Top 25 Comercial Banks have $201 Trillion in Derivatives but only $7.7 Trillion in Assets

You rarely hear about the true nature of the dilemmas our financial system faces. Only recently, as the real economy begins to implode, do the financial media talking heads even discuss such matters.  Judging by the lack of concern amongst most of the people out there; they probably do not realize just what kinds of sums we are dealing with.

Here is what 1 Trillion dollars would look like, in hundred dollar bills, on forklift pallets double stacked:

1 Trillion Dollars in Hundred Dollar Bills on Forklift Pallets

Imagine $201 Trillion Dollars on forklift pallets; because that is the number that our top commercial banks are toying around with on a daily basis. Read the rest of this entry »

The Wormhole at the “Process Event Horizon”

Ever since the beginnings of fiat money, economies have pulsated between polar opposites: paper and tangibles. The Romans started out with pure gold and silver coins; but with the decline of their economy, they diluted the precious metal content until there was virtually no precious metals in the coins.

There comes a point where it becomes painfully obvious that a society cannot function without economic discipline; meaning there must be controls on the issuance of money. The most reliable method known of today is to make all paper money backed by precious metals, or to use precious metal coins themselves for commerce.

We are in the final phases of the paper-promise-based economy; the point at which perceptions can no-longer be papered over to continue this fiat game. Confidence is lost, without which you cannot operate a system of paper-promises. This is where natural law re-asserts itself and real value overtakes fantasy value in the minds of people everywhere.

It happens quickly, when the game is finally up; there are many examples of hyper-inflation throughout history to give you an idea of how it turns out. The velocity of money increases dramatically when hyperinflation hits, meaning people quickly spend the money they have while it still has value; this causes prices to further escalate in a vicious cycle. In Weimar Germany, when all of the chickens came home to roost, their Papiermark was 1 Trillion to a single US Dollar.

Just imagine what would happen if a significant number of the trillions upon trillions of US Dollars in the system today were mobilized to purchase tangible assets. When you factor in the tremendous amount of money creation taking place throughout the world, the prices of these tangible assets will necessarily go up tremendously when the money hits the real economy.

Reliable sources indicate that the MOPE (Management of Perception Economics) cannot last much longer. The game is likely up in late 2009, going into 2010. We are likely to see a year of perilous decline in the value of the US Dollar. It will be an incredibly bad year for the ill-prepared.

The Final Definition of Inflation According To the Law of Relativity

Jim Sinclair | Jim Sinclair’s Mine Set

Inflation equals money squared.

Eventually no speed of creation of money can maintain the economic stabilizing graviton and according to the law of physics we all fall into the Weimar black hyperinflation hole.

The wormhole at the “process event horizon” (the fall of Lehman Brother and the pending fall of CIT) is from commodity money to commodity money.

The wormhole travels through economic pain and suffering.

YOUR SAFE SHIP IS GOLD BULLION for the transitional trip from commodity money through Weimar hyperinflation and back to commodity money.

As sure as E=MC squared rules in physics, hyperinflation, the black hole of the Bernanke electric money printing press, is here and now accelerating to the speed of light that even at that speed must fall into the black hole in the distorted (by Bernanke) of the financial space – time continuum.

There is no escape from the hyperinflationary result of the infinite quantity of money being created to fill the void of value in the now more than one quadrillion dollars worth of value-less OTC derivatives created from 1991 to 2009.

Fiscal ruin of the Western world beckons

For a glimpse of what awaits Britain, Europe, and America as budget deficits spiral to war-time levels, look at what is happening to the Irish welfare state.

By Ambrose Evans-Pritchard | UK Telegraph

Events have already forced Premier Brian Cowen to carry out the harshest assault yet seen on the public services of a modern Western state. He has passed two emergency budgets to stop the deficit soaring to 15pc of GDP. They have not been enough. The expert An Bord Snip report said last week that Dublin must cut deeper, or risk a disastrous debt compound trap.

A further 17,000 state jobs must go (equal to 1.25m in the US), though unemployment is already 12pc and heading for 16pc next year.

Education must be cut 8pc. Scores of rural schools must close, and 6,900 teachers must go. “The attacks outlined in this report would represent an education disaster and light a short fuse on a social timebomb”, said the Teachers Union of Ireland.

Nobody is spared. Social welfare payments must be cut 5pc, child benefit by 20pc. The Garda (police), already smarting from a 7pc pay cut, may have to buy their own uniforms. Hospital visits could cost £107 a day, etc, etc.

“Something has to give,” said Professor Colm McCarthy, the report’s author. “We’re borrowing €400m (£345m) a week at a penalty interest.”

No doubt Ireland has been the victim of a savagely tight monetary policy – given its specific needs. But the deeper truth is that Britain, Spain, France, Germany, Italy, the US, and Japan are in varying states of fiscal ruin, and those tipping into demographic decline (unlike young Ireland) have an underlying cancer that is even more deadly. The West cannot support its gold-plated state structures from an aging workforce and depleted tax base.

As the International Monetary Fund made clear last week, Britain is lucky that markets have not yet imposed a “penalty interest” on British Gilts, given the trajectory of UK national debt – now vaulting towards 100pc of GDP – and the scandalous refusal of this Government to map out any path back to solvency.

“The UK has been getting the benefit of the doubt, both in the Government bond market and also the foreign exchange market. This benefit of the doubt is not going to last forever,” said the Fund.

France and Italy have been less abject, but they began with higher borrowing needs. Italy’s debt is expected to reach the danger level of 120pc next year, according to leaked Treasury documents. France’s debt will near 90pc next year if President Nicolas Sarkozy goes ahead with his “Grand Emprunt”, a fiscal blitz masquerading as investment.

There was a case for an emergency boost last winter to cushion the blow as global industry crashed. That moment has passed. While I agree with Nomura’s Richard Koo that the US, Britain, and Europe risk a deflationary slump along the lines of Japan’s Lost Decade (two decades really), I am ever more wary of his calls for Keynesian spending a l’outrance.

Such policies have crippled Japan. A string of make-work stimulus plans – famously building bridges to nowhere in Hokkaido – has ensured that the day of reckoning will be worse, when it comes. The IMF says Japan’s gross public debt will reach 240pc of GDP by 2014 – beyond the point of recovery for a nation with a contracting workforce. Sooner or later, Japan’s bond market will blow up.

Error One was to permit a bubble in the 1980s. Error Two was to wait a decade before opting for monetary “shock and awe” through quantitative easing.

The US Federal Reserve has moved faster but already seems to think the job is done. “Quantitative tightening” has begun. Its balance sheet has contracted by almost $200bn (£122bn) from the peak. The M2 money supply has stagnated since January. The Fed is talking of “exit strategies”.

Is this a replay of mid-2008 when the Fed lost its nerve, bristling over criticism that it had cut rates too low (then 2pc)? Remember what happened. Fed hawks in Dallas, St Louis, and Atlanta talked of rate rises. That had consequences. Markets tightened in anticipation, and arguably triggered the collapse of Lehman Brothers, AIG, Fannie and Freddie that Autumn.

The Fed’s doctrine – New Keynesian Synthesis – has let it down time and again in this long saga, and there is scant evidence that Fed officials recognise the fact. As for the European Central Bank, it has let private loan growth contract this summer.

The imperative for the debt-bloated West is to cut spending systematically for year after year, off-setting the deflationary effect with monetary stimulus. This is the only mix that can save us.

My awful fear is that we will do exactly the opposite, incubating yet another crisis this autumn, to which we will respond with yet further spending. This is the road to ruin.

Open Letter To Senators Regarding S.604: Federal Reserve Sunshine Act of 2009

Mr. __________,

I am writing today to ask that you co-sponsor S.604: Federal Reserve Sunshine Act of 2009. This is a very important bill for ensuring oversight and accountability in the Federal Reserve, by allowing the GAO to perform an audit.

So-far, six of the seven representatives from our state have pledged their support for the House version of this bill, HR1207. The bill already has more than enough votes to pass in the House of Representatives. At the last count it had 237 votes.

This kind of legislation is very popular with the people of our state and the nation in general. We are ready to see some real changes in Washington D.C. and that means a real challenge to the unchecked power of the Fed.

In order to restore the reputation, both domestic and international, of our government and monetary system, it is essential that the public and the Congress be allowed to know what is going on at the Federal Reserve.

The Federal Reserve Board has become a de-facto fourth branch of government, it is un-elected and in many ways more powerful than the Congress. There are also many Constitutional questions as to whether the Congress even has the authority to establish a central bank; though that is a topic for future legislation.

Most Americans feel very strongly, as do I, that it is time we took the first step, on our path to transparency. This means a complete Audit of the books and records of the Federal Reserve Bank.

Please join the cause of Liberty and co-sponsor this bill.

Thank You,
Chris Case

Largest Financial Smuggling Case In History Ignored by Media

Its interesting how the media will focus on the most trivial matters, such as a politician’s personal problems, or spin about how the economic improvement is “just around the corner.” In this situation, a couple of guys get caught smuggling $134.5 worth of bonds and you hear little to nothing in the press.

Most of you reading this have, at least a suspicion that something smells rotten in Denmark, when it comes to the integrity of the press during this day and age. Stories like this are confirmation of any suspicions you may have. This is a historic event, which we need to get to the bottom of and understand; because there is probably something important here that we need to know about.

Since the media is sweeping it under the rug, I suspect that the perpetrators may have been acting on the behalf of well connected individuals. Perhaps the media refuses to report real news altogether; opting instead to create a fantasy world, which acts as a sort of red herring. This keeps people from getting in the way of powerful individuals; since they wish to conduct their business undisturbed.

Personally, I think there is a little news that leaks in there, from time to time; but, for the most part, the world portrayed on television is a fantasy one used to control the behavior of those who watch. Accuracy and professionalism don’t really factor into the equation much anymore.

US government securities seized from Japanese nationals, not clear whether real or fake

Bonds worth US$ 134.5 billion are seized. This is the largest financial smuggling case in history. But are they real? Concern over ‘funny money’ or counterfeit securities is spreading in Asia. The international press is silent.

Milan (AsiaNews) – Italy’s financial police (Guardia italiana di Finanza) has seized US bonds worth US 134.5 billion from two Japanese nationals at Chiasso (40 km from Milan) on the border between Italy and Switzerland. They include 249 US Federal Reserve bonds worth US$ 500 million each, plus ten Kennedy bonds and other US government securities worth a billion dollar each.
Italian authorities have not yet determined whether they are real or fake, but if they are real the attempt to take them into Switzerland would be the largest financial smuggling operation in history; if they are fake, the matter would be even more mind-boggling because the quality of the counterfeit work is such that the fake bonds are undistinguishable from the real ones.

What caught the policemen’s attention were the billion dollar securities. Such a large denomination is not available in regular financial and banking markets. Only states handle such amounts of money.

The question now is who could or would counterfeit or smuggle these non-negotiable bonds.

In order to stop money laundering Italian law sets a ceiling of 10,000 euros per person for importing or exporting money without declaring it. The penalty for violating the law is 40 per cent of the money seized.

If the certificates were real, for Italy it would be like hitting the jackpot. The fine alone would amount to US$ 38 billion, five times the estimated cost of rebuilding quake-devastated Abruzzi region. It would help Italy’s eliminate its public deficit.

If the certificates are fakes the two Japanese nationals could get a very lengthy jail sentence for fraud.

As soon as the seizure was made the US Embassy in Rome was informed. Italian and US secret services were called in to assist the Italian financial police.

Some important international financial newspapers had already reported on the existence of ‘funny money’ circulating on parallel, i.e. unofficial, financial markets.

For AsiaNews a few points need considering:

1. When it comes to Italy the world press has tended to focus on Italian Prime Minister Berlusconi’s personal problems rather than on stories like the bonds smuggling affair which has been front page on Italian newspapers.

2. The fear of counterfeit bonds and securities has spread across Asia with the result that real securities are also considered with suspicion.

3. During the Second World War several countries at war printed and put in circulation perfectly counterfeit enemy money. It is also historically established that some central banks, like the Bank of Italy 65 years ago, issued the same securities twice (identical registered number and code). This way they could print more money with legal tender than they officially declared. The main difference though is that 65 years ago the world was involved in a bloody war, which is not the case today.

National debt at $545,668 per household

source: UPI.com

WASHINGTON, May 30 (UPI) — Federal debt last year amounted to a record $545,668 per U.S. household
— a 12-percent spike in just one year, government sources said.

The increase burdens each household with an additional $55,000 in national debt for just 2008, USA Today reported Saturday.

The increase can be pinned on the explosion of federal borrowing during the recession and an aging population that is driving up the costs of Medicare and Social Security.

“We have a huge implicit mortgage on every household in America — except, unlike a real mortgage, it’s not backed up by a house,” said David Walker, former U.S. comptroller general, the government’s chief auditor.

The federal government assumed $6.8 trillion in new debt last year, pushing its total debt to a record $63.8 trillion, USA Today reported.

The enormous burden has increased awareness of the government’s financial challenges, U.S. Rep. Jim Cooper, D-Tenn., said.

“More and more, people are worried about our fiscal future,” Cooper said.

The Wheels are Falling off the Wagon

For the last several decades, our civilization has steadily approached the point of no return.  This is the point which, when passed, we can no-longer salvage our lifestyle as we know it.  This means that we cannot simply steer ourselves out, as a society; but we must first endure a painful collapse in which millions will be ruined financially and lose everything they have.  Indeed many people will be absolutely shocked and dumbfounded when the very fabric of the society they are completely reliant on, comes apart suddenly, in a devastating wave of hyper-inflation.

There is no doubt in my mind that hyper-inflation is headed our way very soon.  The unprecedented level of money creation will not be wiped by deflation.  In point of fact, the circumstances we are now in are virtually identical to other situations throughout history, which have all resulted in hyper-inflation.

Basically the economy is in a deep slump, while governments are rapidly increasing the money supply with Quantitative Easing (a fancy academic term for creation of large amounts of money).  This formula has a long history of causing currency failure.

Indeed, the system has been abused to such an extent that they have little choice at this point; the only way to wipe out the massive public and private debt obligations is to shrink the size of the debt by debasing the currency.

In the process of dropping the value of the dollar, they are also wiping out the savings of many people and governments around the world.  Indeed most of the dollars in circulation are actually held overseas.  So this debasement of the currency is going to rob the savings of a great many people who trusted in the integrity of the US government.  I doubt this mistake will be made again; at least for a few generations.

This is precisely why the wealthiest and most successful families in the history of our civilization, will only hold their money in hard assets or quality companies which produce hard assets.  They learned through experience, that hard assets are the only way to preserve their family’s wealth, generation after generation, in situations where the currency has no convertability.

I find it truly interesting to observe the behavior of different types of people, as we head into this period in our history:

• There is a significant segment of our population that doesn’t want to know anything; they prefer to think that their lifestyle is untouchable.  They have everything they own in some mutual funds or money markets in their 401(k) or IRA.  Anything in regards to money is “better left to the professionals” despite the fact that these “professionals” are the ones who created the terminal situation which has robbed so many people of their life’s savings.
• Another portion of our population wishes to be blindly optimistic.  They celebrate the fact that the new President is an well-spoken intellectual who says and does much of what they always wanted their leader to say and do.  There seems to be little to no concern, amongst these pseudo-intellectuals, that nothing is being done to address the fundamental problems which plague our society.  Instead new bandages are being applied to mask the problems and “keep up appearances.”
• Finally, there is another portion of the population who have become thoroughly disgusted with the dis-ingenuous left-right paradigm.  They realize that both political parties are leading us down the primrose path, not into the land of milk and honey; but into the desert to die.  It is this segment of the population, which has chosen to rely on their own abilities; to adapt in whatever ways they are able.  To this group of individuals, the solutions to our problems are not top-down, as we are accustomed to; instead the solutions are implemented by each of us in our own lives.  The basic idea is to reduce and eliminate the dependency on this failed society; instead relying on their selves and the local community.  They don’t wish to wait and hope for someone or something outside of themselves to produce “change ™”; instead they fundamentally change the way they live their lives.

I prefer to identify with the third group, because I feel strongly that the first two groups are simply accomplishing nothing of substance. I believe in our power as individuals to produce what we need to live on this planet. Its not like we’re having to live on Mars or something inhospitable like that. This is a very fertile planet which is positively bursting with life and genetic diversity.

I often hear naysayers say that you must have 40 acres and significant financial resources to change your lifestyle; but I have seen examples of urban homesteaders who have been able to produce the majority of their food on small lots (less than 1/4 acre). Sure, they aren’t totally “off the grid” but producing one’s own food is a significant step in cutting costs and achieving sustainability.

We may as well start where we are at. If we are going to strive for something, we must strive for goals that we know we can achieve in a reasonable amount of time. If a significant segment of our population learned to decrease their dependency on this failed system, the benefits would be innumerable.

The Worst Case Scenario (Someone Has to Say It)

May 03, 2009 | SeekingAlpha.com

Since the economy began sliding downhill in late 2007, mainstream economic and market experts have consistently erred on the sunny side.

As late as June 2008, mainstream consensus held that the U.S. was heading for a “soft landing” and would avoid recession. Several months later, the slump was acknowledged to have started in January 2008, but we were supposed to see renewed growth by mid-2009, with unemployment peaking in the eight-to-nine percent range. A quick “shovel-ready” stimulus bag was supposed to set us back on the road to prosperity.

In January, recovery projections were pushed forward to late 2009. Today, the consensus is for a mid-2010 recovery, with unemployment peaking at just over 10 percent. Clearly, the mainstream has struggled to catch up to reality for well over one year. What are the chances that they finally have it right this time?

Moreover, the mainstream continues to see what is going on as a plain-vanilla recession that will be quelled with some on-the-fly monetary and fiscal tinkering. Washington, we are told, will pull us out of this slump—as soon as the masses can be enticed back to the shopping malls. Then things will return to how they were before. But what if the experts and politicians are wrong not only on their ever-changing recovery timeline, but also on the nature—nay, the very existence—of a recovery?

America’s reigning political-economic ideology has demonstrably failed. Given that its government is obviously fumbling along without a clue, its foreign and domestic credit is tapped out, and its 300 million people are discovering that their hopes for continuous material improvement will never be met, could the U.S. be headed the way of the USSR?

Instead of a recovery as the mainstream envisions it, what if America permanently bankrupts, impoverishes, and marginalizes itself? What if its cherished institutions fail across the board? For example, what happens when the police realize that their under-funded pension plans cannot support a decent retirement? Will they stay honest, or will they opt to survive by any means necessary? These are questions that the mainstream does not even begin to contemplate. Read the rest of this entry »

Geithner’s Hog Wallow

Mike Whitney | Counterpunch

This time the banks are zeroing in on Geithner’s cash giveaway bonanza, the “Public Private Investment Partnership” (PPIP). As expected, Bank of America and Citigroup have angled their way to the front of the herd, thrusting their snouts into the public trough and extracting whatever morsels they can find amid a din of gurgling and sucking sounds. Here’s the story from the New York Post:

“As Treasury Secretary Tim Geithner orchestrated a plan to help the nation’s largest banks purge themselves of toxic mortgage assets, Citigroup and Bank of America have been aggressively scooping up those same securities in the secondary market, sources told The Post…

But the banks’ purchase of so-called AAA-rated mortgage-backed securities, including some that use alt-A and option ARM as collateral, is raising eyebrows among even the most seasoned traders. Alt-A and option ARM loans have widely been seen as the next mortgage type to see increases in defaults.

One Wall Street trader told The Post that what’s been most puzzling about the purchases is how aggressive both banks have been in their buying, sometimes paying higher prices than competing bidders are willing to pay.

Recently, securities rated AAA have changed hands for roughly 30 cents on the dollar, and most of the buyers have been hedge funds acting opportunistically on a bet that prices will rise over time. However, sources said Citi and BofA have trumped those bids.”(“Double Dippers; Citi and B of A buy laundered loans at lower rates”, Mark DeCambre, New York Post)

Thus begins the next taxpayer-subsidized feeding frenzy, featuring all the usual suspects. The race is on to vacuum up as much toxic mortgage paper as possible so it can be dumped on Uncle Sam at a hefty profit. These are the same miscreants the Obama administration is so dead-set on rescuing. Better to let them sink from their own bad bets.

How is it that industry rep Geithner couldn’t see that his latest round of corporate welfare would create incentives for the bank scoundrels to game the system again? Naturally, if the government goes into the business of buying crap-loans from teetering financial institutions, the speculators and snake oil salesmen will follow. And so they have. Citi and B of A are just the first to respond to Geithner’s pigwhistle. Next will be the hedgies and the Private Equity porkers, all nuzzling up to the Treasury’s feedbin.

Geithner’s plan is a disaster from the get-go. It jacks up the price of garbage assets, rewards the misallocation of capital, invites rampant fraud, and prolongs the recession. Worst of all, it transforms the FDIC into a hedge fund putting individual bank deposits at greater risk. Economist Jeffrey Sachs sums up Geithner’s “public-private” boondoggle in his article “Will Geithner and Summers suceed in raiding the FDIC and Fed?”:

“Geithner and Summers have now announced their plan to raid the Federal Deposit Insurance Corporation (FDIC) and Federal Reserve to subsidize investors to buy toxic assets from the banks at inflated prices. If carried out, the result will be a massive transfer of wealth — of perhaps hundreds of billions of dollars — to bank shareholders from the taxpayers (who will absorb losses at the FDIC and Fed)…

The FDIC is lending money at a low interest rate and on a non-recourse basis even though the FDIC is likely to experience a massive default on its loans to the investment funds….In essence, the FDIC is transferring hundreds of billions of dollars of taxpayer wealth to the banks…The public will not accept overpaying for the toxic assets at taxpayers’ expense. Thus, it is very likely that the Administration will attempt to avoid Congressional oversight of the plan, and to count on confusion and the evident “good news” of soaring stock market prices to justify their actions. ….

Other parts of the plan support subsidized loans from the Treasury and, even more, from the Fed. The Fed is already buying up hundreds of billions of dollars of toxic assets with little if any oversight or offsetting appropriations. Since the Federal Reserve profits and losses eventually show up on the budget, the Fed’s purchases of toxic assets also should fall under the Federal Credit Reform Act and should be explicitly budgeted. (“Will Geithner and Summers suceed in raiding the FDIC and Fed?”, Jeffrey Sachs, Huffington Post)

As Sachs points out, the Fed’s liabilities will eventually be shifted onto the taxpayer. But that hasn’t stopped Bernanke from writing checks on an account that is overdrawn by $11 trillion. Nor has it compelled Geithner to seek congressional authorization before he leverages the FDIC up to its eyeballs. These decisions are all being made by a small coterie of bank loyalists who operate independent of any oversight or government supervision. They do what’s best for their constituents and let the chips fall where they may.

Earlier this week, Geithner asked Congress for additional powers to take over insolvent non-bank financial institutions. The Washington Post:

“The Obama administration is considering asking Congress to give the Treasury secretary unprecedented powers to initiate the seizure of non-bank financial companies, such as large insurers, investment firms and hedge funds, whose collapse would damage the broader economy, according to an administration document.”

Geithner must think he’s a shoe-in for the new “systemic regulator” post because of the exemplary way he handled the AIG bonus scandal.

Of course, in the bizarro world of Washington–where failure typically catapults one to higher office–it’s only logical that Geithner would be elevated to Uber-Regulator, not only controlling the public purse, but using his own peerless grasp of the marketplace to decide which institutions pose a systemic risk and need to be sidelined, and which need stepped-up government support via limitless capital injections.

Prediction: If Geithner is granted these special powers by the braindead Congress, the country will undergo the greatest period of bank consolidation in its 230 year history. This is a blatant power grab by a shifty character who has risen to his present pay-grade by nosing his way up the political stepladder. Congress had better get its act together and put an end to this nonsense or the nation will continue its fast-paced metamorphosis into a feudal oligarchy run by the Bank Mafia and Wall Street racketeers. The first step, is to give Geithner, Summers and any other of the Rubin-clones a full-body bacon-rub followed by a few brisk dunks in the shark tank. Then, hose down Treasury and bring in a whole new team.

Nobel Prize winning economist Joseph Stiglitz summed up Geithner’s “public-private” fiasco like this:

“Quite frankly, this amounts to robbery of the American people. I don’t think it’s going to work because I think there’ll be a lot of anger about putting the losses so much on the shoulder of the American taxpayer.”

Attorney General Cuomo May Break Up Wall-Street/Fed Brothel

It looks like the Attorney General of New York will at least attempt to shut down the Wall-Street/Federal Reserve brothel, in which billions of U.S. tax dollars were stolen by high-level U.S. government and Federal Reserve crooks.

The loot was placed into the hands of large institutions such as Goldman Sachs, formerly headed by the Treasury Secretary Henry Paulson.

This was, of course, one of those action/reaction/synthesis aka problem/reaction/solution enterprises, where those in positions of authority create the problem, then wait for the public to react and demand a solution; then they provide the perceived “solution,” which only goes to further the agenda they had set out with initially.

Cuomo Widens His A.I.G. Investigation

Andrew Ross Sorkin | DealBook Blog

Attorney General Andrew M. Cuomo of New York said Thursday afternoon that he was widening his investigation of the American International Group to examine whether its trading counterparties improperly received billions of dollars in government money from the troubled insurer.

Those counterparties include Goldman Sachs, which received $12.9 billion, as well as Société Générale of France and Deutsche Bank of Germany, which each received nearly $12 billion.

“Our investigation into corporate bonuses has led us to an investigation of the credit default swap contracts at A.I.G.,” Mr. Cuomo said in a statement. “CDS contracts were at the heart of A.I.G.’s meltdown. The question is whether the contracts are being wound down properly and efficiently or whether they have become a vehicle for funneling billions in taxpayers dollars to capitalize banks all over the world.”

Other counterparties that received money from A.I.G. include Barclays of Britain ($8.5 billion), Merrill Lynch ($6.8 billion), Bank of America ($5.2 billion), UBS of Switzerland ($5 billion), Citigroup ($2.3 billion) and Wachovia ($1.5 billion).

The government injected about $180 billion in bailout money into A.I.G. to prevent its collapse after the company found itself on the wrong side of the credit default swaps that it sold. The swaps are insurance-like instruments that allow investors to hedge against bond defaults.

A.I.G.’s financial products division sold the credit default swaps, and it has faced a wall of public outrage after it paid out $165 million in retention bonuses. Earlier this week, Mr. Cuomo said A.I.G. employees had agreed to return $50 million of those bonuses.