The Market Ticker

Oh Crap: (Triad)

The insurer, which put itself into run-off and ceased writing new mortgage insurance policies in the middle of last year, said late Wednesday that it had received a corrective order from its regulator, the Illinois Director of Insurance, limiting its payout on claims to 60 percent. The remaining 40 percent of a claim will essentially take the form of an IOU, or a deferred payment obligation (DPO), meaning the lender/investor will not recover the full amount of its claim.

This is going to result in insane severity increases on losses taken by Fannie, Freddie, and anyone else in the mortgage business that has wraps (PMI) written by Triad (think BAC, WFC, etc)

If this spreads then it of course gets even worse.

Worse, policyholders will still be required to make full premium payments!

How would you like to make a full premium payment on your house insurance and then get paid only 60 cents, with the other 40 cents being an "IOU" of dubious value?

This is going to get ugly - imminently.

Hattip Kingfish on the story.

Oh, this is not good.

Go read the latest AIG Ticker again.  Specifically, this paragraph:

As with the phony reinsurance contracts that AIG and other insurers wrote for decades, when AIG wrote hundreds of billions of dollars in CDS contracts, neither AIG nor the counterparties believed that the CDS would ever be paid. Indeed, one source with personal knowledge of the matter suggests that there may be emails and actual side letters between AIG and its counterparties that could prove conclusively that AIG never intended to pay out on any of its CDS contracts.

Now consider this.

There is some gross "notional" (or face) value of $683.7 trillion dollars outstanding as of the end of June 08 (last data available.)

The lions share of those are not "CDS" on individual names or CDOs like what is going on here with AIG.  They are instead interest-rate and/or FX products of one sort or another; $458 trillion worth.

If even a couple of percent of those swaps are in fact "private lettered" out in the fashion that AIG is alleged to have done with their CDS.....

(Hint: This is how "notional" amounts end up becoming realized losses!)

Our Congress had better dig into this hornets nest right damn now because if in fact there is any material amount of this crap going on in the OTC derivative market the $170+ billion blown on AIG trying to cover it up will be a mosquito on an elephant's ass in comparison to what's about to happen to the world's economy and banking system.

If, in fact, it cannot be proved that this is not the case, given the extraordinary lengths that both government and private parties have gone to in order to cover up what IRA alleges AIG was actually up to, we must ring-fence and cut off any part of the financial system impacted by a potential detonation of that market right now, including the US Federal Government, as such a detonation will, if it occurs, destroy any part of the financial system it infests at the time the unwind occurs.

No I'm not kidding.

This really is that serious and the extreme measures taken to attempt to hide this, assuming the IRA article is correct, implies strongly that there is a lot more of this going on that we're simply unaware of.

Yet.

Oh oh....

*DRESDNER KLEINWORT TO DROP FROM RANKS OF FED'S PRIMARY DEALERS
*FEDERAL RESERVE'S PRIMARY DEALER NETWORK TO SHRINK TO 15 FIRMS
*FED'S PRIMARY DEALER NETWORK WILL BE SMALLEST ON RECORD

No link, off wires.

The Fed continued to buy the long end today, all on-the-run securities, nearly all 5 year.  A massive $26 billion were submitted against $7.5 taken, strongly implying that Ben is (obviously) intentionally overpaying in his attempt to drive rates lower.

Unfortunately its not working, as the following chart shows on the TNX, with most of the damage coming right after the auction announcement:

Now granted, this is the 10 year and Ben bought 5s.  But if the intent was to depress the curve generally, well, you tell me how well he did?

The IRX, the 13 week T-bill, didn't move to any material degree.

At this rate it will not be long before The Fed owns enough of the long end of the curve to effectively be the "whip hand", at which point external financing for the government all resides in the short end of the curve - the long end becomes neutered in terms of actual government funding.

And that, my friends, is when a simple decision to run down those short-term bills leads to the inability of the government to finance itself.

The government (and Fed) will thus by forced to dramatically raise offered coupon (interest rates) right into the maw of this economic and banking mess, exactly as happened during The Depression.

Get ready Ben - here it comes!

(Credit Barry Ritholtz and Institutional Risk Analytics, the original source)

WHOAH!

In fact, our investigation suggests that by the time AIG had entered the CDS fray in a serious way more than five years ago, the firm was already doomed. No longer able to prop up its earnings using reinsurance because of growing scrutiny from state insurance regulators and federal law enforcement agencies, AIG’s foray into CDS was really the grand finale. AIG was a Ponzi scheme plain and simple, yet the Obama Administration still thinks of AIG as a real company that simply took excessive risks. No, to us what the fraud Bernard Madoff is to individual investors, AIG is to the global financial community.

As with the phony reinsurance contracts that AIG and other insurers wrote for decades, when AIG wrote hundreds of billions of dollars in CDS contracts, neither AIG nor the counterparties believed that the CDS would ever be paid. Indeed, one source with personal knowledge of the matter suggests that there may be emails and actual side letters between AIG and its counterparties that could prove conclusively that AIG never intended to pay out on any of its CDS contracts.

Read that folks.

Then read it again.

Then read it AGAIN.

More excerpts:

There are two basic problems with side letters. First, they are a criminal act, a fraud that usually carries the full weight of an “A” felony in many jurisdictions. Second, once the side letter is discovered by a persistent auditor or regulator examining the buyer of protection, the transaction becomes worthless. You paid $6 million to AIG to shift risk via the reinsurance, but the side letter makes clear that the transaction is a fraud and you lose any benefit that the apparent risk shifting might have provided.

And finally, the last nail in the coffin:

The key point is that neither the public, the Fed nor the Treasury seem to understand is that the CDS contracts written by AIG with these various non-insurers around the world were shams - with no correlation between “fees” paid and the risk assumed. These were not valid contracts as Fed Chairman Ben Bernanke, Treasury Secretary Geithner and Economic policy guru Larry Summers claim, but rather acts of criminal fraud meant to manipulate the capital positions and earnings of financial companies around the world.

Indeed, our sources as well as press reports suggest that the CDS contracts written by AIG may have included side letters, often in the form of emails rather than formal letters, that essentially violated the ISDA agreements and show that the true, economic reality of these contracts was fraud plain and simple. Unfortunately, by not moving to seize AIG immediately last year when the scandal broke, the Fed and Treasury may have given the AIG managers time to destroy much of the evidence of criminal wrongdoing.

Only when we understand how AIG came to be involved in CDS and the fact that this seemingly illegal activity was simply an extension of the reinsurance/side letter shell game scam that AIG, Gen Re and others conducted for many years before will we understand what needs to be done with AIG, namely liquidation. Seen in this context, the payments made to AIG by the Fed and Treasury, which were then passed-through to dealers such as Goldman Sachs (NYSE:GS), can only be viewed as an illegal taking that must be reversed once the US Trustee for the Federal Bankruptcy Court for the Southern District of New York is in control of AIG’s operations.

Thank you Timmy, thank you Ben Bernanke, thank you Henry Paulson, thank you George Bush and thank you President Obama.

If this is true every one of you needs to go to prison.

After those of you still in your positions are impeached.

Again, for the simple who need it in one sentence:

AIG was a Ponzi scheme plain and simple, yet the Obama Administration still thinks of AIG as a real company that simply took excessive risks. No, to us what the fraud Bernard Madoff is to individual investors, AIG is to the global financial community.

Distilled to one sentence: The bailout of AIG is equivalent to the US Taxpayer bailing out Madoff's admitted (and now convicted) Ponzi Scheme.

PS: This isn't MY analysis, this is the analysis of Institutional Risk Analytics.  If you don't understand who they are, you should - they're one of the most-respected groups out there when it comes to banking system analysis.  If they're willing to print something this damning....

There are various news items flying around today about AIG's former and current CEOs being called in to testify before Congress:

WASHINGTON (Reuters) - The chairman of a U.S. House of Representatives oversight panel said on Wednesday he will soon call the chief executive of American International Group Inc to testify, amid the committee's ongoing probe of the fall of the insurance giant.

Then there was this:

WASHINGTON -- The lead U.S. House Democrat on financial issues called Wednesday for an investigation into whether U.S-based financial institutions who were counterparties to American International Group Inc. (AIG) received disparate treatment compared to their foreign-owned rivals.

Hmmmmm....

Let me put forward the following question:

When you send in a check to your brokerage account it is typically made out to "XXX Bank", then "For further credit to" and your name and account number.  Why?  Because the bank clears the transaction through the banking system for your broker.  The same thing happened here.  Therefore:

• Subpoena all CDS payments made by AIG to any other party since it was first bailed out, including the final payee, not just the "clearing bank."  Specifically, exactly who was the final beneficiary of those 100% payoffs?

Let's have the full list.  In public.  It's our money.

Second, let's talk about the PPIP; there is finally some press attention being paid to the outright scam that this poses to the American People:

The plan may reward investors with 20 percent annual returns on “really toxic” mortgages bought at 45 cents on the dollar by allowing them to borrow six times their money with “non-recourse” government-backed debt, New York-based Credit Suisse Group AG analysts Carl Lantz and Dominic Konstam wrote in a March 27 report. That loan would be worth 15 cents to an investor seeking the same return who can’t use borrowed money.

There's that phrase: "seeking the same return."

Don't we ever learn?  How did we get in this mess in the first place?  Chasing return!

So now we intend to do it again?

It appears so:

“One of the challenges has been that leverage has really been pulled away from the system and as a result the kinds of returns investors are looking for haven’t really been available,” said Ken Hackel, head of fixed-income strategy at RBS Securities in Greenwich, Connecticut. RBS is one of the 16 primary dealers that are obligated to bid at the Treasury’s auctions of government debt and which trade with the Fed.

Right.  Without 30, 40 or 50:1 leverage we can't make 20% returns and skim off $100 million "bonuses" for our retreats in The Hamptons and our 200' Yachts, and there's something dreadfully wrong with having to risk our own money to take that sort of risk. 

Therefore, we will demand that government put that risk on you the taxpayer so we can scam some more, since our faux "profits" have finally been exposed as nothing more than a shell game.

Oh, and there's a nasty little rumor floating around on the street that if banks sell these "assets" into the PPIP at less than their current marks TARP money will be used to "make them whole."

That's right - you, the taxpayer, will get scammed coming and going:

• The banks have been carrying these at dramatically above their mark-to-market value (heh, how's that, given all this furor over "mark to the market"?)
• Treasury will "make good" on any discount from those inflated (some would say "fraudulent") marks that the banks have been using, and the prices paid to sell into the PPIP.
• Treasury will again take any losses beyond the first 5 or 6% that are suffered by the "private" parties.

I have already covered how you can get it in both holes a fourth time - that is, all the bank has to do is fund the "so-called private party" that is going to buy these "toxic" assets with an intentionally-written-off loan, thereby guaranteeing no more than a 5% loss.  It is impossible to prevent this from occurring, by the way; money is fungible so who's to say which dollar came from where?

And since the banks will apparently get paid (by you the taxpayer) any difference between internal marks and the sale price, not only get to prevent more than a 5% loss off the market price, they do even better as they get to guarantee no more than a 5% loss off their internal mark!

We just keep adding scams on top of scams; if $170 billion stolen from taxpayers to "bail out" banks via AIG isn't bad enough, this program will be some $500 billion (or more), and that's not even the total value since some banks have been buying up "distressed" ALT-A liar loans with TARP money in front of this program's announcement!

If you're not mad enough about this, let's add Fannie and Freddie:

Freddie’s net worth was negative in both the third and fourth quarters. The McLean, Virginia-based company took $13.8 billion in aid from the Treasury in November. Washington- based Fannie’s draw from the fund yesterday was its first and goes toward erasing a net-worth deficit for the fourth quarter.

Both companies said in recent securities filings that they will need more aid and that the $400 billion Treasury lifeline may not be enough to stay afloat this year.

These are "companies" that got caught in a huge accounting scandal a few years ago, allegedly "fixed it", but as you can see, they didn't fix the problem (excessive leverage) that led to the issue in the first place.  Indeed, as I have written on before going back more than a year these firms had somewhere between 80:1 and 200:1 (depending on how you do the accounting) leverage last year - leverage that has now blown up in their faces.

These firms, now under "conservatorship" (and which the US Government refuses to consolidate on its balance sheet, despite the CBO saying that it should, since the liabilities are now yours and mine as taxpayers) have an aggregate credit book of five trillion dollars.

The money quote, of course is this one:

Both companies said in recent securities filings that they will need more aid and that the $400 billion Treasury lifeline may not be enough to stay afloat this year.

Got that?  $400 billion stolen from you, the taxpayer - and that's just for this year!  Next year there will be more.

My math puts the total amount of money stolen from you, the taxpayer, to keep firms that intentionally levered up and promoted an asset bubble via imprudent and even fraudulent lending afloat, as well over $1 trillion dollars during the last 12 months - and that's just from these three scams alone ($400 billion Fan/Fred, $500 billion PPIP, $170 billion AIG) and ignores the TARP, much of which is involved in this as well.

Your money is being stolen at gunpoint via future taxation not only from you but also from your children and grandchildren, yet not one penny has been clawed back from these bankers and other executives who continue to enjoy lifestyles powered by the fruits of imprudent and fraudulent lending - lifestyles that, absent our government stealing from you, would have ended immediately as these firms were liquidated and the bankruptcy attorneys feasted on clawbacks and judicial asset freezes.

When will you wake up America?

PS: Enjoy the rally in the market from the layered scams and theft, but don't believe it will lead to a durable recovery in the economy.  It won't, and being prepared for that recognition in the marketplace would be a really, really good idea.