The idea of secret banking cabals that control the country and global economy are a given among conspiracy theorists who stockpile ammo, bottled water and peanut butter. After this week’s congressional hearing into the bailout of American International Group Inc., you have to wonder if those folks are crazy after all.

Wednesday’s hearing described a secretive group deploying billions of dollars to favored banks, operating with little oversight by the public or elected officials.

We’re talking about the Federal Reserve Bank of New York, whose role as the most influential part of the federal-reserve system — apart from the matter of AIG’s bailout — deserves further congressional scrutiny.

The New York Fed is in the hot seat for its decision in November 2008 to buy out, for about $30 billion, insurance contracts AIG sold on toxic debt securities to banks, including Goldman Sachs Group Inc., Merrill Lynch & Co., Societe Generale and Deutsche Bank AG, among others. That decision, critics say, amounted to a back-door bailout for the banks, which received 100 cents on the dollar for contracts that would have been worth far less had AIG been allowed to fail.

That move came a few weeks after the Federal Reserve and Treasury Department propped up AIG in the wake of Lehman Brothers Holdings Inc.’s own mid-September bankruptcy filing.

Source/Full Story: Bloomberg.com

It could take until November 2018 to get the full story behind the U.S. bailout of insurance giant American International Group (AIG.N) because of an action taken last year by the Securities and Exchange Commission.

In May, the SEC approved a request by AIG to keep secret an exhibit to a year-old regulatory filing that includes some of the details on the most controversial aspect of the AIG bailout: the funneling of tens of billions of dollars to big banks like Societe Generale, Goldman Sachs (GS.N), Deutsche Bank (DBKGn.DE) and Merrill Lynch.

The SEC’s Division of Corporation Finance, in granting AIG’s request for confidential treatment, said the “excluded information” will not be made public until Nov. 25, 2018, according to a copy of the agency’s May 22 order.

The SEC said the insurer had demonstrated the information in the exhibit, called Schedule A, “qualifies as confidential commercial or financial information.”

Source/Full Story:  Reuters

The U.S. Federal Reserve on Thursday launched a robust defense of its independence and warned that efforts in Congress to put monetary policy under political sway would hurt the economy.

Fed Vice Chairman Donald Kohn said opening up some of the U.S. central bank’s most sensitive decisions to political scrutiny could result in higher long-term interest rates and hurt the United States’ credit rating. Kohn was speaking before a Congressional panel where he was seeking to beat back a proposal that would open policy decisions by the U.S. central bank to audits by a federal watchdog agency.

“Any substantial erosion of the Federal Reserve’s monetary independence likely would lead to higher long-term interest rates as investors begin to fear future inflation,” he said in testimony prepared for delivery to a House of Representatives Financial Services subcommittee.

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Public anger over last year’s financial crisis and Fed-backed bailouts of investment bank Bear Stearns and insurer American International Group has created a popular backlash that could gain momentum in Congress.

A bill put forward by Representative Ron Paul, a Texas Republican, would expose the Fed’s decisions on monetary policy and emergency lending to audits by the Government Accountability Office. It has won support from a majority in the House of Representatives.

The GAO is currently prohibited from auditing these areas. Kohn said removing this exclusion would be highly detrimental and could lead investors to worry politics — not economics — would guide the Fed’s decisions.

“The Federal Reserve strongly believes that removing the statutory limits on GAO audits of monetary policy matters would be contrary to the public interest by tending to undermine the independence and efficacy of monetary policy,” he said.

He also said it could “cast a chill” on monetary policy deliberations by making officials nervous ideas they throw around behind closed doors could become public.

Paul’s bill has 250 co-sponsors, including 78 Democrats. But it has not been promoted by the Democratic majority leadership in the House, where it has yet to face even a committee-level vote.

If it were to emerge from the House, to become law it would also need to clear the Senate, where support may be more scarce.

Kohn warned that congressional meddling in the Fed’s affairs could exact a high cost.

Source/Full Story: Reuters

The people cried for a “king”, and now they have one…

President Barack Obama proposed the most sweeping overhaul of the U.S. financial regulatory system in 75 years, seeking to correct a “cascade of mistakes” that toppled major securities firms, froze credit markets and destroyed $26.4 trillion in stock market value around the world.

The proposal, much of which will be subject to approval by Congress, sets out the biggest overhaul of market rules in more than seven decades, adding an additional layer of regulation for the biggest firms. It would create an agency for monitoring consumer financial products, make the Federal Reserve the overseer of companies deemed too big to fail, and bring hedge and private equity funds under federal scrutiny.

“This was a failure of the entire system,” Obama said at a White House event that included the leaders of the Treasury, the Fed and other regulatory agencies. “An absence of oversight engendered systematic, and systemic, abuse.”

The announcement marks the beginning of what promises to be a political battle that’s likely to alter the president’s plan, with Republicans criticizing it as an expansion of government power over the economy. Obama, who has called the “sweeping overhaul” of regulations one of his top domestic priorities, said he wants to sign legislation by the end of the year.

The administration’s proposal comes after a year of shocks on Wall Street and a credit crunch that contributed to the worst U.S. recession in half a century. Since September, the government has been forced to spend billions of dollars bailing out such firms as Citigroup Inc., Bank of America Corp., American International Group Inc., General Motors Corp. and housing finance companies Fannie Mae and Freddie Mac.

Source/Full Story: Bloomberg.com

Newspapers are fixated upon $160 million in bonuses given to American International Group (AIG) executives. And it’s nice to know where the millions are going (note: the bonuses could have been cancelled had the federal government let the company go bankrupt, as officials should have). But where are the trillions in TARP, TALC and Federal Reserve Bank bailout funds going?

The man in charge of administering the bailouts is Treasury Secretary Timothy Geithner, who served as a staff member of the New York City-based Council on Foreign Relations before being hired in 2003 to head the New York City branch of the Federal Reserve Bank (Fed). As the vice chairman of the Fed’s Open Market Committee, Geithner is probably a poor choice to get the nation out of it’s current economic mess. He served as Alan Greenspan’s number two man at the Fed, so Geithner is as responsible as anyone for facilitating the severity of the real estate and financial bubble and its subsequent collapse. After all, the Fed was the driving force behind the asset bubble, inflating the bubble larger and larger through artificially low interest rates and an inflationary easy-money policy.

Source/Full Story:: thenewamerican.com

The Obama administration will announce details of a plan today to expand the $700 billion rescue of the financial system that will rely on enticing private investors to buy the troubled assets clogging banks’ balance sheets.

Treasury Secretary Timothy Geithner, who will unveil the Public Private Investment Program today, has crafted an approach using up to $100 billion of bailout money to spur investment funds to purchase — and banks to unload — the illiquid securities and loans that have caused credit to dry up. The Treasury, Federal Reserve and the Federal Deposit Insurance Corp. will all play a role alongside private investors in aiming to buy between $500 billion and $1 trillion of troubled assets.

“By providing a market for these assets that does not now exist, this program will help improve asset values, increase lending capacity by banks, and reduce uncertainty about the scale of losses on bank balance sheets,” Geithner said in an op-ed piece published in today’s Wall Street Journal. “The ability to sell assets to this fund will make it easier for banks to raise private capital.”

The announcement is a major test for Geithner, whose first speech on the financial rescue Feb. 10 offered so few details that it triggered a sell-off in financial stocks. Adding to the pressure on the administration is an unprecedented wave of populist anger over the rescue thus far, following the revelation that employees of American International Group Inc. got $165 million in bonuses after the insurer received taxpayer funds.

Source: Bloomberg.com

The Treasury Department will unveil the next step in its financial rescue efforts tomorrow, announcing that it intends to create a government body, called the Public Investment Corp., to finance the purchase of as much as $1 trillion in soured loans and toxic assets from ailing banks, according to sources.

The plan calls for the new entity to combine its resources with the Federal Deposit Insurance Corp., the Federal Reserve and private investors to buy those loans and other assets. But the government will put far more money into the deals and take on more risk than the investors, which could include hedge funds, private-equity firms, pension funds and foreign investors with U.S. headquarters, the sources said. The corporation will be funded with $75 billion to $100 billion from the $700 billion financial rescue package.

Key details of the toxic asset purchasing program are not yet finalized, said officials in contact with the Treasury. Some expressed concern that the markets would expect too much out of Monday’s announcement. When Treasury Secretary Timothy F. Geithner first sketched out the administration’s rescue plan last month, he was criticized on Wall Street and on Capitol Hill for being too vague and creating uncertainty in the markets.
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The Obama administration also risks a backlash from lawmakers and ordinary Americans who expressed outrage over $165 million in bonus payments by American International Group to employees of its most troubled unit — despite the firm receiving more than $170 billion in federal aid.

Source:  washingtonpost.com

The American International Group, which has received more than $170 billion in taxpayer bailout money from the Treasury and Federal Reserve, plans to pay about $165 million in bonuses by Sunday to executives in the same business unit that brought the company to the brink of collapse last year.

Word of the bonuses last week stirred such deep consternation inside the Obama administration that Treasury Secretary Timothy F. Geithner told the firm they were unacceptable and demanded they be renegotiated, a senior administration official said. But the bonuses will go forward because lawyers said the firm was contractually obligated to pay them.

The payments to A.I.G.’s financial products unit are in addition to $121 million in previously scheduled bonuses for the company’s senior executives and 6,400 employees across the sprawling corporation. Mr. Geithner last week pressured A.I.G. to cut the $9.6 million going to the top 50 executives in half and tie the rest to performance.

The payment of so much money at a company at the heart of the financial collapse that sent the broader economy into a tailspin almost certainly will fuel a popular backlash against the government’s efforts to prop up Wall Street. Past bonuses already have prompted President Obama and Congress to impose tough rules on corporate executive compensation at firms bailed out with taxpayer money.

A.I.G., nearly 80 percent of which is now owned by the government, defended its bonuses, arguing that they were promised last year before the crisis and cannot be legally canceled. In a letter to Mr. Geithner, Edward M. Liddy, the government-appointed chairman of A.I.G., said at least some bonuses were needed to keep the most skilled executives.

“We cannot attract and retain the best and the brightest talent to lead and staff the A.I.G. businesses — which are now being operated principally on behalf of American taxpayers — if employees believe their compensation is subject to continued and arbitrary adjustment by the U.S. Treasury,” he wrote Mr. Geithner on Saturday.

Source: NYTimes

American International Group Inc had warned of turmoil around the globe if the government allowed the insurer to fail when it appealed to U.S. regulators for its latest rescue, Bloomberg said citing an AIG presentation dated February 26.

AIG needed immediate help from the Federal Reserve and Treasury to prevent a “catastrophic” collapse that would be worse for markets than the demise of Lehman Brothers Holdings Inc, according to the 21-page draft AIG presentation circulated among federal and state regulators, the agency reported.

Source: Reuters

A relentless sell-off in the stock market Monday blew through barriers that would have been unthinkable just weeks ago, and investors warned there was no reason to believe buyers will return anytime soon.

AP – People walk to work in the snow as they pass the flag-draped New York Stock Exchange Monday, March …

The Dow Jones industrial average plummeted below 7,000 at the opening bell and kept driving lower all day, finishing at 6,763 — a loss of nearly 300 points. Each of the 30 stocks in the index lost value for the day.

And the Standard & Poor’s 500 stock index, a much broader measure of the market’s health, dipped below the psychologically important 700 level before closing just above it. It hadn’t traded below 700 since October 1996.

Investors were worried anew about the stability of the financial system after insurer American International Group posted a staggering $62 billion loss for the fourth quarter, the biggest in U.S. corporate history — and accepted an expanded bailout from the government.

But beyond daily headlines, Wall Street seems to have given up the search for a reason to believe that the worst is over and the time is ripe to buy again.

“As bad as things are, they can still get worse, and get a lot worse,” said Bill Strazzullo, chief market strategist for Bell Curve Trading, who said he believes the Dow might fall to 5,000 and the S&P to 500.

The Dow’s descent has been breathtaking. It took only 14 trading sessions for the average to fall from above 8,000 to below 7,000. For the year, the Dow has lost 23 percent of its value.

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U.S. companies, consumers and communities may grow so addicted to government financial help that cutting them off could trigger another recession soon after the current one ends.

Between the U.S. Federal Reserve’s trillions of dollars in lending programs, the $787 billion stimulus package and $700 billion — and counting — in bank bailout funds, no one can accuse officials of soft-pedaling their crisis response.

But there is increasing concern that when the flow of public money subsides — beginning next year when much of that stimulus package is spent — the economy still won’t be strong enough to stand on its own.

"The stuttering attempts to repair the banking and lending mechanisms so far by the new administration suggests that by late 2010, the specter of a second dip into recession will be looming large," said Merrill Lynch economist Sheryl King.

The latest evidence of the government’s ever-changing plans came on Monday when insurer American International Group Inc got its third bailout, each with different terms.

That did nothing to improve confidence on Wall Street, where investors dumped stocks amid fears that the financial crisis was worsening.

The longer it takes to stabilize the financial sector, the more the economy suffers, and that feeds back into bigger loan losses and the need for even more government intervention.

John Silvia, chief economist at Wachovia, said the government’s success so far in shoring up markets and reviving the economy resembled the pattern of police patrols.

"At each corner where a policeman is stationed, we witness a decline in crime," he said. "In every market where the Fed focuses its liquidity facilities," credit conditions improve.

Unfortunately, where there is no direct government support, conditions are grim. Merrill expects unemployment to hit 10 percent by the end of 2009, with house prices losing 10 percent to 15 percent more and the stock market dropping another 20 percent.

That could erase $6.5 trillion off of household wealth, on top of the $12 trillion hit consumers have already taken, Merrill’s King estimated.

Source:   Reuters

Source: Bloomberg.com

Stocks fell worldwide, sending the Dow Jones Industrial Average below 7,000 for the first time since 1997, and Treasuries rose after Warren Buffett said the economy is in “shambles” and American International Group Inc. reported a $61.7 billion loss.

Berkshire Hathaway Inc. retreated 5.9 percent after reporting the worst annual drop in book value since Buffett took control in 1965. HSBC Holdings Plc sank 19 percent after announcing a rights offering, driving down lenders such as Bank of America Corp. Exxon Mobil Corp. declined for a fourth day as oil tumbled 9.4 percent.

“The bear market has only begun,” Robert Prechter, the founder of Gainesville, Georgia-based Elliott Wave International Inc. who predicted the 1987 stock market crash, said on Bloomberg Radio. “I don’t see the clear weather yet.”

The Dow average decreased 214.65 points, or 3 percent, to 6,848.28 at 11:48 a.m. in New York. The Standard & Poor’s 500 Index dropped 3.4 percent to 710.21. Europe’s Dow Jones Stoxx 600 Index tumbled 4.8 percent, its steepest loss of the year. Treasuries rose as investors sought a haven, driving the yield on 10-year notes down to 2.92 percent from 3.01 percent.

The MSCI World Index of stocks in 23 developed nations fell 4.2 percent and dropped as low as 719.42, the lowest intraday level since the Iraq War began in March 2003. The MSCI Emerging Markets Index slid 4.5 percent, while Hungary’s forint dropped after European Union banks

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Source: Reuters

The U.S. government threw a new $30 billion lifeline to American International Group Inc on Sunday as the embattled insurer prepared to report the biggest quarterly loss in corporate history.

AIG’s board approved a new rescue package that also includes more lenient terms on a government investment in its preferred shares and a lower interest rate on a government credit line, two sources familiar with the matter said.

Details will be announced on Monday when AIG is expected to report a fourth-quarter loss of about $60 billion — roughly $460,000 per minute.

This would be the third time the government has had to step in to save AIG, once the biggest insurer by market value whose global reach may have made it too big to fail.

A source familiar with the matter said on Sunday night that U.S. authorities felt it was cheaper to put more taxpayer money into AIG than to take the risk of letting it fail.

Allowing the collapse of AIG, which has struggled to sell assets, would have far-reaching consequences for the global financial system as the company guarantees about $300 billion of asset-backed securities and other debt, analysts have said.

The source told Reuters that a failure of AIG would be both a systemic risk for the U.S. economy and would send shockwaves through the retail insurance industry, adding that as long as it remains a systemic risk, more government help may be needed.

The government has been blamed by many for exacerbating the financial crisis by allowing Lehman Brothers to fail.

“The government really does not have the option of letting AIG totally blow up,” said Robert Haines, senior insurance analyst at CreditSights. “The counterparties on most of the book are (European) banks that would be hammered if the U.S. walked away. Hopefully, the third bailout will be the charm.”

The rejigged bailout, which changes the terms of an earlier $150 billion rescue, is the latest example of how federal authorities are having to revamp aid for top financial institutions as the global financial crisis deepens.

Last week, the government agreed to boost its equity stake in Citigroup Inc to as much as 36 percent in a bid to bolster the bank, already the recipient of billions of dollars in taxpayer funds.

The dollar rose against most other currencies in Asia as news of the deal emerged.

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Source: Reuters

Life insurance companies, nervous over massive investment losses that could ultimately threaten their viability, are hoping they are next in line to get a piece of the U.S. financial bailout.

They argue federal funds could stabilize their trillions in investments and warn that any failure of a life insurer could dry up a key source of corporate financing.

But U.S. officials are not convinced.

Treasury Secretary Henry Paulson said Tuesday he had not yet decided whether other insurers would get federal funds. The only insurer to get government help so far is American International Group Inc (AIG.N: Quote, Profile, Research, Stock Buzz), which was saved from bankruptcy with a rescue package that has ballooned to $152 billion.

As the biggest buyers of U.S. corporate bonds, life insurers say they grease the wheel of corporate America. Industry officials insist the failure of a large U.S. life insurer would drastically shrink bond financing, potentially creating another hurdle to the nation’s economic recovery.

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So much for “free” markets.  And where do you suppose the Federal Reserve is getting $85 billion dollars from exactly?  Yea, most probably out of thin air.

Source: money.cnn.com

In an unprecedented move, the Federal Reserve Board is lending as much as $85 billion to rescue crumbling insurer American International Group, officials announced Tuesday evening.

The Fed authorized the Federal Reserve Bank of New York to lend AIG (AIG, Fortune 500) the funds. In return, the federal government will receive a 79.9% stake in the company.

Officials decided they had to act lest the nation’s largest insurer file bankruptcy. Such a move would roil world markets since AIG (AIG, Fortune 500) has $1.1 trillion in assets and 74 million clients in 130 countries.

An eventual liquidation of the company is most likely, senior Fed officials said. But with the government loan, the company won’t have to go through a tumultuous fire sale.

“[A] disorderly failure of AIG could add to already significant levels of financial market fragility and lead to substantially higher borrowing costs, reduced household wealth and materially weaker economic performance,” the Fed said in a statement.

The bailout marks the most dramatic turn yet in an expanding crisis that started more than a year ago with the mortgage meltdown. The resulting credit crunch is now toppling not only mainstay Wall Street players, but others in the wider financial industry.

The line of credit to AIG, which is available for two years, is designed to help the company meet its obligations, the Fed said. Interest will accrue at a steep rate of 3-month Libor plus 8.5%, which totals 11.31% at today’s rates.

AIG will sell certain of its businesses with “the least possible disruption to the overall economy.” The government will have veto power over the asset sales and the payment of dividends to shareholders.

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