Secretly saving Goldman Sachs, Paulson's company.
==========Behind AIG's crisis, a blind eye to a web of risk
iht.com
Two weeks ago, the United States' most powerful regulators and bankers huddled in the Lower Manhattan fortress that is the Federal Reserve Bank of New York, desperately trying to stave off disaster.
As the group, led by Treasury Secretary Henry Paulson Jr., pondered the collapse of one of the oldest U.S. investment banks, Lehman Brothers, a more dangerous threat emerged: American International Group, the world's largest insurer, was teetering. AIG needed billions of dollars to right itself and had suddenly begged for help.
The only Wall Street chief executive participating in the meeting was Lloyd Blankfein of Goldman Sachs, Paulson's former firm. Blankfein had particular reason for concern.
Although it was not widely known, Goldman, a Wall Street stalwart that had seemed immune to its rivals' woes, was AIG's largest trading partner, according to six people close to the insurer who requested anonymity because of confidentiality agreements. A collapse of the insurer threatened to leave a hole of as much as $20 billion in Goldman's side, several of these people said.
Days later, U.S. officials, who had let Lehman die and initially balked at tossing a lifeline to AIG, ended up bailing out the insurer for $85 billion.
Their message was simple: Lehman was expendable. But if AIG unspooled, so could some of the mightiest enterprises in the world.
A Goldman spokesman said during an interview that the firm was never imperiled by AIG's troubles and that Blankfein participated in the Fed discussions to safeguard the entire financial system, not his firm's own interests.
Yet an exploration of AIG's demise and its relationships with firms like Goldman offers important insights into the mystifying, virally connected - and astonishingly fragile - financial world that began to implode in recent weeks.
Although America's housing collapse is often cited as having caused the crisis, the system was vulnerable because of intricate financial contracts known as credit derivatives, which insure debt holders against default. They are fashioned privately and beyond the ken of regulators - sometimes even beyond the understanding of executives peddling them.
Originally intended to diminish risk and spread prosperity, these inventions instead magnified the impact of bad mortgages like the ones that felled Bear Stearns and Lehman and now threaten the entire global economy.
In the case of AIG, the virus exploded from a freewheeling little 377-person unit in London, and flourished in a climate of opulent pay, lax oversight and blind faith in financial risk models. It nearly decimated one of the world's most admired companies, a seemingly sturdy insurer with a trillion-dollar balance sheet, 116,000 employees and operations in 130 countries.
"It is beyond shocking that this small operation could blow up the holding company," said Robert Arvanitis, chief executive of Risk Finance Advisors in Westport, Connecticut. "They found a quick way to make a fast buck on derivatives, based on AIG's solid credit rating and strong balance sheet. But it all got out of control."
The insurance giant's London unit was known as AIG Financial Products, or AIGFP. It was run with almost complete autonomy, and with an iron hand, by Joseph Cassano, according to current and former AIG employees.
A onetime executive with Drexel Burnham Lambert - the investment bank made famous in the 1980s by the junk bond king Michael Milken, who later pleaded guilty to six felony charges - Cassano helped start the London unit in 1987........
Ten years ago, a "watershed" moment changed the profile of the derivatives that Cassano traded, according to a transcript of comments he made at an industry event last year. Derivatives specialists from JPMorgan Chase, a leading bank that had many dealings with Cassano's unit, came calling with a novel idea.
JPMorgan proposed the following: AIG should try writing insurance on packages of debt known as "collateralized debt obligations." CDOs were pools of loans sliced into tranches and sold to investors based on the credit quality of the underlying securities.
The proposal meant that the London unit was essentially agreeing to provide insurance to financial institutions holding CDOs and other debts in case they defaulted - in much the same way some homeowners are required to buy mortgage insurance to protect lenders in case the borrowers cannot pay back their loans.
Under the terms of the insurance derivatives that the London unit underwrote, customers paid a premium to insure their debt for a period of time, usually four or five years, according to the company. Many European banks, for instance, paid AIG to insure bonds that they held in their portfolios......
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So, what this former junk bond creep did to AIG, investment bankers with Republican right wing deregulation did to the USA. You take an institution which built up a solid balance sheet piece by piece over a long period of work and sacrifice and use that strength to gamble for personal gain.
Nice to see that JP Morgan, the Supreme Commander of Wall Street (used to be King of WS after receiving the exceptionally nice package called Bear Stearns without the riskiest junk --- we got that) was intimately involved.
What is to prevent another bubble -- gold, commodities, oil -- from forming now?
Furious yet?
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