The Great Financial Circle Jerk

Published on Economic Populist.org, by Robert Oak, March 22, 2011.

Yes the title is crass, vulgar. Yet the never ending trading of mortgage backed securities, previously titled toxic assets in some game of musical chairs justifies the analogy. Take just this latest revolving door as an example. Did you know a former New York Federal Reserve Official, in charge of overseeing AIG now works for AIG?

The insurance giant has also brought on board Charlie Shamieh as chief actuary; Mark Scully to oversee actuarial functions at its main property and casualty division, Chartis; Sid Sankaran as chief risk officer; and former Federal Reserve official Brian Peters to also help manage risk in an executive position.

Naked Capitalism comments on this little gem in Sleaze Watch

Now we have another example of unseemly revolving door behavior, this with an even more direct connection between a former official’s old purview and his current role, this time involving AIG and its biggest sugar daddy, the New York Fed.

We were probably remiss in not commenting on the peculiar announcement of AIG’s offer to buy back the bonds in the New York Fed’s Maiden Lane II portfolio for $15.7 billion. The stated reason, that the purchase would “reduce its obligation” to the government is nonsense; it’s astonishing that the press is parroting it. As this Cleveland Fed summary indicates, the latest of a series of restructurings converted the remaining debt payable by AIG to equity; it has paid down all its loan balances. the New York Fed loan to Maiden Lane II is payable by that entity, not by AIG (AIG does have an “equity” position in that portfolio).

AIG can buy plenty of bonds in the marketplace; the only reason for it to offer to buy these bonds in particular is if it believes it can obtain them at a discount, which means that this is yet again another pretty blatant subsidy to the giant insurer. (The only other rationale we could fathom at the time of the announcement of this offer was to justify the government’s continued insistence that all these bailout programs were really great deals. Yes, if you have the Federal Reserve engaging in QE, you can play a three card monte game that makes your older portfolio buys look amazingly astute. But as we discuss below, the evidence has now fallen out conclusively on the side of this move being yet another subsidy to AIG).

Note that if the NY Fed were serious about selling these bonds and maximizing value to the public, the last way you’d do it would be as a single massive portfolio. Big portfolio sales do result in discounts due to the lack of competing bids (think of selling all the artwork in an estate, which included a lot of painting, sculptures, collectable ceramics, and rugs, as a block versus selling the items individually in an auction). The way to fetch a decent price would be to break the portfolio up, in some cases down even to the single bond level, or at least into much smaller homogeneous lots, and work the orders through multiple dealers over time. Admittedly, AIG made its brazen offer back in December and the officialdom failed to respond.

This piece comes on the news the Federal Reserve made record profits and transferred $79 billion to the U.S. Treasury: … (full text).

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