Over at TPM, Josh has been doggedly highlighting the refusal of both AIG and the federal government to reveal the identity of AIG’s counter-parties in its disastrous credit default swaps. And several lawmakers have in recent days pressed Tim Geithner and Ben Bernanke on the issue.
The question matters, of course, because AIG needed to make its most recent multi-billion dollar trip back to the public trough (that’s over $160 billion in all for AIG, if you’re counting) in order to pay back its creditors on those disastrous swaps — and thereby, we’re told, prevent a wider financial collapse. So identifying who those swaps were made with will tell us, in effect, who this latest portion of our money is ultimately going to.
It’s worth noting, then, that, thanks to some great reporting from the Wall Street Journal and the New York Times, we do in fact have some preliminary information about who AIG’s partners were on the swaps.
This Journal story from October 2008 names the following nine American and foreign banks as having bought swaps from AIG: Goldman Sachs; Merrill Lynch; UBS of Switzerland; Credit Agricole SA of France; Deutsche Bank of Germany; Barclays, and Royal Bank of Scotland Group, of Britain; and CIBC, and Bank of Montreal, of Canada.
Merrill is described by the Journal as a “big client” of the AIG unit that did the swaps.
By the end of 2007, with the value of the underlying assets plummeting, many of these banks had asked for collateral on the swaps, according to the Journal.
For instance, the paper reports that Goldman held swaps that insured about $20 billion of securities. In August 2007, Goldman demanded $1.5 billion in collateral from AIG. It ultimately got $450 million, then another $1.5 billion last October. At that point, says the Journal:
Goldman hedged its exposure by making a bearish bet on AIG, buying credit-default swaps on AIG’s own debt.
That picture of Goldman’s exposure jibes with a New York Times story from September 2008 about the credit default swaps, which reported that Goldman was AIG’s “largest trading partner,” and likewise gave a figure of $20 billion for Goldman’s exposure to AIG.
The Times also implicates another domestic firm: JP Morgan (now JP Morgan Chase). In fact, it recounts that it was derivatives traders from that company that a decade ago, first brought to AIG’s London-based financial products unit, run by Joseph Cassano, the ill-fated idea of doing credit default swaps.
Ten years ago, a “watershed” moment changed the profile of the derivatives that Mr. Cassano traded, according to a transcript of comments he made at an industry event last year. Derivatives specialists from J. P. Morgan, a leading bank that had many dealings with Mr. Cassano’s unit, came calling with a novel idea.
Morgan proposed the following: A.I.G. should try writing insurance on packages of debt known as “collateralized debt obligations.” C.D.O.’s. were pools of loans sliced into tranches and sold to investors based on the credit quality of the underlying securities.
It’s not 100 percent clear, then, that JP Morgan Chase is a current counter-party of AIG on the swaps — but it certainly wouldn’t be surprising.
That same Times story offers another hint, albeit a vague one, about the identity of the counter-parties.
While clients and counterparties remain closely guarded secrets in the derivatives trade, Mr. Cassano talked publicly about how proud he was of his customer list.
At the 2007 conference he noted that his company worked with a “global swath” of top-notch entities that included “banks and investment banks, pension funds, endowments, foundations, insurance companies, hedge funds, money managers, high-net-worth individuals, municipalities and sovereigns and supranationals.”
What to make of all this? Well, here’s one thing. As Josh has noted, the usual argument given against disclosing the identities of the counter-parties is that it would reduce public confidence in the banks that were named, with potentially disastrous consequences for their positions. But there’s little evidence we’re aware of that any of the banks named above suffered such an effect when, for instance, the Journal and the Times published their stories — whose accuracy have not been questioned.
In fact, Geithner and Bernanke haven’t deigned to explain their position in even this much detail — so it’s difficult to know whether there are factors we’re not considering. But in the absence of a fuller explanation, we’ll keep pressing…