Chris Bowers at Open Left had a post yesterday about a spokespersons response to this AIG-NY Fed email scandal. Chris rightfully points out the complete and utter disconnect between Wall Street-Washington DC mafia and what the rest of us are experiencing. Included in Chris' insight is the quote for a treasury department spokesperson (actual quote from this article by Shahien Nasiripour):
The Treasury's response this morning is, essentially, no harm no foul. Meg Reilly, a Treasury spokeswoman, released a statement: "In the transaction at the heart of this dispute... the FRBNY made a loan of $25 billion which is on track to be paid back in full with interest so that taxpayers will be made whole. Somehow that fact that the government's loan is 'above water' gets lost in all the consternation despite its mention on page 2 of the SIG-TARP report (and weekly updates on the FRBNY's web site."
Let's put the disgusting disconnect aside and focus on the phrase "the government's loan is 'Above water'." The point of the quote is 'no harm no foul'. But is it an accurate statement and case of someone speaking before they have all the facts or is it an outright lie? The post - Stroll Down Maiden Lane Part 2 Maiden Lane II and III - will provide some background and context to the emails and above quote. In a nut shell, Maiden Lane III, a super-special investment vehicle, holds over $20 billion worth assets purchased from AIG counterparties. The most recent balance sheet information is here [pdf file]. Since, NY FED is the sole member of Maiden Lane III, the Fed is consolidating Maiden Lane III (the same for the rest of Maiden Lane entitie) balance sheet. The big multi- multi- billion dollar question is what is the value of these assets and hence the questionable nature of the Treasury spokesperson's statement? Janet Tavakoli started the questioning:
In the first place, that loan is not the heart of the dispute. Nonetheless, the FRBNY should immediately release the details of all of the Maiden Lane III assets backing that loan and show the current prices BlackRock has placed on them. Based on the current market, it is extremely likely that the loan is underwater. The assets backing the loan are so-called super senior and AAA rated collateralized debt obligations (CDOs). Similar CDOs trade for under ten cents on the dollar, not close to the average price of 35 cents for the loan's assets shown in a recent Fed report. The Fed claims prices climbed 4.5%. Yet in the secondary market, prices have dropped. The Fed awarded no-bid contracts to BlackRock to manage and price these assets (among other things). Given BlackRock's track record as a CDO manager*, I have no reason to believe its prices are reliable. As I mention above, I have reason to question the prices. If the Treasury wants to publicly claim the loan is not underwater, now is the time to prove it, even though this particular loan is not the key issue.
Now, a lot might have changed since September; Prices on some CDOs have improved as appetite for structured finance returned, but there remains a huge question mark over the fair value pricing being used by the Fed (via manager selected BlackRock). Note for instance, that the official, ratings on the Maiden Lane CDOs have been sliding steadily towards the non-investment grade bracket, yet their reported fair value improved between the end of September and the end of June:
As FT Alphaville points out based on credit ratings distribution the claim of "above water" may be questionable but as Janet Tavakoli's post implies at very least a bluff or worst a lie.
What do you think?
IMO: Mr. Geithner is quickly becoming a major liability and having your spokesperson make statements like this is beyond irresponsible not only because of the lack of accuracy but because of the complete lack of sensibility to the economic situation the rest of us are facing. "No harm no foul" - as Chris Bowers said yesterday - fuck you.