AIG Insider: AIG Was Responsible For The Banks' Jan & Feb Profitability

darth

Exclusive: AIG Was Responsible For The Banks' January & February Profitability

Posted byTyler Durdenat6:35 PM
Zero Hedge is rarely speechless, but after receiving this email from acorrelation desk trader, we simply had to hold a moment of silence forthe phenomenal scam that continues unabated in the financial markets,and now has the full oversight and blessing of the U.S. government,which in turns keeps on duping U.S. taxpayers into believing everythingis good.

I present the insider perspective of trader Lou (who wishes to remain anonymous) in its entirety:

"AIG-FPaccumulated thousands of trades over the years, all essentiallyconsisted of selling default protection. This was done via a number ofstructures with really only one criteria - rated at least AA- (if itfit these criteria all OK - as far as I could tell credit assessmentwas completely outsourced to the rating agencies).

Main productsthey took on were always levered credit risk, credit-linked notes(collateral and CDS both had to be at least AA-, no joint probabilitystuff) and AAA or super senior portfolio swaps. Portfolio swaps wereeither corporate synthetic CDO or asset backed, effectively sub-primewraps (as per news stories regarding GS and DB).

Credit linkednotes are done through single-name CDS desks and a cash desk (for thenote collateral) and the portfolio swaps are done through thecorrelation desk. These trades were done is almost every jurisdiction -wherever AIG had an office they had IB salespeople covering them.

Correlationdesks just back their risk out via the single names desks - thecorrelation desk manages the delta/gamma according to their correlationmodel. So correlation desks carry model risk but very little marketrisk.

I was mostly involved in the corporate synthetic CDO side.

DuringJan/Feb AIG would call up and just ask for complete unwind prices fromthe credit desk in the relevant jurisdiction. These were not singledeal unwinds as are typically more price transparent - these were whole portfolio unwinds. The size of these unwinds were enormous, the quotes I have heard were "we have never done as big or as profitable trades - ever".

Asthese trades are unwound, the correlation desk needs to unwind thesingle name risk through the single name desks - effectively the AIG-FPunwinds caused massive single name protection buying. This causedsingle name credit to massively underperform equities - run a chartfrom say last September to current of say S&P 500 and Itraxx -credit has underperformed massively. This is largely due to AIG-FP unwinds.

Ican only guess/extrapolate what sort of PnL this put into the majorglobal banks (both correlation and single names desks) during thisperiod. Allowing for significantreserve release and trade PnL, I think for the big correlation playersthis could have easily been US$1-2bn per bank in this period."

For those to whom this is merely a lot of mumbo-jumbo, let me explain in layman's terms:
AIG,knowing it would need to ask for much more capital from the Treasuryimminently, decided to throw in the towel, and gifted major bankcounter-parties with trades which were egregiously profitable to thebanks, and even more egregiously money losing to the U.S. taxpayers,who had to dump more and more cash into AIG, without having the U.S.Treasury Secretary Tim Geithner disclose the real extent of this, forlack of a better word, fraudulent scam.

In simple terms think ofit as an auto dealer, which knows that U.S. taxpayers will provide foran infinite amount of money to fund its ongoing sales of horrendousvehicles (think Pontiac Azteks): the company decides to sell all thecars currently in contract, to lessors at far belowthe amortized market value, thereby generating huge profits for theselessors, as these turn around and sell the cars at a major profit,funded exclusively by U.S. taxpayers (readers should feel free toprovide more gripping allegories).

What this all means is thatthe statements by major banks, i.e. JPM, Citi, and BofA, regardingabnormal profitability in January and February were true, however theseprofits were a) one-time in nature due to wholesale unwinds of AIGportfolios, b) entirely at the expense of AIG, and thus taxpayers, c)executed with Tim Geithner's (and thus the administration's) fullknowledge and intent, d) were basically a transfer of money fromtaxpayers to banks (in yet another form) using AIG as an intermediary.

Forbanks to proclaim their profitability in January and February is aboutas close to criminal hypocrisy as is possible. And again, the taxpayersfund this "one time profit", which causes a market rally, thus allowingthe banks to promptly turn around and start selling more expensiveequity (soon coming to a prospectus near you), also funded bytaxpayers' money flows into the market. If the administration is trulyaware of all these events (and if Zero Hedge knows about it, it is safeto say Tim Geithner also got the memo), then the potential falloutwould be staggering once this information makes the light of day.

And the conspiracy thickens.

Thanks to an intrepid reader who pointed this out, a month ago ISDA published anamended close out protocol. This protocol would allow non-market close outs, i.e. CDS trade crosses that were not alligned with market bid/offers.

The purpose of the Protocol is to permit parties to agree upfront that in the event of a counterparty default, they will use Close-Out Amount valuation methodologyto value trades. Close-Out Amount valuation, which was introduced inthe 2002 ISDA Master Agreement, differs from the Market Quotationapproach in that it allows participants more flexibility in valuation where market quotations may be difficult to obtain.

Of course ISDA made it seems that it was doing a favor to industry participants, very likely dictating under the gun:

Industryparticipants observed the significant benefits of the Close-Out Amountapproach following the default of Lehman Brothers.
Inlaunching the Close-Out Amount Protocol, ISDA is facilitating amendmentof existing 1992 ISDA Master Agreements by replacing Market Quotationand, if elected, Loss with the Close-Out Amount approach.

    "Thisis yet another example of ISDA helping the industry to coalesce aroundmore efficient and effective practices, while maintaining flexibility,"said Robert Pickel, Executive Director and Chief Executive Officer,ISDA. "The Protocol permits parties to value trades in the way that ismost appropriate, which greatly enhances smooth functioning of themarket in testing circumstances."

And, lo and behold, on the list of adhering parties, AIG takes front and center stage (together with several other parties that probably deserve the microscope treatment).
So - in simple terms, ISDA,which is the only effective supervisor of the Over The Counter CDSmarket, is giving its blessing for trades to occur (cross) below wherethere is a realistic market bid, or higher than the offer. Intraditional equity markets this is a highly illegal practice. ISDA isallowing retrospective arbitrary trades to have occurred atwhatever price any two parties agree on, so long as the very vaguenecessary and sufficient condition of "market quotations may bedifficult to obtain" is met. As anyone who follows CDS trading knows,this can be extrapolated to virtually any specific single-name, indexor structured product easily. In essence ISDA gave its blessing forbelow the radar fund transfers of questionable legality. The curioustiming of this decision and the alleged abuse of CDS transaction marksby and among AIG and the big banks, is striking to say the least.

This wholesale manipulation of markets, investors and taxpayers has gone on long enough.

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Labels:AIG-FP,bank of countrywide lynch,CITI,JP Morgan

maserati

The title should be "Taxpayers were responsible for their profits."

Maxie

No. Taxpayers were only paying for it.

The title should be "Taxpayers were responsible for their profits."
maserati 发表于 2009-3-30 10:29