Thursday, March 5, 2009

Throwing Our Money Around

(The following is best read while listening to the John Lee Hooker song from my previous post. Scroll down to that post, click on the video, scroll back up here and read. It will help to cushion the shock.)

From the blog, Moon of Alabama, comes this bombshell, entitled Josh Asks Why Geithner Doesn't Tell. Some very disturbing excerpts:
When Lehman Brothers went bankrupt -a 'credit event' - people who had insured their holdings of Lehman bonds asked their insurers to pay for their losses. Such a credit event was also triggered when Fannie and Freddie were taken into receivership.

AIG which had written insurances for the debt of those entities faced a big payout and the taxpayer had to cough up the money.

What is the moral justification for this?

It was morally okay because the people and institutions insured by AIG were justified to expected the payout as their 'assets', i.e. Lehman bonds had really lost value. They had hedged a real risk like you do when you pay for fire insurance on your house. Insured you are right to expect a payout when your house burns down.

But their is another group of people and institution who got money from the taxpayer through AIG.

This second group never ever owned a Lehman or Freddie or Fannie bond. But they also had bought insurance from AIG against the default of these bonds. These people never invested in 'assets'. They payed a small monthly fee to AIG for a lottery slip and when Lehman failed they had a huge win. They went to AIG, pointed to the 'credit event' and demanded the payout. AIG obliged and the taxpayer gave the money.

Some may ask:

"While it is easy to understand the moral case for bailing out real bondholders that insured against default, what is the moral case for paying out to people who made pure bets? These people never owned a fire insured house at all. Why do they get taxpayer money when my house burns down?"

. . . . .

The total economic loss was $600 billion, $450 billion by bond owners and $150 billion by insurances. $600 million left the monetary system - poof.

But on top of that there were written insurances with a notional value of $250-$350 billion that insured people who never had the insured asset but were only playing the lottery. These people demanded money from the insurer and indeed they were payed.

. . . . . .

Earlier Josh Marshall at TPM wondered where the taxpayer money goes. Secretary Geithner did not answer the question when he was asked by Senator Cantwell. Now Josh proposes a compromise and only wants to asks Geithner for the reason why they can not tell us.

Dear Josh the reason is simple.

AIG still has $300 billion in CDS exposure. If the Lehman quote of 1/3 real insurance and 2/3 lottery bets is the same with those CDS, which is likely, than a few rich people are waiting for a $200 billion free payout from the taxpayer.

Geithner does not want you or anyone else to know who profits from this scheme without having risked any real money. His rich friends do not want you to know that they are racking in billions of dollars in lottery wins that cost them little money and that the taxpayers are paying out because the private lottery operator went bust. They will pay off Geithner when his job is done and he finally gets kicked out.

The most important thing to keep in mind is that the gamblers who made bets on these "financial products" are not threatened with heavy losses. They bet relatively modest sums. Consequently the Treasury's failure to pay off on those bets would NOT -- I repeat, NOT pose a threat to the US economy. So WHAT is going on here? If you bet on a horse that wins and your bookie can't make good because he's gone broke, you go to the US Treasury for your payoff???????????

I knew things were bad, but I didn't think they were this bad. I knew people had been literally gambling on these credit default swaps but I didn't think payoffs to the gamblers were going to be part of the bailout. Am I being naive or what? Is this going to be a huge scandal or just business as usual on our merry road to ruin?

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