I've learned, from ZeroHedge, the name of a possible hero in all of this financial mess. His name is Borofsky and he's the head of SIGTARP, the Special Inspector General for TARP. Here's what his office submitted to Congress on AIG in the first quarter.
AIG Counterparty Payments: On November 10, 2008, the Federal Reserve
Nothing I heard yesterday in the Senate hearings on Goldman seems to be as heinous as this, not that I understand it perfectly well. I don't even think I know anyone who understands this perfectly well. But I'm watching.
and Treasury announced the restructuring of the Government’s financial support
to AIG. As part of this restructuring, a special purpose vehicle, Maiden
Lane III, purchased certain assets underlying AIGFP’s credit default swap
(“CDS”) contracts from its counterparties using $24.3 billion of FRBNY financing
in combination with a $5.0 billion equity investment from AIG. In exchange
for this payment and being permitted to retain $35 billion in collateral payments
already made (thus effectively being paid par or face value for the underlying
assets), the counterparties agreed to terminate their CDS contracts with AIGFP.
SIGTARP’s audit, which was issued on November 17, 2009, found, among
other things, that the terms of the original FRBNY financing did not result from
independent analysis, but were simply an adoption of the term sheet from an
aborted private financing discussion, and those terms, which included an onerous
effective interest rate of 11%, made modification of the terms and further
Government action inevitable. The audit also found that, in structuring Maiden
Lane III, FRBNY attempted to obtain concessions, or “haircuts” from the CDS
counterparties — and one counterparty was prepared to take a modest haircut
— but the FRBNY’s negotiating strategy was hampered by a series of policy
decisions that severely limited its ability to obtain concessions, including its
decision not to accept concessions unless concessions could be obtained from
all of the counterparties, its refusal to use its leverage as regulator to some of the
institutions involved, and its basic discomfort with interfering with the sanctity
of the counterparties’ contractual rights. These policy choices led directly to a
negotiating strategy with the counterparties that even then-FRBNY President
Geithner acknowledged had little likelihood of success. The audit further noted
that although Mr. Geithner has denied that his intent was to benefit the counterparties,
the overall structure of the AIG bailout resulted in AIG’s counterparties
receiving tens of billions of dollars they likely would not have otherwise
received had AIG gone into bankruptcy.
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