Sunday, November 1, 2009

catch 22 in the Zona

Zeks in the Zona, sweating to pay the rent and the mortgage, have had some wonderful reading matter tossed to them this week as they sit before their Zek tvs and watch blue pills (it’s a blue pill!), cars and weak beer dance through the collective dream. For instance, they could have read the wonderful tale from Bloombergs about the supposed “negotiations” over the AIG payout last November. O zeks, do you remember how the Darwinian weeding out of the weak, so beloved of neo-classical economists, unfurled in its natural course back then? Well, of course you don’t, because Darwinian weeding out of the weak is only for the weak! The wealthy don’t have that extra 500 million sitting around to spend it all on dancing girls, no sir. Sometimes, you buy a legislature. Sometimes, you buy a Treasury department. And always, you have the Fed at your back as your friend, with whom you can discuss the finer points of Ayn Rand's philosophy.

But the Fed is subject to its own moods. Although our secretary of the Treasury, Tim Geithner, might look like a weasel, evidently he was feeling more like Santa Claus, all jolly and fat and charitable last November. And so, remarkably, were his friends, the loveable crew of Santa’s helpers that sit on the board of the NY branch of the Fed – upstanding citizens like Stephen Freedman, former chairman of Goldman Sachs but, as we all know well, a patriot and a hero first and foremost, and our beloved Jamie Dimon, a busy man who not only helps direct Fed policy, but also manages JP Morgan – noblesse oblige, you know.

Now, these beauties were confronted with that little problem of AIG last November. A pesky thing. Oh, 150 billion were out there somewhere, being mulched. And the Fed was supposed to devise a rescue plan!

Because this was serious. It wasn’t like, say, this story, from a recent NYT piece about runaways:

“She ran away from her group home in Medford, Ore., and spent weeks sleeping in parks and under bridges. Finally, Nicole Clark, 14 years old, grew so desperate that she accepted a young man’s offer of a place to stay. The price would come later.
They had sex, and he soon became her boyfriend. Then one day he threatened to kick her out if she did not have sex with several of his friends in exchange for money.”

Another tale of the bad choices of the poor! Why, it might break your heart – or cause you to turn the newspaper page – but really, it would just be made infinitely worse if the state intervened to prop up lifestyles like this through yucky welfare. And no doubt this 14 year old doesn’t have the IQ, the smarts, that our heavenly bunch of NY Fed benchwarmers have. They are the cream of the crop, no doubt. So, let us say salut to Nicole and good luck surviving in Zona America, and come back to our exciting tale of the rescue of AIG’s counterparties!

“Beginning late in the week of Nov. 3, the New York Fed, led by PresidentTimothy Geithner, took over negotiations with the banks from AIG, together with the Treasury Department and Chairman Ben S. Bernanke’s Federal Reserve. Geithner’s team circulated a draft term sheet outlining how the New York Fed wanted to deal with the swaps -- insurance-like contracts that backed soured collateralized-debt obligations.

Part of a sentence in the document was crossed out. It contained a blank space that was intended to show the amount of the haircut the banks would take, according to people who saw the term sheet. After less than a week of private negotiations with the banks, the New York Fed instructed AIG to pay them par, or 100 cents on the dollar. The content of its deliberations has never been made public.
The New York Fed’s decision to pay the banks in full cost AIG -- and thus American taxpayers -- at least $13 billion. That’s 40 percent of the $32.5 billion AIG paid to retire the swaps. Under the agreement, the government and its taxpayers became owners of the dubious CDOs, whose face value was $62 billion and for which AIG paid the market price of $29.6 billion. The CDOs were shunted into a Fed-run entity called Maiden Lane III.”

It surely was gracious of the Fed to do that. Why, otherwise those counterparties – like, say, Goldman Sachs – might have been left a little temporarily improvident. Luckily, they would never have been forced to have sex with their “boyfriend’s” friends for money. They are too busy creating the wealth that the rest of us Zeks enjoy, God bless em!

So what happened, you might be thinking?

“The deal contributed to the more than $14 billion that over 18 months was handed to Goldman Sachs, whose former chairman, Stephen Friedman, was chairman of the board of directors of the New York Fed when the decision was made. Friedman, 71, resigned in May, days after it was disclosed by the Wall Street Journal that he had bought more than 50,000 shares of Goldman Sachs stock following the takeover of AIG. He declined to comment for this article.
In his resignation letter, Friedman said his continued role as chairman had been mischaracterized as improper. Goldman Sachs spokesman Michael DuVally declined to comment.
AIG paid Societe General $16.5 billion, Deutsche Bank $8.5 billion and Merrill Lynch $6.2 billion.”

Now, for those of you who like a little implication with your news, this story is all the more interesting for the clash between the Fed’s version of this transaction and GS’s version. According to the Fed, expecting AIG’s counterparties to take a haircut of 40 percent was impossible, since this would have driven them to the wall:

“Far more money was wasted in paying the banks for their swaps, says Donn Vickrey of financial research firm Gradient Analytics Inc. “In cases like this, the outcome is always along the lines of 50, 60 or 70 cents on the dollar,” Vickrey says.
A spokeswoman for Geithner, now secretary of the Treasury Department, declined to comment. Jack Gutt, a spokesman for the New York Fed, also had no comment.
One reason par was paid was because some counterparties insisted on being paid in full and the New York Fed did not want to negotiate separate deals, says a person close to the transaction. “Some of those banks needed 100 cents on the dollar or they risked failure,” Vickrey says.”

Yet, after pocketing its 12.9 billion, GS has consistently maintained that it didn’t need it. Gee, you think they might then have given it to, say, fourteen year old Nicole – but no, what GS means is that they had counterparties to their counterparties at AIG who, in November of 2008, would have gladly forked out the 12.9 billion to them.

This is truly a story of miracles, a holiday story for the whole family! Much like that Jimmy Stewart one, if we purged the Stewart character and made the hero, oh, some GS ex exec on a Fed branch board. A much better hero all the way around!

The Fed has noticed that their story, per Bloomberg, makes a mockery of GS’s story – and not just a mockery. It is actually against the law for a company to lie about such things at news conferences, as this, for one thing, distorts stock prices. Some sleepy NY attorney general could actually investigate, although the likelihood of anybody investigating is pretty close to zero. Still, newspapers could rattle these cages. So stories have to be aligned. This is from the Washington Post, Friday:

“New York Fed officials explained that the main reason creditors were willing for a time to accept less than full reimbursement was their fear of an AIG bankruptcy. The government's rescue of the company removed that threat and left the company with virtually no way to wrestle concessions from the banks.
"In its negotiations with its counterparties, AIG just didn't have the same bargaining power that it did with the Federal Reserve standing in the background," said Thomas C. Baxter, New York Fed's general counsel. "The only sensible outcome was to give them what they were legally entitled to."

And then there is this:

Yossarian looked at him soberly and tried another approach. “Is Orr crazy?”
“He sure is,” Doc Daneeka said.
“Can you ground him?”
“I sure can. But first he has to ask me to. That’s part of the rule.”
“Then why doesn’t he ask you to?”
“Because he’s crazy,” Doc Daneeka said. “He has to be crazy to keep flying combat missions after all the close calls he’s had. Sure, I can ground Orr. But first he has to ask me to.”
“That’s all he has to do to be grounded?”
“That’s all. Let him ask me.”
“And then you can ground him?” Yossarian asked.
“No. Then I can’t ground him.”
“You mean there’s a catch?”
“Sure there’s a catch,” Doc Daneeka replied. “Catch-22. Anyone who wants to get out of combat duty isn’t really crazy.”
There was only one catch and that was Catch-22, which specified that a concern for one’s own safety in the face of dangers that were real and immediate was the process of a rational mind. Orr was crazy and could be grounded. All he had to do was ask; and as soon as he did, he would no longer be crazy and would have to fly more missions. Orr would be crazy to fly more missions and sane if he didn’t, but if he was sane he had to fly them. If he flew them he was crazy and didn’t have to; but if he didn’t want to he was sane and had to. Yossarian was moved very deeply by the absolute simplicity of this clause of Catch-22 and let out a respectful whistle.
“That’s some catch, that Catch-22,” he observed.
“It’s the best there is,” Doc Daneeka agreed.”

Well, our zek might be puzzled by these events, and even begin to think that something isn’t right. And he would no doubt be confounded further by the history of Citibank, as processed by today’s NYT article about the four times it has had to be rescued by the Government.

This paragraph sets up a nice contrast between apparatchik and zek in this crazy world of small government lovin’ Wall Street, where capitalism is king!

“As a result, the government has handed Citigroup $45 billion under the Troubled Asset Relief Program over the last year. Through the Federal Deposit Insurance Corporation, a major bank regulator, the government has also agreed to back roughly $300 billion in soured assets that sit on Citigroup’s books. Even as other troubled institutions recently curtailed their use of another F.D.I.C. program that backs new debt issued by banks, Citigroup has continued to tap the arrangement.

Citigroup is also one of only two TARP recipients so desperate for capital that they’ve swapped government-issued shares into common stock, diluting existing shareholders. (GMAC, the troubled auto lender that may receive another government infusion, is the other.)

While Citigroup has written down tens of billions of dollars’ worth of mortgages on its books, there are looming problems in its huge credit card portfolio. Of the company’s $1.2 trillion in credit commitments outstanding in the second quarter, $873 billion were credit card lines. A measure of the bank’s efforts to wrestle that problem to the ground is the interest it charges customers: in October, Citigroup raised interest rates on some credit card holders to 29.99 percent.”

30 percent interest. That’s some interest! And in fact, before the law was reformed in the golden days of Reagan, it was charged mainly by men whose assistants carried lead pipes and exacted in-kind late fees. But just as drug dealers, those unheralded entrepreneurs, created business m.o.s that have become standard for big pharma – see your doctor about the blue pill! – so, too, the mafia’s defunct – like e.e. cumming’s buffalo bill. The frontier has been passed and trampled into the ground, and debt slavery, once considered the scourge of peasants, is now just good business. Interest helps us get an x ray of power in America – banks get loans at 2 percent, I believe it is at present, with which they can buy T-notes paying 3 to 4 percent, or loan out money to zeks at 30 - you know how it goes. It’s a meritocracy, baby.

With a few catches.


northanger said...


Thomas Jefferson, the Secretary of the Treasury, lived at 57 Maiden Lane [[T'Madde Paatje]]. At the time, his home was a fine mansion; today a skyscraper occupies the site. He spent part of his leisure time researching American Indian vocabularies in the New York metropolitan area. Over a fine dinner in Thomas Jefferson's candle-lit dining room, Alexander Hamilton and his former ally, now opponent, James Madison, the first Speaker of the House of Representatives, struck a bargain. If James Madison and Thomas Jefferson would convince enough southern representatives to pass his financial program, Hamilton would collect enough northern votes to move the capital from New York, first to Philadelphia temporarily to please the people of that state, and finally to the banks of the Potomac River.

George Washington, the president, supported the deal behind the scenes.

northanger said...

dutch girls used to wash clothes in the stream running alongside. cabbages grew there too. then it became the jewelry district, then the fed moved in.

Roger Gathmann said...

North - my favorite cybernaut! So why did you not pitch in on the Limited Inc thread? I'd have thought you would have loved the etymology of explore.

But I can't be too greedy - I know your mission is to to explore strange new worlds; to seek out new life and new civilizations; to boldly go where no cyber sorceress has gone before.

northanger said...

it is never too late to pitch in! um, where should i pitch in?

northanger said...

oh, this looks like fun: voyage to synthetica - eldorado of all the old boys