Currently sweeping the blogosphere: 250,000 pages of AIG-related emails.
The documents were released by the House Committee on Oversight and Government Reform in May, but have been helpfully sifted through and linked to by the New York Times. We’re still trying to download most of them — these are huge files — but for now, all you need to know is this.
From the NYT:
When the government began rescuing it from collapse in the fall of 2008 with what has become a $182 billion lifeline, A.I.G. was required to forfeit its right to sue several banks — including Goldman, Société Générale, Deutsche Bank and Merrill Lynch — over any irregularities with most of the mortgage securities it insured in the precrisis years.
Wha-at? AIG signed away its rights to sue its bank counterparties for potentially fraudulent securities?
As a reminder, in late 2008 the Federal Reserve began putting together a $25bn loan to AIG to bail-out the troubled insurer. In return for the loan, the Fed got a bunch of assets backing CDOs from AIG’s counterparties; now sitting in a special-purpose vehicle called Maiden Lane III. AIG’s counterparties got paid at par, or 100 cents on every dollar of their insurance contracts with AIG. No haircuts here.
Note the legal waiver, shown below, wasn’t in the original counterparty termination agreement regulators circulated in November 2008. It was added a day later, but according to the NYT, the Congressional documents show no e-mails that might explain the addition.
“The beginning of the world” sounds pretty striking. And multiple uses of “forever” look pretty definitive. Want a possible explanation for such an all-encompassing waiver?
Take your pick, the NYT provides two:
Mr. Moss, the Harvard professor, said the government might have been concerned that the insurer would use taxpayer money to sue banks . . .
. . . But two people with direct knowledge of the negotiations between A.I.G. and the banks, who requested anonymity because the talks were confidential, said the legal waiver was not a routine matter — and that federal regulators forced the insurer to accept it.
According to the NYT, the waiver only applies to mortgage securities — not the synthetic collateralised debt obligations (CDOs) which have come under heavy regulatory and legal scrutiny in recent months. That’s because synthetic CDOs don’t contain actual bonds, and so weren’t accepted as Fed collateral.
And indeed, the FT reported in April that AIG was considering legal action against Goldman for its Abacus synthetic CDOs. Goldman was charged by the SEC for fraud over its Abacus 2007 AC1 deal.
But it does mean that AIG can’t sue to recoup losses on things like the Triaxx CDOs, also under the scrutiny of the SEC. The Triaxx deals arguably have a stronger legal case against them than Abacus, and were insured by AIG, eventually winding up in Maiden Lane III.
Setting the CDO scandal aside, there’s plenty in the documents about the at-par bailout for AIG’s counterparties too. Those counterparties were banks like Goldman Sachs, SocGen, Calyon, BofA, Deutsche, Barclays and Merrill. The 100-cents-on-the-dollar has always been controversial and indeed, the Fed went against some of its own advisers in paying-up at par.
But we think this email pretty much sums up the Fed-bank relationship.
Sent by Terrence J. Checki — the man selected by the NY Fed to liaise with the banks during the AIG bail-out — to Robert Wolf at UBS, another one of AIG’s eight biggest counterparties :
UBS, you might recall, was the only AIG counterparty that agreed to a haircut on its AIG contracts, provided other banks do the same. None of them did of course, and the Fed paid out 100 per cent.
Very benign, indeed.
Related links:
The inexplicable AIG waiver – Felix Salmon
The uncomfortable position of UBS – FT Alphaville
AIG and the Fed, not above water but drowning? – FT Alphaville
Point counter point: AIG, Goldman and the NYT – FT Alphaville