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Here's a Sunday NYT data dump of sorts. Russian Oligarchs suffering terribly, European debt crisis shows why USA is better, and AIG needs... more... flesh...
But we'll start with Federal Reserve dick, Democratic consultant and Princeton prof Alan Blinder beating a nationalization strawman and advocating instead for "bad bank" a.k.a. trash for taxpayers, cash for banksters.
http://www.nytimes.com/2009/03/08/business/08view.html
Economic View
Nationalize? Hey, Not So Fast
By ALAN S. BLINDER
Published: March 7, 2009
THE financial crisis grows weirder by the day. When philosophical conservatives like Alan Greenspan start talking about nationalizing banks, you know you’ve passed into some kind of parallel universe. Why are so many people entertaining an idea that sounds vaguely Marxian?
The answer, I think, is simple. We have some pretty sick banks in America right now, some of which may not be viable in the long run. But putting a giant bank through bankruptcy is unthinkable. (Remember Lehman Brothers?)
The trick: start by dismissing as "unthinkable" exactly what
must happen. When I think nationalization of the financial sector, it doesn't mean nationalization of any of the specific private banks. Au contraire, we start by letting them fail already. This insupportable reverse pyramid of obligations denominated at values greater than all the real assets in the world itself crashes. All you'd really have to do is open the books and stop the bailouts and this would happen, followed by mass trials of the bankers.
This will look like chaos and destruction, but clears the way to set up a new system in the ruins.
Afterward you set up a national bank using the government's awesome positive authority to restructure and write down debts of every kind and lend money at low interest, for example to worthy projects in the energy and transport conversion.
But Prof. Blinder prefers to define nationalization only as the process of temporarily holding on to the likes of Citibank so as to assume its debts and later reprivatize it under roughly the same name and management -- which isn't actually nationalization and makes it seem insane. (Hudson deconstructed this in his piece on the terminology of the "free market" a couple of pages back.)
And continuing the water torture that is keeping zombie banks alive is both expensive and dangerous. So why not just bite the proverbial bullet and nationalize them?
I believe in biting the bullet, but it matters which bullet you bite. Like Ben Bernanke, the Federal Reserve chairman, and Timothy Geithner, the Treasury secretary, I am not convinced that nationalization is the only, or even the best, way out.
Because “nationalization” can mean many things, let’s first clarify what the current debate is about. Don’t think Hugo Chávez or even Clement Attlee.
Aye aye sir, you already made the thought crime of thinking about steps to actual nationalized banking amply clear! So, dear Economist and Higher Being, how are we allowed to imagine "nationalization"?
Imagine instead that the government acquires a majority interest in — or perhaps 100 percent of — a bank, wipes out the existing shareholders and installs new managers. Then, sometime later, a healthy bank is sold back into private hands, and we all live happily ever after. At least that’s the idea.
Sounds good, you say? And didn’t Sweden pull this off with great success in the early 1990s? Yes, it did, for which the Swedes deserve praise. But this is not Sweden. Let’s think about some of the downsides to nationalizing banks in America.
WHERE TO DRAW THE LINE? First and foremost, the Swedish government had to deal with only a handful of banks; we have more than 8,300. Numbers matter, because deciding where to draw the nationalization line isn’t easy. Presumably, no one wants to nationalize all the banks, thousands of which are healthy. But where do you stop, once you start?
Suppose we nationalized four banks. Bank Five would then find itself at a severe disadvantage in competing for funds with the government-backed quartet. Forced to pay higher interest rates to attract depositors and other creditors, its profitability would suffer. Soon, Bank Five might start looking like a candidate for nationalization, too — followed by Banks Six, Seven and so on.
THE DOMINO EFFECT As stock traders began to contemplate the nationalization of Banks Five, Six and Seven, their share prices would tank, and short-sellers might consign the companies to an early grave.
THE MANAGEMENT CHALLENGE The Swedes had a relatively simple task. They never had to deal with institutions of the size and complexity of our banking behemoths.
Mr. Geithner has emphasized that governments are ill-suited to manage businesses. I’d take the point a step further: Overseeing the management of dozens, or hundreds, or maybe even thousands of nationalized banks is a daunting task.
POLITICAL OBSTACLES The process of nationalization and reprivatization went amazingly well in Sweden partly because it was remarkably free of political interference. Would that happen here? You decide. My bet is no.
THE CONFIDENCE QUESTION Finally, because nationalization runs counter to deeply ingrained American traditions and attitudes, there is a danger that it might undermine rather than bolster confidence. As I said, this is not Sweden. The Treasury, of course, would never use “nationalization” in public; it would invent some nice euphemism. But the commentariat would not be so constrained.
O dreadful! You've convinced us that this kind of nationalization would suck.
All of that said, there are arguments in favor of nationalization. Or are there?
One is that financial firms are careening off track, thereby costing taxpayers more and more bailout money. (Think A.I.G.) That’s a big concern — and a major reason to seek quick closure.
But remember, the government already owns shares in many banks, and supervisors have immense powers to influence banks without owning them. According to a banking adage, “When your regulator asks you to jump, your only question is ‘How high?’”
WTF? Outrageous reversal of reality, a lie on the scale of "the liberal media." (Recall the Darrell Dochow case back on p. 12, the Treasury regulator who dated back to the Keating scandal and is still around in 2008, helping Indymac doctor its books.)
According to a politician's adage, which I'm making up on the spot: "When the bankers financing your campaigns and your slush funds ask you to jump, your only question is, 'How high up your royal ass may I stick my narrow head without being unseemly as I rewrite all the laws straight from your notes?'"
(Here's a relevant find:
In 1998, Congress succumbed to wealthy and influential advocates of deregulation, and passed legislation allowing the merging of banks, securities firms, and insurance companies. They repealed Glass-Steagall in 1999 since it was already dead. In 2000, Congress passed the Commodity Futures Modernization Act, a milestone in deregulation. It effectively made the market for derivatives and other exotic financial instruments off-limits to regulatory agencies... A former Federal Reserve vice-chairman, Alan S. Blinder, who holds a doctorate in economics from M.I. T., told the NY Times (3/23/08) that he has only a "modest understanding" of complex derivatives. "If you presented me with one and asked me to put a market value on it, I'd be guessing." http://www.americanchronicle.com/articles/view/60806)
Back to Blinder:
Because the Fed can pretty much dictate to the banks right now, what additional powers would nationalization bring?
How do you define dictate? AIG asks for another $30 bn, Fed provides. Citi asks for another $25 bn, Fed provides. So the dictator doubles as a waiter, right?
Another argument is that banks’ dodgy assets are hard to value, making it impossible to know how much capital they need — and probably very expensive to provide it. True again. But nationalization doesn’t make these problems disappear.[*] [See NOTE]
If the government takes over a bank, the taxpayers tacitly acquire its assets, thereby inheriting all the uncertainties over valuation. And if a bank has negative net worth when it is nationalized, who do you think fills the hole?
SO, on closer inspection, the best-sounding arguments for nationalization are really arguments for bullet-biting. Worse yet, even talk about nationalization can be harmful if it puts bank stocks under further selling pressure. After all, who wants to own a stock whose value is heading toward zero? Which is why Mr. Bernanke and Mr. Geithner have taken pains to beat down rumors that nationalization is coming.
Unfortunately, their denials can never be categorical. If worst really does come to worst, the other options may evaporate, leaving the government no choice but to nationalize some banks. (Think Fannie Mae and Freddie Mac.) But, please, let’s not rush there. Let’s first at least explore what is called the “good bank, bad bank” approach.
What’s that? While there are many variants, the basic idea is to break each sick institution into two. The “good bank” gets the good assets, presumably all the deposits and a share of the bank’s remaining capital. As a healthy institution, it can presumably raise fresh capital and go on its merry way as a private company.
At last! Freddie (Kruger, not Mac) is free to kill again!
The “bad bank” inherits the bad assets and the rest of the capital — which, after appropriate markdowns of the assets, will not be enough. So, again, someone must fill the hole. And, realistically, given the mess we’re in, much of that new capital would likely come from the taxpayers.
Realistic, see? No more "imagine."
Here’s a prediction: We will get to the good-bank, bad-bank solution sooner or later. Wouldn’t it be nice if it was sooner?
Alan S. Blinder is a professor of economics and public affairs at Princeton and former vice chairman of the Federal Reserve. He has advised many Democratic politicians.
WTF? Cash for trash was already the original idea, and this is only a variation. In fact his strawman version of nationalization is also the same concept at heart. All of his answers amount to this: Of course taxpayers will be paying for the bad bets of the banksters.
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BLINDER: TANGENTApparently he loves the idea of government as garbage dump for capital's errors, in the name of "stimulation." Check this out:
http://www.nytimes.com/2008/07/27/busin ... html?fta=yEconomic View
A Modest Proposal: Eco-Friendly Stimulus
By ALAN S. BLINDER
Published: July 27, 2008
ECONOMISTS and members of Congress are now on the prowl for new ways to stimulate spending in our dreary economy. Here’s my humble suggestion: “Cash for Clunkers,” the best stimulus idea you’ve never heard of.
Enlarge This Image
Cash for Clunkers is a generic name for a variety of programs under which the government buys up some of the oldest, most polluting vehicles and scraps them. If done successfully, it holds the promise of performing a remarkable public policy trifecta — stimulating the economy, improving the environment and reducing income inequality all at the same time. Here’s how.
A CLEANER ENVIRONMENT The oldest cars, especially those in poor condition, pollute far more per mile driven than newer cars with better emission controls. A California study estimated that cars 13 years old and older accounted for 25 percent of the miles driven but 75 percent of all pollution from cars. So we can reduce pollution by pulling some of these wrecks off the road. Several pilot programs have found that doing so is a cost-effective way to reduce emissions.
The real eco-balance: Every new car represents at least 25 tons in mostly toxic junk, before it starts eating fuel. So how about you reequip the old polluters with new catalytic converters, and put the billions into railways and mass transit and an electric car initiative from the government (since the car companies never want to go there themselves)? Because the point should be to have less and less cars on the road, not find ways to stimulate new model sales growth for Detroit and Japan/South Carolina.
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[*] BLINDER -NOTE: To make "problems disappear," receivership does wonders. Here are some options:
Chapter 11 is a chapter of the United States Bankruptcy Code, which permits reorganization under the bankruptcy laws of the United States. Chapter 11 bankruptcy is available to any business, whether organized as a corporation or sole proprietorship, and to individuals, although it is most prominently used by corporate entities. In contrast, Chapter 7 governs the process of a liquidation bankruptcy, while Chapter 13 provides a reorganization process for the majority of private individuals.
Liquidate all insolvent institutions. Watch the dominoes fall, as they mostly deserve. Then establish a national bank that actually helps people. If friggin' Hamurabi could do this kind of thing...
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Here's one on the Europe bashing train, again with the untrue truism that unpayable private debts must always be assumed by taxpayers, or the world! ends! now!
http://www.nytimes.com/2009/03/08/opinion/08Ahamed.htmlOp-Ed Contributor
Subprime Europe
By LIAQUAT AHAMED
Published: March 7, 2009
Washington
THE 1931 collapse of the Austrian bank Creditanstalt provoked financial panic across Europe and almost single-handedly turned a bad downturn into the Great Depression. Last week, when I read about the brewing European banking crisis, I suddenly began to dread that history might be repeating itself.
You might think that my worries are a bit late. After all, losses on subprime mortgages in the United States have already caused a Depression-like banking collapse. Well, believe it or not, Europe’s current crisis is scarier. For while losses on Eastern European debts may be only a small fraction of those on subprime mortgages, the continent’s problems are politically harder to solve, and their consequences may prove to be much worse.
Much as in our subprime mess, Eastern Europe’s problems began with easy credit. From 2004 to 2008 Eastern Europe had its own bubble, fueled by the ready availability of international credit. In recent years countries like Bulgaria and Latvia borrowed annually the equivalent of more than 20 percent of their gross domestic product from abroad. By 2008, 13 countries that were once part of the Soviet empire had accumulated a collective debt to foreign banks or in foreign currencies of more than $1 trillion. Some of the money went into investment, much of it into consumption or real estate.
When the music stopped last year and banks retrenched, the flow of new capital to Eastern Europe came to an abrupt halt, and then reversed direction. This credit crunch hit the region just as its main export markets in Western Europe were going into free fall. Moreover, with so much of the debt denominated in foreign currencies, everyone in Eastern Europe has been scrambling to get their hands on foreign exchange and local currencies have collapsed.
Most of the Eastern European debt is held by Western European banks. It also turned out that some of the biggest lenders to Eastern Europe were Austrian and Italian banks — for example, loans by Austrian banks to Eastern European countries are almost equivalent to 70 percent of Austria’s G.D.P. Now, Italy and Austria can’t afford to bail out even their own banks.
The debt crisis in Eastern Europe is much more than an economic problem. The wrenching decline in the standard of living caused by this crisis is provoking social unrest. American subprime borrowers who have had their houses foreclosed on are not — at least not yet — rioting in the streets.
What is wrong with them - or better yet, the US workers losing their jobs compared to the following?
Workers in Eastern Europe are. The roots of democracy in the region are not deep and the specter of right-wing nationalism remains a threat.
So what is to be done? The potential approaches essentially mirror those that have been attempted in response to America’s subprime problem.
The first approach is to deal with the short-run liquidity problem. In the same way that the Federal Reserve expanded its own lending last year to compensate for the collapse in private lending, the International Monetary Fund is providing funds to Eastern Europe, and Hungary has proposed that the European Central Bank lend to borrowers who use non-euro assets as collateral. But given the state of the rest of the world, Eastern Europe will not be able to export its way out of its troubles in the immediate future.
The debts of many Eastern European countries and some banks will have to be written off. Ultimately, as in the case of the American subprime debts, taxpayers will have to foot the bill. But which taxpayers? The taxpayers of Austria and Italy certainly can’t. So the burden will have to fall on the rich countries of Europe, especially Germany and France.
There are two approaches to taxpayer-financed bailouts. The first is to go case by case. This is being proposed by the Germans. The problem here, as we discovered after the Bear Stearns rescue last March, is that the case-by-case approach does nothing to establish confidence in the system and prevent contagion.
The best choice would be a fund that provides bailout money and a protective umbrella to banks and countries, even those that don’t seem to need it now. Hungary has proposed the creation of such a fund with roughly $240 billion at its disposal. Though the proposal has already been rejected by stronger European economies, the American experience of last year in which the Treasury finally had to ask Congress for $700 billion for a similar fund suggests that this is where Europe will end up.
The response of the American government to the financial crisis has been criticized for being too slow and inadequate.
Oh, really, is that the problem?
But at least we have a federal budget, the national cohesion and the political machinery to get New Yorkers and Midwesterners to pay for the mistakes of homeowners in California and Florida, or to bail out a bank based in North Carolina. There is no such mechanism in Europe. It is going to require leadership of the highest order from officials in Germany and France to persuade their thrifty and prudent taxpayers to bail out foolhardy Austrian banks or Hungarian homeowners.
This is basically what Hudson was arguing about why the dollar's risen again against the euro, in the interview with Bonnie Faulkner last week, as described above.
The Great Depression was largely caused by a failure of intellectual will.
One of the favored Big Lies, that it was the post-crash failure of the government to follow Policy Prescription X that caused the depression; when it was caused by the routine operations of capitalism culminating in bubble and 1,001 scams.
In other words, the men in charge simply did not understand how the economy worked. Now, it is the failure of political will that could lead to economic cataclysm. Nowhere is this danger more real than in Europe.
Liaquat Ahamed is the author of “Lords of Finance: The Bankers Who Broke the World.”
Sigh.
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http://www.nytimes.com/2009/03/08/busin ... wanted=allThe Last Days of the Oligarchs?
By ANDREW E. KRAMER
Published: March 7, 2009
Ilya Naymushin/Agence France-Presse — Getty Images
President Dmitri Medvedev of Russia with Oleg Deripaska, right, once Russia’s richest man.
THEY are larger-than-life figures at home and abroad, men who saw themselves as the Carnegies or Rockefellers of Russia. They are known as oligarchs, and they may soon be thrown into the dustbin of history by the economic crisis.
Brash, young and wealthy, those insiders of post-Soviet business who escaped nationalization — to say nothing of exile or prison — under Vladimir V. Putin went on to make ever greater fortunes in the commodity boom of recent years. But few businessmen anywhere have fallen as hard or as fast in recent months.
Many of Russia’s richest men were highly leveraged going into the financial crisis and were unable to roll over loans from Western banks. The Kremlin bailed them out with short-term credits last year, not wanting the assets to fall into foreign hands. Those state loans will be coming due by the end of the year, on top of additional foreign loans.
The mountain of debt is so huge — the Central Bank calculates that corporations and banks in Russia must repay $128 billion this year alone — that many oligarchs will be unable to repay the loans, bankers say. Only a fraction of this debt, about $7 billion, is corporate bonds. The rest is bank loans to companies predominantly owned by the oligarchs or the state.
“Those who are left will be swept away in the crisis,” said Olga V. Kryshtanovskaya, a sociologist who studies the Russian elite at the national Academy of Sciences. “The Kremlin has all the levers. If they want to help, they will help. If they do not want to help, they will say, ‘We are liberalizing now; market relations will determine which of you survive.’ ”
Some oligarchs are so desperate that a group of metal executives made a pilgrimage to the Kremlin in January to make what once would have been an unthinkable proposal. Meeting with President Dmitri A. Medvedev, they proposed merging their assets, which include some of Russia’s largest mines and factories, into a state-controlled conglomerate. In exchange, the government would refinance billions in Western bank debt.
In other words, they were voluntarily proposing to reverse the contentious loans-for-shares privatizations that birthed the oligarchs in the mid-1990s.
“They’ve all been racing to see who can be the first to do a deal with the government,” said Rob Edwards, a metals analyst at Renaissance Capital in Moscow. Access to Russia’s hard currency reserves, he said, is the oligarchs’ “get-out-of-jail-free card.”
Unfortunately for many oligarchs, and the Western banks who lent them money, that card may no longer be drawn. In a paradoxical twist, the government that had supported nationalization in oil and other industries is now strapped for funds to support the ruble and prop up the budget, and seems wary of investing in troubled industries.
Once-invincible oligarchs now look extremely vulnerable. With or without state aid, the government is likely to gain more control of their operations. If they get no help, many could go into bankruptcy, with nationalization of one form or another likely to follow. And any new bailout would probably mean larger equity stakes for the government.
ALREADY, bankers say, the crisis has touched a lifestyle of megayachts, private jets and spacious residences in Britain and France.
“Today’s crisis is merciless for raw-materials producers,” Alisher B. Usmanov, an iron and steel tycoon, and one of those at the Kremlin meeting, said in an interview. “It will take back everything we accumulated yesterday.”
In the initial collapse of the Russian stock market from May to October last year, Bloomberg News has calculated, the richest 25 people on the Forbes magazine list for Russia lost a collective $230 billion. Some of those unable to win state bailouts put up planes, yachts and mansions on the Côte d’Azur as collateral for loans, said Oleg V. Vyugin, the director of MDM Bank.
Mr. Vyugin’s bank has many tycoons as customers; he declined to discuss any specific properties he has claimed lately, but he says he meets often with the rich to sign such deals. “Industrial assets are worth so little now,” he explained with a shrug.
But more than the garish sparkle of post-Soviet wealth is at stake. As the Kremlin meeting makes clear, the future ownership of a pivotal global mining and metals industry, needed to restore supplies in any economic recovery, is on the line.
In addition to Mr. Usmanov, other oligarchs at the meeting were Oleg V. Deripaska, a nuclear physicist turned post-Soviet corporate raider; Mikhail D. Prokhorov, a metals investor known as the bachelor billionaire; Vladimir O. Potanin, an industrialist and early beneficiary of privatization; and Viktor F. Vekselberg, an oil magnate who recently donated a $100 million collection of Fabergé eggs (some of which he bought from the family of Malcolm Forbes) to a Russian museum.
Together, they own the world’s largest aluminum and nickel producers. At first blush, the oligarchs’ proposal looks similar to what governments worldwide are considering: taking stakes in collapsing companies. But Russia is different. Even before the crisis, the government had been consolidating industry in state hands; a takeover here in the midst of crisis would look less like a measured policy response and more like yet another pretext for an ever-expanding role for the government in business.
The talks are under way in a typically opaque Russian style: those with money and power are maneuvering in the palace corridors. “What matters in Russia,” said Masha Lipman, a researcher at the Carnegie Center in Moscow, “is personalities.”
For Western bankers, determining which of the big industrialists is up or down has become a post-Soviet twist on Kremlinology. Industry players were disturbed to learn that Mr. Deripaska, considered the consummate insider, was recently left waiting in the hallway outside a minister’s office, according to one adviser to the metals industry who did not want to be cited discussing its business publicly. “The ministers are not eager to see him,” the adviser said.
FOR tycoons who compared their heady rise to riches and hard-charging expansion in the 1990s to that of the robber barons of American capitalism at the turn of the previous century, bankruptcy or nationalization is not the fade into philanthropy and family legacy that the analogy suggests.
In the best case, the Russians may be reduced to running their businesses as divisions of state conglomerates. More darkly, exile or prison are also within recent Russian tradition. Some of the richest from the 1990s who fell from favor with Mr. Putin, such as Boris A. Berezovsky, once known as the Gray Cardinal of the Kremlin, and Vladimir A. Gusinksy, a banking and media executive, are in self-imposed exile.
Last week, Mikhail B. Khodorkovsky, the former Yukos Oil owner who has served six years in prison for tax evasion and fraud, was on trial again on charges of money laundering and embezzlement. His supporters called the first trial a maneuver by Mr. Putin to eliminate a potential political rival. The new charges could add 22 years to his sentence.
Mr. Deripaska, who is married to the step-granddaughter of former President Boris N. Yeltsin, is no longer seen as the richest man in Russia. The business magazine Finans reported in February that he had fallen to eighth place after the value of his assets fell 90 percent, to $4.9 billion, in the market crash that began in Russia last spring. Finans listed Mr. Prokhorov as the richest man, with an estimated worth of $14.9 billion.
Mr. Prohkorov may be reveling in schadenfreude: Mr. Putin’s team forced him to sell his stake in Norilsk Nickel to Mr. Deripaska last April, near the peak of the market. Mr. Prohkorov is now cash-rich, while Mr. Deripaska is left with billions in debt.
Others are similarly diminished. The oil and real estate tycoon Shalva P. Chigirinsky has promised in a filing to shareholders to sell a jet and homes in France and Britain to repay debt.
So confident was another developer, Sergei Y. Polonsky, in his bets on a new high-rise district in Moscow that last year he named his son, Mirax, after his company, the Mirax Group Corporation. Mr. Polonsky recently held a news conference to refute rumors that Mirax was bankrupt.
Mikhail M. Fridman, a deft and boyish-looking billionaire, was compelled to ask Deutsche Bank executives last fall for a gentlemen’s agreement not to foreclose on one of his prize assets, a 44 percent share in VimpelCom, a cellphone company. After the chat, Mr. Fridman was able to secure a $2 billion Kremlin bailout to repay Deutsche Bank.
Grasping at straws, other oligarchs followed Mr. Fridman in turning to the government.
Before the crash, Mr. Putin’s government forcefully reversed post-Soviet privatizations in some oil and other companies. Citing tax arrears, the state seized and dismantled Yukos beginning in 2003. In 2006, Shell Oil was compelled to sell half its Sakhalin 2 development to Gazprom. Aircraft makers, car companies and other industries were rolled into giant state holdings, not always voluntarily.
(In what now looks prescient, one former oligarch who was close to Mr. Putin, Roman A. Abramovich, sold his Sibneft oil company to the state giant Gazprom in 2005 for $13 billion and left Russia for London.)
Several dozen such conglomerates arose, often under the control of former K.G.B. colleagues of Mr. Putin’s. These companies and their former secret-agent directors, sometimes viewed as a new generation of oligarchs that arose under Mr. Putin, are not now seen as in danger of default.
In one sign that the metals industry might have been headed toward a forced consolidation, Vladimir Strzhalkovsky, who served in the Leningrad K.G.B. in the 1980s, was appointed chief executive of Norilsk Nickel, the company at the core of the proposed merger, last summer.
At the Kremlin meeting in January, however, President Medvedev was noncommittal; he asked the tycoons to agree among themselves and return with a merger plan all could accept. That was not easy.
On Feb. 26, Mr. Potanin and Mr. Deripaska met with Mr. Medvedev again; this time, Mr. Medvedev said Norilsk would not be included in a merger. Once a cornerstone of state policy, gaining control of an industry in crisis is now viewed skeptically by the Kremlin.
The idea of merging with a state corporation, however, is not dead. Mr. Usmanov has said he would pursue a merger of his Ural Mountain iron ore and coal company with Russian Technologies, a weapons and manufacturing conglomerate run by a former K.G.B. agent, Sergei V. Chemezov, who served with Mr. Putin in Dresden, in the former East Germany, in the 1980s.
Mr. Deripaska, meanwhile, has been playing down his need for additional state assistance after receiving $4.5 billion last fall to repay a syndicated loan from banks including Merrill Lynch, Royal Bank of Scotland and BNP Paribas. Before the policy shift this year, the Kremlin had disbursed only about $11.8 billion of $50 billion set aside in the initial plan for refinancing foreign debt.
“We do not need financial aid from the state,” Mr. Deripaska said in an interview with Vesti Russian television on Feb. 28. “It is the other way around; we are trying to be as quick as possible to repay the debt to it.”
WESTERN banks, though, are on edge. Among the most exposed to Mr. Deripaska is Raiffeisen bank in Austria, which last fall refinanced a 500 million euro Deutsche Bank loan to rescue Mr. Deripaska from a margin call on his construction business. Now Mr. Deripaska says he is seeking a moratorium on payments to all creditors. On Friday, his aluminum company, Rusal, said bankers had agreed to a two-month reprieve while a longer-term agreement on restructuring debt is negotiated.
Mr. Usmanov said Russian mining companies would surely need state support.
What remains, he said, is to negotiate a viable model for the state to again take a role in the great mining and metallurgy works built by the Soviets. “The crisis determined the situation,” he said. “I don’t see anything shameful in this.”
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http://www.nytimes.com/2009/03/08/busin ... et.html?hpFair Game
A.I.G., Where Taxpayers’ Dollars Go to Die
By GRETCHEN MORGENSON
Published: March 7, 2009
“DERIVATIVES are dangerous.”
That simple sentence, written by Warren Buffett, begins an enlightening discussion in Berkshire Hathaway’s most recent annual report. Mr. Buffett’s views on derivatives, gleaned from his own unhappy encounters with them, should be required reading for all United States taxpayers.
Why? Because we own almost 80 percent of the American International Group, the giant insurer whose collapse was a direct result of derivatives it sold during the late, great credit boom.
A.I.G. nearly barreled off the cliff last September, when it couldn’t meet its obligations to customers who had bought a version of derivatives called credit default swaps. Such swaps are like insurance policies; bondholders buy them to protect themselves from default on various forms of debt.
When A.I.G. couldn’t meet the wave of obligations it owed on the swaps last fall as Wall Street went into a tailspin, the Federal Reserve stepped in with an $85 billion loan to keep the hobbled insurer from going bankrupt; over all, the government has pledged a total of $160 billion to A.I.G. to help it meet its obligations and restructure operations.
So is A.I.G. the taxpayer gift that keeps on taking? Sure looks that way. And while no one can say with certainty whether more money will be needed, the sheer volume of derivatives engineered by a small London unit of A.I.G. suggests that taxpayers haven’t seen the bottom of this money pit.
Some $440 billion in credit default swaps sat on the company’s books before it collapsed. Its biggest customers, European banks and United States investment banks, bought the swaps to insure against defaults on a variety of debt holdings, including pools of mortgages and corporate loans.
Because of the way A.I.G. wrote its swaps, and because the company had a double-A credit rating at the time, it did not have to put up collateral to assure its customers that it would be able to pay on the insurance if necessary. Collateral would be required only if A.I.G.’s credit rating were cut or if the debt underlying the swaps declined.
Both of these “unthinkable” events occurred in 2008. Suddenly, A.I.G. had to cough up collateral it didn’t have.
SO, you see, the rescue of A.I.G. also involved a bailout of its many customers, none of whom the insurer or the government is willing to identify.
Nevertheless, Edward M. Liddy, the chief executive of A.I.G., explained to investors last week that “the vast majority” of taxpayer funds “have passed through A.I.G. to other financial institutions” as the company unwound deals with its customers.
On Wall Street, those customers are known as “counterparties,” and Mr. Liddy wouldn’t provide details on who the counterparties were or how much they received. But a person briefed on the deals said A.I.G.’s former customers include Goldman Sachs, Merrill Lynch and two large French banks, Société Générale and Calyon.
All the banks declined to comment.
How much money has gone to counterparties since the company’s collapse? The person briefed on the deals put the figure at around $50 billion.
Unfortunately, that is likely to rise.
According to its most recent financial statements, A.I.G. had $302 billion in credit insurance commitments at the end of 2008. Of course, the company is not going to have to make good on all that insurance: the underlying securities are not all going to zero.
But as the economy deteriorates, A.I.G.’s insurance bets certainly become more perilous. And because most of A.I.G.’s swaps are known as the “pay as you go type,” collateral must be supplied when the underlying debt declines in value. Swap arrangements made by other insurers require payments only if a default occurs.
So the meter is constantly running at A.I.G. Just as quickly as taxpayer funds flow into the firm, chunks of it go right out the door to settle derivatives claims.
A.I.G.’s insurance commitment stood at “only” $302 billion in part because the government has already voided $62 billion of the protection A.I.G. had written on pools of especially toxic securities. The underlying collateral on those contracts, valued at about $32 billion or so, now sits in a facility that the Federal Reserve Bank of New York oversees and which we, the taxpayers, own.
In order to rip up those contracts, the taxpayers had to make A.I.G.’s counterparties whole by buying the debt that A.I.G. had insured and paying out — in cash — the remaining amount owed to the counterparties.
Of the $302 billion in insurance outstanding at A.I.G., about $235 billion was sold to foreign banks and covers prime home mortgages and corporate loans. The banks that bought this insurance did so to reduce the money they must set aside for regulatory capital requirements.
A.I.G. also wrote $50 billion of insurance on pools of corporate loans. These contracts are performing O.K. for now, the company has said.
But there’s yet another complication that will probably force A.I.G. to cough up cash more quickly than it otherwise might have had to. That’s because it didn’t simply write insurance protection on debt; it also entered into yet another derivative contract — known as an interest rate swap — with counterparties buying the protection.
The reason A.I.G. entered into the second contract was that banks feared they were also exposed to interest rate risks on the loans bundled into debt pools. Presto! A.I.G. was happy to remove that risk by writing another complicated swap.
Now, however, A.I.G. not only has to meet collateral calls as the value of the debt it insured withers, but also has to post collateral related to the interest rate swaps.
Another troubling aspect of these deals is how long it takes to untangle them when they go awry. Back to Mr. Buffett’s recent shareholder letter: when Berkshire acquired the insurance company General Re in 1998, he wrote, General Re had 23,218 derivatives contracts that it had struck with 884 counterparties.
Mr. Buffett wanted out from under the contracts and he began unwinding them. “Though we were under no pressure and were operating in benign markets as we exited,” he said, “it took us five years and more than $400 million in losses to largely complete the task.”
When you look back with the benefit of hindsight, it is truly amazing how outsized A.I.G.’s insurance commitment was, at $440 billion. After all, in 2005, when A.I.G. put many of these swaps on its books, the market value of the entire company was around $200 billion.
That means the geniuses at A.I.G. who wrote the insurance were willing to bet more than double their company’s value that defaults would not become problematic.
That’s some throw of the dice. Too bad it came up snake eyes for taxpayers.
