Dehydrated Conspiracy: Just Add AIG!

Author:
Publish date:

Certain networks just attract conspiracy theorists and the theories that these theorists theoretically theorize with the same level of surreal magnetism that acts between big oil and Maxine Waters. That's not to say, for instance, that Goldman Sachs isn't totally responsible for spiking oil prices up to nearly $150 a barrel, unleashing law enforcement on Governor Spitzer at a particularly (in)opportune time, sinking Bear Stearns in retribution for that firm's failure to pitch in to rescue LTCM, and arranging to demoralize Tim "The Safecracker" Geithner and Ben "The Beard" Bernanke by getting them to wear the same tie while attending recent Congressional hearings,* just that smoke and fire may or may not be totally related.
Goldman, at least, appears mostly to have an appearance of quiet (and loud) competence. It is not all that intellectually pressing to imagine Goldman at the center of a plan to irradiate a bunch of gold (see what we did there?) and thereby reduce available supply to spike the price and boost the value of the long positions it may or may not hold in the metal ("Gold-man Sachs-en-fin-ger" even sounds cool when Karaoked loudly to the theme song). But, it seems to us, that this sort of thing begins to collapse in on itself when AIG becomes the supposed criminal mastermind organization at the center of a plot complex enough to involve more than three laptop computers with disparate versions of Windows. So, when we see posts like the one Zero Hedge penned this weekend ("AIG Was Responsible For The Banks' January & February Profitability") you can color us skeptical- at least of the conspiracy laden parts. (Not that we do or do not love Zero Hedge, but still). We have no doubt that AIG poured an Imperial Asston of cash into a series of counter-parties in January and February. What, exactly, is mysterious about this?


The central argument seems to be that a friend of Zero Hedge tells the blog that when AIG would call for the unwind of a given portfolio en masse (and emphasis is placed on the size of a given unwind here) counterparties would benefit via the freeing up of reserve capital as well as actual profit on the trades. I think the suggestion is supposed to be that these positions are far less risky than they appear to be- the further implication being that a liquidation is not totally necessary, or that it should be done piecemeal for single-names, or... we aren't sure what. This is not made clear in the original piece. Negative convexity with respect to the CDS market isn't explicitly discussed in the piece either, but the effects thereof, we suppose, might aggravate the efforts to unwind a big slew of CDS positions.
Another commentator (who shall remain nameless) called this "pure money laundering," and wondered why AIG didn't just unwind these positions at terms "favorable terms for itself...." Ah yes! Surely, it would have been trivial to just flip the "favorable" option to "to self" instead of leaving it on the "to others" setting when leaving the VWAP running on AIG's CDS portfolio.
It seems to us there is a much simpler explanation: AIG was pressed with a mandate to reduce total exposure to... well... everything, and to do so as quickly and effectively as possible with bonus points for not inducing the immediate heat death of the known universe as this was accomplished. This is so "not unusual" there is actually a term for it: "Fire Sale."
It takes little or no effort to discover that the focus over at AIG has been on aggressive unwinding for some time with the addition of a "be quick about it, man," any time anyone has occasion to interject one. Liddy said as much in the hearings on March 18th:

Although we have wound down more than $1 trillion in the portfolio of AIG Financial Products, roughly a third from its peak, the unit that is at root of our financial problems, that portfolio remains very large -- $1.6 trillion. And it continues to contain substantial risk.
The financial downside for taxpayers is potentially very large, and it's very real. And that's why we're winding down that business as quickly as possible.

And this exchange:

GARRETT: One of the -- final question is on the bigger picture. And that is, how do we get the taxpayer off the hook going forward? Is there basically, in a word, an exit strategy here for the government to get out from under this?
LIDDY: There is.
GARRETT: Is that exit strategy basically in part to sell off some of the assets? And if that is the case, do you see -- I know you haven't been able to do it now, because of the global economic climate. Is there anything that you would see in the near future that any of this exit strategy is really going to engage itself?
LIDDY: The exit strategy, I think, is a solid one. It's been in place for a while now. And it's sell whatever assets we can, use that money to pay back the Federal Reserve and the TARP money.
To the extent we -- we can't sell an asset, we're going to ring- fence it, put it in a -- in a separate trust, and actually give that asset to the Federal Reserve as satisfaction of the debt.
[...]
With respect to the credit default swaps that have caused us all the difficulty, that number started out at about $80 billion. It's now about $10 billion.

In any other context (say: "Large hedge fund tries to unwind positions. Market smells blood in the water, bites down and hangs on. Counterparties reap massive returns.") no one so much as blinks. Add "AIG" and suddenly prosecutors are re-reading the RICO act and Congressional Committee members are sending interns to spy on Ed Liddy so they can sharpen their disemboweling cutlasses in their offices privately and without scaring the kids.
As for "money laundering," we aren't really sure where the rest of the planet thought the cash to unwind these positions was going to go. The Red Cross? Habitat for Humanity? Al Gore's carbon offset hedge fundcharity?
AIG Was Responsible For The Banks' January & February Profitability [Zero Hedge]
* We totally aren't saying they are either. We're just, you know, sayin', is all.

Related