. This is because banking clients want to 1) spread transaction financing and execution risk across multiple service providers and 2) make sure none of these oligopolist bastards has an exclusive right to grab the client by the short and curlies. Just look at securities underwriting data, for chrissakes: as the number of independent investment banks has shrunk (and their product lines, geographic reach, and balance sheets have swollen) over the past 20 years, the average number of book running underwriters per transaction has risen. This is not the result one should expect if one believes customers prefer to use giant universal banks as one-stop shops.
The next time that you hear a senior investment banker intoning ponderously about the importance of being able to serve clients across multiple geographic regions and asset classes, ask for references. These banks all claim to be so client-focused, but where are the clients’ encomia to the megabank model?
If there was a wave of jubilation in corporate America when JP Morgan bought Bear and BofA bought Merrill, I think I missed it. Is there a single multinational saying “this is great, now we can use just one institution for all our banking needs”? Of course not. And even if there was a bank big enough to keep the entirety of a $20 billion loan to Pfizer on its own balance sheet, there’s no way that Pfizer would accept such a deal.
Being big is great, if you’re a big bank. But for the rest of us, big banks do little but increase systemic risk. There’s certainly no indication of any economies of scale when it comes to things like fees on our checking accounts. So the next time you think that someone else surely values these banks’ size, think again. Yes, they can be extremely profitable. But that doesn’t necessarily mean they’re valuable, on a societal level.
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