Bailout Report

In late 2008, the New York Fed, then headed by now Treasury Secretary Timothy Geithner, created a special entities, Maiden Lane II and Maiden Lane II LLCs, to funnel $70 billion to 16 big U.S. and European banks whose failed “hedge trades”  would otherwise have prevented a single bonus from being paid.

The Federal Reserve, Securities and Exchange Commission, and Treasury Department colluded to keep thisbackdoor bailout, which now threatens the careers of Timothy Geithner, secret.  In a frantic back pedal announced the day before Goldman Saches announced it’s 2009 bonus payout, the Federal Reserve seeks to explain the unusual circumstances behind the AIG payments.

Along with surrendering $25.9 billion of collateral that had been previously posted by AIG with the counterparties, the purchase of the $46.1 billion of par value essentially made the counterparties whole.”

The publicly disclosed information from the secretive “Schedule A“, also known as the Amended Shortfall Agreement, reports the the aggregate notional value, aggregate total collateral posted and aggregate negative mark to market with respect to the credit default swaps which the US government made good on for the benefit of the following banks:

                                                                                                                  Aggregate                                                                Aggregate              Aggregate Total             Negative
Institution                                                   Notional Value          Collateral Posted         Mark to Market
Deutsche Bank                                                $  8,518,356,966        $     5,715,341,619        $ 3,644,691,001
Landesbank Baden-Wuerttemberg (George Quay)                  $     89,034,985        $                 0        $    40,937,631
Wachovia                                                     $    926,335,734        $       164,607,606        $   404,018,461
Calyon                                                       $  4,323,637,555        $     3,128,037,164        $ 2,413,600,219
Rabobank                                                     $    649,590,459        $       336,620,199        $   362,881,964
Goldman Sachs                                                $ 13,978,535,327        $     8,422,666,771        $ 7,998,529,640
Societe Generale                                             $ 16,424,803,684        $     9,568,581,132        $ 8,390,548,571
Merrill Lynch                                                $  6,223,719,622        $     3,110,396,153        $ 3,398,791,448
Bank of America                                              $    772,111,117        $       267,404,090        $   396,835,377
The Royal Bank of Scotland                                   $  1,131,034,073        $       624,290,063        $   601,061,184
HSBC Bank USA                                                $    155,675,217        $       149,724,900        $   131,700,553
Deutsche Zentral-Genossenschaftsbank (Coral Purchasing)      $  1,795,127,468        $       818,267,668        $   993,019,847
Dresdner Bank AG (ReMo Finance Inc.)                         $    398,443,938        $                 0        $   169,597,157
UBS                                                          $  3,833,585,715        $     1,306,638,258        $ 1,977,043,626
Barclays (BGI Cash Equivalent Fund II and Barclays)          $  1,537,250,236        $       889,155,039        $   976,019,953
Bank of Montreal                                             $  1,372,477,391        $       503,719,529        $   644,506,924

The following other banks were also bailed out: Barclays, Rabbobank, Danske, Banco Santander, Morgan Stanley, and Lloyds Banking Group.

Long before their respective employers ceased to exist as independent companies, former Merrill Lynch Top North American Economist David A. Rosenberg and former Bear Stearns Chief Equities Investment Strategist Francois Trahan published research reports with explicit warnings about asset and credit bubbles in the U.S. housing and mortgage markets.

As early as August 2004, Mr. Rosenberg, Chief Economist at Merrill Lynch for North America, published a detailed analysis regarding the precarious state of the American housing market. Rosenberg warned that there could serious problems ahead in an Economic Commentary entitled: “Housing: If not a Bubble Then an Oversized Sud.”

Former Bear Stearns Chief Equities Investment Strategist Francois Trahan first published a report that raised serious questions about housing and real estate investments in a May 2005 report called “REIT all About it.” Trahan and his team at Bear Stearns followed their 2005 report with publications in 2006 that explicitly warned about the difficult future facing the U.S. housing market and even raised the possibility of a global credit crisis. The 2006 Bear Stearns reports definitively described the housing market as an unsustainable “bubble” and further cautioned that the term bubble was not one the Bear team used lightly.

It was not until 2008 that overcommitments to mortgage-backed securities (a byproduct of the housing boom), CDO’s and related products tied to residential and commercial mortgages caused Merrill Lynch and Bear Stearns to suffer backbreaking losses so severe that Merrill sold itself to Bank of America and Bear Stearns narrowly avoided bankruptcy with a Fed-assisted fire sale to JP Morgan.

Continue Reading →

In an effort to increase transparency about the $1 Trillion (of $2.1 Trillion) it has added to it’s balance sheet since last September, the Fed committed to issuing a balance sheet performance report on the second Wednesday of each month.

In the first reports, the Fed indicated it netted $2.7 Billion in the first quarter, largely on gains from Term Auction Facility (TAF) loans and on its Commercial Paper Funding Facility; earned $4.6 Billion from Treasury bonds which it started purchashing in March; and lost $5.3 Billion on Bear Stearns and AIG collateral.

Federal Reserve Credit and Liquidity Programs and the Balance Sheet
Continue Reading →

RECESSIONWIRE May 14, 2009: “So… how big is your package?”

It’s a question that used to be taboo, something only discussed between intimates. But these days, virtually no one is too shy to ask about the dimensions of someone else’s severance deal. In fact many people can’t help but compare what they received against the packages of their friends, enemies and former coworkers.

It’s natural to want to know how you measure up. And information sharing in this regard can be valuable because as you’ve no doubt realized by now, severance packages come in all shapes and sizes—some generous, many decent, some completely non-existent. So what’s fair and what’s your legal due… and technically what is severance anyway?

Severance, as defined by the American Heritage Dictionary is: “The state or condition of being severed or separated, as in the ending of a relationship.” But you already suspected it was a parting gift for being dumped, didn’t you? Legally speaking, severance pay is what an employer gives an employee at the time of termination. It is sometimes given in lieu of notice (as in, “So sorry to let you go. But here’s two weeks of pay. Don’t let the door kick you in the ass on the way out.”) Sometimes a company provides severance based on how long you’ve been in your job; for example, one week of severance for every year of service. But depending on how poor the financials of the company at the time, sometimes the employer will offer a flat two weeks of pay regardless of your length of service. And sometimes, you’ll get bupkes—Yiddish for diddley squat.

Continue Reading →

In August 2007, Bear Stearns CEO Jimmy Cayne wrote to Bear investors.  Cayne’s mission that August was critically important, and he knew it.  In the wake of the shocking failure of two huge Bear Stearns hedge funds with heavy ties to the subprime mortgage market, the CEO needed to convey his confidence in the future of his company. Cayne cooly reassured investors that Bear’s conservative tradition, strong risk management culture, and plan to pare its mortgage backed securities portfolio would assure Bear Stearns a speedy and full recovery from the summer’s disastrous fund collapses.

In Cayne’s words, “You can count on us.”  Less than seven months later, Bear was purchased by JP Morgan for $10 per share.

A year later, Cayne sang a completely different tune in an interview with Fortune Magazine titled “The Rise and Fall of Jimmy Cayne.” The ex-Bear Stearns CEO revealed that the strength he projected in the summer of 2007 was in fact false strength. Fortune reported that Cayne “did not know how to deal with the devaluation of the firm’s mortgage-backed securities and other illiquid assets.  Nor did he know what to do… when two hedge funds that contained those same toxic assets collapsed and further poisoned the company’s balance sheet.”

The truth according to Jimmy Cayne himself is that Bear’s all-powerful dictator was paralyzed by indecision in the wake of Bear’s hedge fund troubles. Cayne had absolutely no idea how to cope with the company’s financial troubles.

In the CEO’s own words: “It was not knowing what to do. It’s not being able to make a definitive decision one way or the other, because I just couldn’t tell you what was going to happen.”

“I didn’t stop it. I didn’t reign in the leverage,” Cayne also admitted to Fortune.  Clearly, Mr. Cayne understood that Bear was overleveraged and blames himself for  doing  nothing about it.

Continue Reading →