Within the 47-page document that is the SIGTARP report (The Office of the Special Inspector General for the Troubled Asset Relief Program), lies a host of heroes and villains — depending upon your personal point of view.
For a start there are the banks, like Goldman Sachs and Morgan Stanley, which refused to accept haircuts on the collateral due to them by the limping insurance giant AIG. There’s also one — UBS — which had agreed to a 2 per cent haircut provided the other banks do the same.
All of this, of course, took place in November 2008, when the Federal Reserve and the US Treasury were trying to negotiate some sort of rescue of the stricken insurer, which acted as counterparty to billions worth of CDOs.
Here’s the summary from the SIGTARP report:
The Fed eventually, having realised it could not force banks to agree to concessions (nor, in its opinion, should it), agreed to pay AIG’s counterparties at par – in layman’s terms 100 cents on the dollar. That turned out to be a move which would generate a significant amount of controversy and a number of Goldman Sachs conspiracy theories.
So why then did Goldman refuse the haircut? Here’s what SIGTARP says:
According to the report Merrill Lynch also refused concessions offered by the Fed. The bank had already paid about $40m in fees to obtain credit protection and thought that it would have to pay an additional $16m in fees and costs to resolve the Maiden Lane III CDOs — the special purpose vehicle created by the Fed to buy up the underlying collateral of a portion of AIG’s CDS.
And then, there was the issue of the French banks. From the report:
In fact the only bank out of the eight contacted that would agree to a haircut, it seems, was UBS:
Now, if you’re of the opinion that the banks were being unreasonable by refusing to accept a haircut on collateral posted by a near-bankrupt insurer, you might applaud UBS for its flexibility at this point. If, however, you’re of the opinion that the other seven banks were doing the right thing, you might be less than impressed with UBS’s actions.
Either way, the report looks to have put UBS in something of an uncomfortable position. And without even having scored points from the Treasury…
… From the SIGTARP footnotes:
Related links:
Weird waterfalls and the synthetic CDO stumper, part deux – FT Alphaville
Goldman and AIG, redux – FT Alphaville
Point counter point: AIG, Goldman and the NYT – FT Alphaville
The AIG fiasco or how not to manage your CDO exposure – A Credit Trader