In a case of the pot calling the kettle black, Bernanke Says Insurer AIG Operated Like a Hedge Fund.
“If there is a single episode in this entire 18 months that has made me more angry, I can’t think of one other than AIG,” Bernanke told lawmakers today. “AIG exploited a huge gap in the regulatory system, there was no oversight of the financial-products division, this was a hedge fund basically that was attached to a large and stable insurance company.”
The company “made huge numbers of irresponsible bets, took huge losses, there was no regulatory oversight because there was a gap in the system,” Bernanke said. At the same time, officials “had no choice but to try and stabilize the system” by aiding the firm.
My Comment: By attempting to bail out Fannie Mae, Freddie Mac, AIG, Citigroup, Bank of America, and Merrill Lynch, the Fed is making irresponsible bets, taking huge losses, and has no regulatory oversight. There is a huge gap in the system, and that gap is the Fed itself.
AIG is getting as much as $30 billion in new government capital and relaxed terms on its bailout announced yesterday.
In another sign of tighter regulation to come, Bernanke said supervisors should have authority to bar new financial products that may be destabilizing to markets.
My Comment: The first thing supervisors should do is eliminate the Fed for its role in destabilizing the markets.
“AIG is a huge, complex, global insurance company attached to a very complicated investment bank, hedge fund that was allowed to build up without any adult supervision,” U.S. Treasury Secretary Timothy Geithner said today during testimony to the House Ways and Means Committee. Because of “the risks AIG poses to the economy,” he said, “the most effective thing to do is to make sure the firm can be restructured over time.”
My Comment: The most effective thing to do is let AIG go under.
“Whether we like it or not, America’s federal policy is now driven by the need to avoid another Lehman,” said David Kotok, chairman and chief investment officer of Cumberland Advisors Inc., in Vineland, New Jersey.
My Comment: There is no need to prevent another Lehman. Instead, there is precisely a need for more Lehmans. The sooner we stop trying to prop up failed institutions, the sooner the economy recovers. This is the lesson of Japan. Kotok badly needs a history lesson.
Bernanke said the revised bailout gives taxpayers “the best chance” of eventually recovering “most or all of the investments” the public has.
My Comment: There is no chance of recovering the $163 billion taxpayers have wasted bailing out AIG and Bernanke knows it.
Banks relied on AIG’s financial products unit to back about $298 billion of assets through derivative contracts at year-end, making the firm a “systemically significant failing institution” that has to be propped up, the Treasury said.
My Comment: Bernanke ought to name the banks being bailed out on the other side of those $298 billion in derivatives. And the amazing thing is even with that $163 billion going Goldman, Citigroup, JPMorgan or whoever, and even with a further $300 billion in guarantees to Citigroup and another $100 billion in guarantees to Bank of America, the banking system is still insolvent.
“We’re doing our absolute best in partnership with the Fed and Treasury to unwind the very issues that Chairman Bernanke is talking about in a way that preserves systemic stability and pays back taxpayers,” said Christina Pretto, an AIG spokeswoman.
AIG has reduced the number of bets made by the financial products unit that sold credit-default swaps by more than 25 percent since October and cut expenses by “ hundreds of millions” of dollars, she said.
My Comment: Lovely. Taxpayers have shelled out $150 billion and AIG has only reduced its derivatives by 25%. Pretto has some gall to suggest taxpayers will be paid back.
AIG’s Fourth Rescue May Not Be Last
Taxpayers can expect to shell out still more as analysis shows AIG’s Fourth Rescue May Not Be Last.
U.S. taxpayers may not be done bailing out American International Group Inc. after the head of the Federal Reserve said a fourth rescue of the insurer was needed to keep the financial system from failing.
“We’re not done with AIG by a long shot,” said Phillip Phan, professor of management at the Johns Hopkins Carey Business School in Baltimore. “The problem is we still don’t know the extent of the risk AIG has. We don’t know where the bottom is.”
The rescue, which now leaves taxpayers on the hook for $163 billion at AIG, a government official said, was raised after the New York-based company reported a $61.7 billion fourth-quarter loss on March 2. AIG still has billions of dollars in unrealized losses on assets and faces declining revenue on premiums because of the slump in commercial insurance and the company’s struggle to attract new business.
Bernanke told the Senate Budget Committee yesterday that because AIG has so many counterparties, its failure “would have had very adverse effects on the banking system.” The company’s growth in risky markets is attributable to a lack of regulation, he said.
The insurer will probably need more government funds to cover contract liabilities and declines in asset values, according to Sean Egan, president of Egan-Jones Ratings Co. in Haverford, Pennsylvania. At the end of December, AIG had $27 billion in unrealized losses on swaps, options and forward contracts and $25 billion in pretax gross unrealized losses on bonds and equity securities. Credit-rating downgrades on structured finance products may also boost losses, Egan said.
“We expect the U.S. will continue to support AIG until it is no longer too big to fail,” Egan wrote in a March 2 report.
More Hedge Fund Insanity
Inquiring minds are reading Ackman’s Pershing Square Target Fund Fell 33.3% in February.
William Ackman’s hedge fund that invests solely in Target Corp. fell 33.3 percent in February, bringing the loss since inception to 93 percent, according to an e-mail sent to investors.
The decline in Pershing Square IV fund was more than three times that of Target shares in February. Ackman made his bet using options rather than the underlying stock, which can magnify gains or losses on an investment. Target tumbled about 9 percent last month.
Ackman last month told investors seeking redemptions that they would get their money back in March.
Ackman, 42, started his fund investing in the Minneapolis-based retailer in 2007 with $2 billion. A call to his office wasn’t immediately returned.
Hedge Funds typically take 2% of assets (annually) and 20% of profits.
In this case there were no profits. However, assuming the 2% figure is accurate, Ackman made a veritable fortune driving his target fund to a 93% loss. Not to worry, investors will “get their money back in March”, whatever is left of it.
Mike “Mish” Shedlock
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