AIG Was Responsible For The Banks' January & February Profitability

Discussion in 'Wall St. News' started by Eliot Hosewater, Mar 29, 2009.


    Sunday, March 29, 2009
    Exclusive: AIG Was Responsible For The Banks' January & February Profitability
    Posted by Tyler Durden at 6:35 PM
    Zero Hedge is rarely speechless, but after receiving this email from a correlation desk trader, we simply had to hold a moment of silence for the 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 everything is good.

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

    "AIG-FP accumulated thousands of trades over the years, all essentially consisted of selling default protection. This was done via a number of structures with really only one criteria - rated at least AA- (if it fit these criteria all OK - as far as I could tell credit assessment was completely outsourced to the rating agencies).

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

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

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

    I was mostly involved in the corporate synthetic CDO side.

    During Jan/Feb AIG would call up and just ask for complete unwind prices from the credit desk in the relevant jurisdiction. These were not single deal 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".

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

    I can only guess/extrapolate what sort of PnL this put into the major global banks (both correlation and single names desks) during this period. Allowing for significant reserve release and trade PnL, I think for the big correlation players this 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 Treasury imminently, decided to throw in the towel, and gifted major bank counter-parties with trades which were egregiously profitable to the banks, 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, for lack of a better word, fraudulent scam.

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

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

    For banks to proclaim their profitability in January and February is about as close to criminal hypocrisy as is possible. And again, the taxpayers fund this "one time profit", which causes a market rally, thus allowing the banks to promptly turn around and start selling more expensive equity (soon coming to a prospectus near you), also funded by taxpayers' money flows into the market. If the administration is truly aware of all these events (and if Zero Hedge knows about it, it is safe to say Tim Geithner also got the memo), then the potential fallout would be staggering once this information makes the light of day.
  2. Like I've been saying lately, AIG is a money laundering tool for the federal reserve to siphon tax backed debt from the treasury to the major world banks.
  3. Sooner or later, somebody is gonna step up in the MSM and educate the public on the details of this fraud. When Joe Q. Public finally realizes just how badly he has been getting screwed, there will be some serious retribution. I would not want to be one of those guys at the top whose name is always out in the open. It could get real ugly.
  4. This shit gets better and better. These gov't official and inside politician are the scum bags are the earth.

    I am looking for the best place to move to and never pay one more dime of tax dollars to this corrupt and fucked up country that is following the Roman Empire path.

    Trade well.
  5. mokwit


    Thanks for posting this. Criminal misrepresentation by the banks - from the headlines and their statements it would be reasonably inferred that the profitability was from recovery.
  6. achilles28


    Yep. Spot on.

    10 Trillion in taxpayer bailouts for 2 Trillion in toxic underlying?

    Anyone smell a rat yet??

    Its a gigantic fraud perpetrated with the full blessing of Bush and Obama.

    Bankers Rule over Political Whores.
  7. So wait --

    Are current valuations of banks correct, or incorrect? Or is the real question that they are correct for now, but not indicative of the next quarter when AIG can't be funneling money?

    How about a time estimate on when the market discounts the Jan/Feb profitability and goes back to a sell-off?
  8. classic! might as well buy banks for first qtr earnings now! they are gonna be HUGE!! LOL

    quit with the whining and BANK baby!:D
  9. Market already accounted for improved bank earnings when it rallied out of the toilet. Issue is whether or not they see improved earnings for 2nd qtr. I don't think anyone serious will go long until they see the breakdown of the revenue streams. If they are one-time payouts, then bank earnings will be crap and the market will sell off and take the S&P back to sub 700.
  10. um no I don't think mkt realizes banks are having a huge winfall from AIG trade unwinds. And as per normal banks will deny it was AIG as they surprise to the upside.
    #10     Mar 29, 2009