AIG

A noontime roundup of business and politics.

It’s a Bird, It’s a Plane! No, It’s HubrisMan!

In today’s Financial Times, the new Treasury Secretary, Tim Geithner had to make the call to Citibank officials to tell them that it might not be a wise idea to buy that $50 million jet they recently ordered. It seems that executive hubris know no limits at Citibank.

FT.com

Santander Covers It’s Madoff Losses

Banco Santander, the Spanish bank, announced that it would repay victims of the Bernie Madoff fraud in an attempt to stave off lawsuits and preserve its reputation. 

FT.com

Sen. Chris Dodd Get’s Bailout Money?

OpenSecrets.org reports that Senator Chris Dodd, Chairman of the Senate Committee on Banking, Housing and Urban Affairs and is now charged with shaping legislation to jump-start the economy and help floundering companies is getting some bailout money of his own, to wit:

Dodd’s most generous donors include many of the companies that have filed for bankruptcy or sought government help over the last six months: Citigroup ($428,300), Morgan Stanley ($211,300), American Insurance Group ($280,250) and Lehman Brothers ($154,300). Despite the companies’ support, when the Senate was called on this month to release the second half of the $700 billion bailout money, Dodd called for stronger oversight provisions and limits on executive compensation for the companies receiving a handout.

Senator, perhaps the guys at Citigroup will let you borrow their plane.

Opensecrets.org

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Yesterday, the Congressional Oversight Panel (COP) released its second monthly report on the expenditure of Troubled Asset Relief Program (TARP) funds authorized by Congress in the Emergency Economic Stabilization Act of 2008 (EESA). The report documents the efforts to get answers to the questions posed in the Panel’s first report, and details both the answers received from Treasury, and the many questions that remain un-addressed or un-answered.

“Hullo Houston, we’ve got a problem.”

As was noted in the report, “[b]ecause the questions we asked one month ago are important as ever, in this second report we lay out exactly what questions have been answered, what haven’t been answered and why these questions are important,” said Elizabeth Warren, the Chair of the Oversight Panel. “The American people have a right to know how their taxpayer dollars are being used, and so far, they have not gotten the transparency and accountability they deserve.”

Apparently the Treasury Department does not see this as a problem.

TARP and the Congressional Oversight Panel

On October 3, 2008, Congress provided the U.S. Treasury with the authority to spend $700 billion to stabilize the U.S. economy. Congress created the Office of Financial Stabilization (OFS) within Treasury to implement a Troubled Asset Relief Program (TARP). At the same time, Congress created a Congressional Oversight Panel (COP) to “review the current state of financial markets and the regulatory system.”

COP is empowered to hold hearings, review official data, and write reports on actions taken by Treasury and financial institutions and their effect on the economy. Through their reports to Congress and American taxpayers, the COP is mandated to:

• Oversee Treasury’s actions
• Assess the impact of spending to stabilize the economy
• Evaluate market transparency,
• Ensure effective foreclosure mitigation efforts
• And guarantee that Treasury’s actions are in the best interest of the American people.

Lastly, Congress has instructed COP to produce a special report on regulatory reform that will analyze “the current state of the regulatory system and its effectiveness at overseeing the participants in the financial system and protecting consumers.”

So far, so good.

The Panel’s Second Report

However, in today’s report we now find that the Treasury Department is choosing to ignore the Panel’s queries into how it is managing the distribution of more than $700 billion in taxpayer money. I won’t go into great detail about all of the questions that the Treasury Department has so far failed to answer. However, it’s worth noting some of the more critical questions that we all want an answer to but have received no response from Treasury. As the report notes:

The Panel still does not know what the banks are doing with taxpayer money.  Treasury places substantial emphasis in its December 30 letter on the importance of restoring confidence in the marketplace.  So long as investors and customers are uncertain about how taxpayer funds are being used, they question both the health and the sound management of all financial institutions.  The recent refusal of certain private financial institutions to provide any accounting of how they are using taxpayer money undermines public confidence.

For Treasury to advance funds to these institutions without requiring more transparency further erodes the very confidence Treasury seeks to restore.  Finally, the recent loans extended by Treasury to the auto industry, with their detailed conditions affecting every aspect of the management of those businesses, highlights the absence of any such conditions in the vast majority of TARP transactions.  EESA does not require recipients of TARP funds to make reports on the use of funds.  However, it is within Treasury’s authority to make such reports a condition of receiving funding, to establish benchmarks for TARP recipient conduct, or to have formal procedures for voluntary reporting by TARP recipient institutions or formal guidelines on the use of funds.  The adoption of any one of these options would further the purposes of helping build and restore the confidence of taxpayers, investors, and policy makers.

On a practical level, where did the $100 billion or so given to AIG and its creditors go? So far, the Treasury Department isn’t saying. What is Treasury’s vision of the problem? So far, no word. What does Treasury think the central causes of the financial crisis are and how does its overall strategy for using its authority and taxpayer funds address those causes? Mums the word.  Is Treasury seeking to use TARP money to shape the future of the American financial system, and if so, how? Apparently, this is none of our taxpaying business.

The full report can be found here. Be forewarned, this report is not for the faint of heart.

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It’s been a helluva year for corporate greed. Multinational Monitor recently published its annual list of the 10 Worst Corporations of the year. There was no shortage of contenders!

Robert Weissman, the author of the Multinational Monitor article, reports that “The financial crisis first gripping Wall Street and now spreading rapidly throughout the world is, in many ways, emblematic of the worst of the corporate-dominated political and economic system that we aim to expose with our annual 10 Worst list.” Weissman cites the following factors that have made this year particularly flagrant: improper political influence, deregulation and non-enforcement, short-term thinking and profit over social concerns. He goes on to say, “What is most revealing about the financial meltdown and economic crisis, however, is that it illustrates that corporations – if left to their own worst instincts – will destroy themselves and the system that nurtures them. It is rare that this lesson is so graphically illustrated. It is one the world must quickly learn, if we are to avoid the most serious existential threat we have yet faced: climate change.”

Here are the highlights:

AIG: Money for Nothing

• Received more than $100 billion in government funds in recent months.
• Guilty of dealing in high risk “credit default swaps” but treated it as a safe practice. The company was basically collecting insurance premiums and assuming it would never pay out on a failure – let alone a collapse of the entire market it was insuring.
• Over the course of a weekend in September, the amount of money AIG owed shot up from $20 billion to more than $80 billion.

Cargill: Food Profiteers

Thirty years ago, most developing countries produced enough food to feed themselves. Now, due to giant food companies and their allies in the U.S. and other rich country governments, and at the International Monetary Fund and World Bank, 70% of developing countries are net food importers and they are suffering due to private sector greed. Food riots broke out around the world in early 2008, but for Cargill, spiking prices was an opportunity to get rich. In the second quarter of 2008, the company reported profits of more than $1 billion.

Chevron: “We can’t let little countries screw around with big companies”

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As I noted in a post yesterday at Global Investment Watch, ”Preemption, Deregulation, Foreclosure, Oh My“ an underlying factor in the current economic collapse is the regulatory neglect in Washington. While conservatives use the term “deregulation,” it is in fact neglect by elected officials and government officials responsible for watching out for all Americans. The question that I am pondering is, “Why?” We all have our beliefs and suspicions about what caused this mess but let’s take a look at some of the facts here, particularly those related to money and influence in Washington DC.

AIG’s Rap Sheet and How it Made “Bail”

AIG is the world’s biggest insurer. It was also a huge Credit Default Swap insurer/underwriter. The terms of CDS require collateral to be posted, depending upon such factors as credit rating and credit spreads. As home prices fell, spreads widened, and companies went down, AIG’s collateral requirements went up significantly.

The Federal Reserve Board authorized the Federal Reserve Bank of New York to lend up to $85 billion to the American International Group (AIG) under section 13(3) of the Federal Reserve Act. The secured loan has terms and conditions designed to protect the interests of the U.S. government and taxpayers.

The Board determined that a disorderly failure of AIG could add to already significant levels of financial market fragility and lead to substantially higher borrowing costs, reduced household wealth, and materially weaker economic performance. [1. http://bigpicture.typepad.com/comments/2008/09/aig-bailout-85b.html]

In 2007, AIG paid $126 million in fines to the SEC and Justice Dept. for deals it structured for outside clients that allegedly violated insurance accounting rules. The company also came under the glare of then New York Attorney General Eliot Spitzer for its role in bid-rigging with broker Marsh & McLennan, which led to the ouster of Hank’s son Jeffrey as CEO.

Earlier this year, investigators initially focused on two transactions involving Berkshire Hathaway’s (BRK ) General Re Corp. unit. The deals essentially amounted to a $500 million loan that was dressed up on the books as premium revenue. That allowed AIG to boost its sagging reserves at a time when investors thought they were too low. However AIG never assumed any of the risk associated with insurance underwriting. On Mar. 30, the company acknowledged that “the transaction documentation was improper” and should never have been classified as insurance premiums.

But problems continued with the company, According to BusinessWeek, in March of this year, the company itself identified several problems. These included transactions with supposedly independent companies that were in fact controlled by AIG; bond transactions that may have allowed it to claim gains without actually selling the bonds; misclassified losses; and questionable estimates on deferred acquisition costs. Investigators and state regulators are looking into some 60 transactions involving these and other possible accounting shenanigans. “Greenberg strived for a steadily rising stock price,” says a source in Spitzer’s office. “He used mechanisms now being revealed as deceptive and improper.”

Getting It’s Way in Washington

If you or I were to pull some of the financial stunts that AIG has done in the last few years, we would be doing time. Sometime in the distant future, we would face a parole board begging for mercy. Not AIG. From the casual observer, it would seem that AIG managed to get the parole board to let it walk and give it a huge wad of pocket change to solve its problems.

As I noted in a post this week, regulators in Washington sat on the sidelines while  AIG and others merrily maximized short term profits without any serious efforts were made to control this obviously risky behavior.

Why?

One factor may be the influence peddling that AIG undertook with its lobbying efforts in the nation’s capital.

According to OpenSecrets.org, since 1998 the company spent a total of $145,874,600 in lobbying fees to in-house staff and consultants in Washington. In addition, the company spent an additional $9,153,251 in contributions to sitting legislators. Considering the investment in Washington, this bailout represents a whopping 54000% return on investment (ROI).

And who pays for all of this?

We do.

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