Las Vegas finds a second home on Wall Street

Dennis Sevakis
The media brouhaha -- regarding AIG and the wayward bonuses paid to some of its employees because of an "oversight" on the part of Senator Dodd et al. -- has for the past few days been essentially nonstop. However improper and infuriating those payouts may be to the taxpayer who is expected to foot the bill, now and for foreseeable generations, they're small potatoes -- or should I say plums?  Set along side the dollars going to the financial institution players such as banks and the now-bank but former Wall Street brokerages, the total amount of the AIG bonuses are insignificant chump change.

Consider the following excerpt from the Wall Street Journal piece "Goldman's Price of Protection":

An AIG failure likely would have prevented Goldman from receiving the $2.5 billion of collateral, and the cash payments[$5.6 billion from the Fed through the AIG conduit]. Instead, Goldman would have been exposed to further declines in the value of the CDOs.

This could have hurt Goldman's $37.3 billion of tangible common equity. And an AIG failure could have led to losses on other trades.

AIG had about $20 billion of total swaps with Goldman, substantially more than the $13.98 billion on the multisector CDOs.

Goldman's defense: It had protected itself against that outcome by acquiring swaps protection against a default by AIG itself.

[Emphasis added]

Essentially, the government bailout of AIG has made Goldman whole, as least as far as their relationship and counter-party agreements with AIG are concerned.  And Goldman was so smart that even if AIG had been allowed to fail, these Tom Wolfean "Masters of the Universe" would have remained unscathed in spite of anything that may else have come tumbling down in the pyroclastic financial meltdown.

Really?

Okay, Goldman, pony up! Let's see those "Here's-how-we-hedged-AIG" derivative contracts. And are, or would those counter-parties still be viable if AIG had gone belly-up? Hmmm? Otherwise, the above is probably no more than c.y.a. pabulum for regulator/congressional consumption.  

If you think having Goldman's ex-CEO as Treasury Secretary was no factor whatsoever in the "Let's-see ... whom-should-we-and-whom-should-we-not-bailout?" decision making, there are lots of financial wizards out there willing to sell you the same NY landmark bridge several times over -- just as they have with credit default swaps.  "CDSs" to the initiated, if you will.

However, we should keep in mind that the current financial crisis has been a long time in the making.  It is not an orphan, but rather the bastard child of many a sire who would now be inclined to avoid mention of his or her parentage.

One of the more curious and less well known headwaters of the current financial crisis may be found hiding in the closing paragraphs of the late 2000 tag-along legislation regarding financial derivatives, which was passed in the dead of night as an attachment to the 11,000 page omnibus expenditure bill. To wit, the "Commodity Futures Modernization Act of 2000."  Sponsored, written and inserted by the Republican controlled House, but signed into law by President Clinton, this legislative wunderkind ends with the following interesting catch phrases:

(b) COVERED SWAP AGREEMENTS.

No covered swap agreement shall be void, voidable, or unenforceable, and no party to a covered swap agreement shall be entitled to rescind, or recover any payment made with respect to, a covered swap agreement under any provision of Federal or State law, based solely on the failure of the covered swap agreement to comply with the terms or conditions of an exemption or exclusion from any provision of the Commodity Exchange Act or any regulation of the Commodity Futures Trading Commission.

(c) PREEMPTION.

This title shall supersede and preempt the application of any State or local law that prohibits or regulates gaming or the operation of bucket shops (other than antifraud provisions of general applicability) in the case of

(1) a hybrid instrument that is predominantly a banking product; or

(2) a covered swap agreement.

If that's not a gaming license, I don't know what is.

Just goes to show you, can't blame everything on Senator Dodd.  Nor Ms. Speaker.
The media brouhaha -- regarding AIG and the wayward bonuses paid to some of its employees because of an "oversight" on the part of Senator Dodd et al. -- has for the past few days been essentially nonstop. However improper and infuriating those payouts may be to the taxpayer who is expected to foot the bill, now and for foreseeable generations, they're small potatoes -- or should I say plums?  Set along side the dollars going to the financial institution players such as banks and the now-bank but former Wall Street brokerages, the total amount of the AIG bonuses are insignificant chump change.

Consider the following excerpt from the Wall Street Journal piece "Goldman's Price of Protection":

An AIG failure likely would have prevented Goldman from receiving the $2.5 billion of collateral, and the cash payments[$5.6 billion from the Fed through the AIG conduit]. Instead, Goldman would have been exposed to further declines in the value of the CDOs.

This could have hurt Goldman's $37.3 billion of tangible common equity. And an AIG failure could have led to losses on other trades.

AIG had about $20 billion of total swaps with Goldman, substantially more than the $13.98 billion on the multisector CDOs.

Goldman's defense: It had protected itself against that outcome by acquiring swaps protection against a default by AIG itself.

[Emphasis added]

Essentially, the government bailout of AIG has made Goldman whole, as least as far as their relationship and counter-party agreements with AIG are concerned.  And Goldman was so smart that even if AIG had been allowed to fail, these Tom Wolfean "Masters of the Universe" would have remained unscathed in spite of anything that may else have come tumbling down in the pyroclastic financial meltdown.

Really?

Okay, Goldman, pony up! Let's see those "Here's-how-we-hedged-AIG" derivative contracts. And are, or would those counter-parties still be viable if AIG had gone belly-up? Hmmm? Otherwise, the above is probably no more than c.y.a. pabulum for regulator/congressional consumption.  

If you think having Goldman's ex-CEO as Treasury Secretary was no factor whatsoever in the "Let's-see ... whom-should-we-and-whom-should-we-not-bailout?" decision making, there are lots of financial wizards out there willing to sell you the same NY landmark bridge several times over -- just as they have with credit default swaps.  "CDSs" to the initiated, if you will.

However, we should keep in mind that the current financial crisis has been a long time in the making.  It is not an orphan, but rather the bastard child of many a sire who would now be inclined to avoid mention of his or her parentage.

One of the more curious and less well known headwaters of the current financial crisis may be found hiding in the closing paragraphs of the late 2000 tag-along legislation regarding financial derivatives, which was passed in the dead of night as an attachment to the 11,000 page omnibus expenditure bill. To wit, the "Commodity Futures Modernization Act of 2000."  Sponsored, written and inserted by the Republican controlled House, but signed into law by President Clinton, this legislative wunderkind ends with the following interesting catch phrases:

(b) COVERED SWAP AGREEMENTS.

No covered swap agreement shall be void, voidable, or unenforceable, and no party to a covered swap agreement shall be entitled to rescind, or recover any payment made with respect to, a covered swap agreement under any provision of Federal or State law, based solely on the failure of the covered swap agreement to comply with the terms or conditions of an exemption or exclusion from any provision of the Commodity Exchange Act or any regulation of the Commodity Futures Trading Commission.

(c) PREEMPTION.

This title shall supersede and preempt the application of any State or local law that prohibits or regulates gaming or the operation of bucket shops (other than antifraud provisions of general applicability) in the case of

(1) a hybrid instrument that is predominantly a banking product; or

(2) a covered swap agreement.

If that's not a gaming license, I don't know what is.

Just goes to show you, can't blame everything on Senator Dodd.  Nor Ms. Speaker.