Baseball91's Weblog

March 18, 2009

Debt Forgiveness & Rescue

The demagogues have been out this week, tone deaf to the how the music of Wall Street is produced. Edward Liddy, the chief executive of A.I.G., was brought in to run AIG after a Frankenstein monster had been created at a property and casualty company. Mr. Liddy had nothing to do with the fact the credit derivative monster was let loose. But Mr. Liddy did have enough sense to recognize that on the playing field of Wall Street he was going to have to retain financial scientists who understood the credit derivative markets, and he was going to have to find compensation to keep these employees on board. In other words, he and others “approved the bonuses to keep employees in the risky business areas from fleeing and possibly causing the collapse of a big-book unit valued at $1.6 trillion. If they walked out the door, A.I.G. was at considerable risk of falling apart because the most fragile business unit would have imploded.”

Liddy told Congress on Wednesday that he generally would deal with Fed officials, figuring they would keep Treasury informed. To go back to mid-September 2008, at 6 pm September 13, 2008, a Friday evening, Timothy Geithner, the then president of the New York Federal Reserve summoned the heads of major Wall Street firms to a meeting in Lower Manhattan to review their financial exposures to a collapse of the investment bank, Lehman Brothers, and develop plans to work out contingency plans over the possibility that on Monday (September 15th) the government would need to orchestrate an orderly liquidation of Lehman Brothers, and stabilize the financial markets, according to the New York Times.

The spreading trouble was the latest sign of growing concern of big financial institutions that the general public was just becoming cognizant about. The meetings involving top executives from Goldman Sachs, Morgan Stanley, J P Morgan Chase, Citigroup and other financial companies continued over the next 24 hours. Geithner at the time initially called for Wall Street institutions to support one of their own, encouraging them to find a way to rescue Lehman Brothers. This came at a time when many of them were also short on capital.

Some politicians were now attempting to make Timothy Geithner out as some kind of villain in all of this. To get out of this credit derivative crisis was the goal. He had little to do with the Frankenstein monster in his previous job. As AIG employees working those books succeeded to wind down a credit derivative book of business to $1.6 trillion from $2.7 trillion, the AIG employees were entitled to the bonuses even as they left. AIG was not going to keep these financial scientists on board by offering frequent flyer’s bonuses. And the AIG employees still had to complete much of the task at hand.

the Best News of the Day: “After saying a little while ago that most of the employees who were responsible for the risky credit-default swaps are gone, those who have stayed have already reduced the risky business from $2.7 trillion to $1 trillion,” Mr. Liddy stated.

Vikas Baijaj of the The New York Times reported on September 13, 2008 that American International Group and Merrill Lynch might face a similar crisis in the immediate days ahead, in need of billions of dollars in capital to strengthen their businesses. Adding urgency to the discussions was government intervention into private enterprise during the last year that have not been enough to halt the unraveling of the financial system.

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