Monday, July 28, 2014
Inquirer Daily News

AIG bonuses 'a diversion' for Goldman Sachs bailout: economist

Economist Ed Yardeni asks tough questions about Goldman Sachs' role in the AIG bailout

AIG bonuses 'a diversion' for Goldman Sachs bailout: economist

Treasury Secretary Geithner last week hinted that President Obama might effectively reinstate the Glass-Steagall Act's ban oncommercial banks getting mixed up with investment banks. Economist (and ex-Deutsche Bank and Prudential Securities strategist) Ed Yardeni, in his newsletter today, quotes Goldman Sachs ceo Lloyd Blankfein's response - "It’s hard to turn back the clock” -- then ridicules it:

"Why is it hard to turn back the clock to November 1999, when the act was gutted by a cabal of Wall Street’s power brokers and their supporters in Congress?

"The Depression-era act prohibited brokerage firms from having investment banking divisions. Following the elimination of this prohibition and restrictions on their leverage ratios in 2004 (engineered by Goldman's CEO Hank Paulson at the time), Wall Street's banks ran amuck.

"In 1999, AIG purchased a thrift in Delaware. As a result, the entire operation of AIG was regulated by the woefully understaffed Office of Thrift Supervision (OTS).

"Under a law passed in 1999, certain kinds of holding companies could choose the OTS as their regulator, provided they owned one or more thrifts. Because the OTS was viewed as more compliant than the Fed or the SEC, companies rushed to reclassify themselves as thrifts. AIG blew up in mid-September 2008 after making a wholesale rush into risky derivatives without adequate collateral.

"Goldman Sachs, it turns out, was AIG’s biggest customer, with $20bn of exposure to CDS contracts written by AIG to insure Goldman’s mortgage derivatives. This explains why Goldman’s Lloyd Blankfein was in the room with Treasury Secretary Hank Paulson the weekend of September 13, when the federal government was scrambling to prop up AIG. The AIG bailout, in effect, was a bailout for Goldman.

"Could it be that all the commotion over $165 million in bonuses paid at AIG to retain key employees is just a diversion--just a game of trivial pursuit? After weeks of stonewalling, federal and company officials, who have jointly made the major decisions, recently disclosed that Goldman Sachs got $13 billion from AIG to settle trades and Merrill Lynch, now owned by Bank of America, got $12 billion. Among foreign firms, Deutsche Bank got $11.8 billion, Barclays $8.5 billion and Societe Generale $11.9 billion. The total is $57 billion!

"Apparently, none of AIG’s counterparties had to take haircuts. Why not? Why is Goldman's CEO giving us advice on how to fix the financial system?"

About this blog

PhillyDeals posts raw drafts and updates of Joseph N. DiStefano's columns and stories about Philly-area finance, investment, commercial real estate, tech, hiring and public spending, which he's been writing since 1989, mostly for the Philadelphia Inquirer.

DiStefano studied economics, history and a little engineering at Penn, taught writing at St. Joe's, and has written the book Comcasted, more than a thousand columns, and thousands of articles, and raised six children with his wife, who is a saint.

Reach Joseph N. at JoeD@phillynews.com or 215 854 5194.

Joseph N. DiStefano