FCIC Releases Telephone Transcripts; What's Wrong With David Viniar's Memory?

As Robert Wenzel noted, the Financial Crisis Inquiry Commission (FCIC) has uploaded a substantial portion of their work product, including interviews, transcripts, and supporting documentation. "Substantial", but not complete, as Yves Smith (who was interviewed by the Commission) commented:

The FCIC has made a great show of being transparent, but if you are going to make that your signature, you can’t engage in halfway measures. Lambert Strether, in an e-mail titled “A data conversion effort that shows FCIC’s “Resource Library” is farcically bad and obfuscatory” noted:

Obviously, any independent evaluation of the material is not at all a priority with these guys. Yes, they’ve made it easy enough to DISTRIBUTE, and no doubt there will be an iPhone app any day now. Yay. But as far as making it easy to EVALUATE, which takes data you can interchange and manipulate and search, everything they have done makes that harder. Every single thing.

More tooth gnashing from Lambert here and here.

Another mystery is why so many interviews are being withheld. When they interviewed me in November (and yes, sports fans, my interview is up on the FCIC site), I was informed that 600 interviews would be released. I’m told by people close to the investigation that not all interviews were recorded; this was an oversight early in the process, but starting in July, all were apparently taped.

Regardless, a number of interesting documents were released. One, in particular, produced on the Role of the Derivatives in the Financial Crisis section outlines the history of the Goldman Sachs collateral calls, including supporting documentation for each notable event. Readers may recall that it was Goldman's forced haircuts that revealed AIG's shaky (to phrase it charitably) capitalization. Included in the document are the transcripts of several internal calls in the AIG Financial Products division. From the summary on page 2 of the timeline:

July 11, 2007

Telephone call between Andrew

Forster (AIGFP) and Alan Frost (AIGFP)

Andrew Forster (AIGFP) tells Alan Frost

(AIGFP) that (1) he is focusing on CDS and

subprime,” (2) “every f---ing … rating

agency …[came] out with more

downgrades,” (3) “about a month ago I

was like, you know suicidal,” (4) “the

problem that we’re going to face is that

we’re going to have just enormous

downgrades on the stuff we got,” (5)

AIGFP will “have to mark” its books, and

(6) “we’re [unintel] f---ed basically.”

We've excerpted the full conversation and OCR'd the PDF here:

Tab 9 AIG Transcript From 2010 0701 AIG Goldman Supporting Docs

A second series of conversations takes place on July 30, 2007, summarized as follows:

July 30, 2007

Telephone call between Andrew

Forster (AIGFP) and John Liebergal

(AIGFP)

Forster (AIGFP) tells John Liebergal

(AIGFP) that (1) Goldman margin call “hit

out of the blue and [] a f---ing number

that’s well bigger than we ever planned

for,” (2) Goldman’s prices were

“ridiculous” but that the value “could be

anything from 80 to sort of, you know 95,”

(3) he would not buy bonds at 90 cents on

the dollar “because they could probably

go low” and because it would require

AIGFP to mark its books. He specifically

stated, “we can’t mark any of our

positions, and obviously that’s what saves

us having this enormous mark to market.

If we start buying the physical bonds back

then any accountant is going to turn

around and say, well, John, you know you

traded at 90, you must be able to mark

your bonds then.”

Again, we've excerpted and OCR'd here:

Tab 9 AIG Transcript From 2010 0701 AIG Goldman Supporting Docs

For the record, Goldman's haircuts were proven entirely correct, as AIG was clearly over-extended on its poor insurance bets. As far as Goldman misconduct goes, we're much more interested in the "truthiness" of the testimony of Goldman CFO, David Viniar and Managing Director David Lehman. From the Huffington Post (via Naked Capitalism), emphasis ours:

Goldman Sachs collected $2.9 billion from the American International Group as payout on a speculative trade it placed for the benefit of its own account, receiving the bulk of those funds after AIG received an enormous taxpayer rescue…

At a hearing on July 1, 2010–two weeks before Goldman sent the e-mail acknowledging how $2.9 billion in AIG funds wound up in its own account–the crisis panel questioned Goldman’s chief financial officer, David A. Viniar and managing director David Lehman. Both said they knew nothing about AIG funds landing in the bank’s private coffers, according to a transcript of the hearing…

According to the crisis commission report, Goldman bought credit default swaps from AIG as a form of insurance on investments known as Abacus, which were pools of mortgage-linked securities.

And further, from Morgan Housel at the Motley Fool (emphasis ours):

On Goldman Sachs (NYSE: GS) riding the AIG (NYSE: AIG) bailout train: Goldman also produced documents to the FCIC that showed it received $3.4 billion from AIG related to credit default swaps on CDOs that were not part of Maiden Lane III. Of that $3.4 billion, $1.9 billion was received after, and thus made possible by, the federal bailout of AIG. And most -- $2.9 billion -- of the total was for proprietary trades (that is, trades made solely for Goldman's benefit rather than on behalf of a client) largely relating to Goldman's Abacus CDOs. Thus, unlike the $14 billion received from AIG on trades in which Goldman owed the money to its own counterparties, this $2.9 billion was retained by Goldman.

Interestingly, the NY Fed was well aware of Goldman's "naked short" position, as this internal Fed email from November 4, 2008 to VP Sarah Dahlgren reveals, which was released by Issa's Congressional Committee on Oversight and Government Reform (emphasis ours):

Sarah,

We met with Govs. Kohn and Warsh [EB: yes, soon to be departed Kevin Warsh who is rumored to be picked up by AIG] today to update them on the package of measures being prepared for AIG. The governors asked two questions in the meeting that we did not know the answers to. I expect these are issues that someone on your team is already working on, but we would like to get the latest information from you so we can get back to the governors with answers.

Concessions: the worry is that giving the counterparties par in exchange for the underlying COO security might be giving them a gift - they no longer have AIG credit risk, and whatever CVA they have taken against potential future exposure to AIG will be released upon tear-up. If a counterparty has not received all the collateral it has called for, the tear-up eliminates current exposure also. On the other hand, AIG is now receiving government support so the perceived credit risk of AIG is less. Also, AIG needs to get the CDS torn up to put its problems behind it, so its bargaining power may be weak. If I understand the current version of the proposed structure, any concessions will result in an excess amount left in the escrow account which pays down the Fed's senior note. This may reduce AIG's incentive to bargain for the best concession possible. Is Morgan Stanley or some advisor from our side embedded in the tear-up negotiations to track these issues?

Goldman: is a special case because their CDS with AIG are a naked short position and they don't own the bonds. If the CDS are just torn up at current mark-to-market, the value of that mark influences the cash Goldman will receive in a way that is not the case for the counterparties who own the bonds and will be receiving par. The Fed, Goldman's senior management, and Treasury all have an interest in making sure the negotiation of the mark between AIG and Goldman is done in a fair way. However, the normal procedure might be for the negotiations to be done between someone at AIGFP and their counterpart on a trading desk at Goldman. A Goldman trader may not share the perspective of Goldman's senior management and may attach higher value to an extra billion dollars of P&L that could affect his or her 2008 bonus, even if that carries significant reputation risk for Goldman as a firm. Again, is Morgan Stanley or some advisor involved here and aware of the issue? Is there a contingency plan to approach Goldman at a more senior level if roadblocks start appearing in the negotiations?

So, just what were the haircuts, if any, that Goldman received on the $3.4 billion payout on its synthetic CDO insurance that was subsidized directly by the US Treasury (and not part of ML III)? Further, what are the details of the negotiating process enacted? Was Morgan Stanley ultimately involved? If there were any "roadblocks", how were they "fairly" resolved? Finally, if top level executives at the NY Fed and Governors Kohn and Warsh themselves were aware in November, 2008 that Goldman would profit from their short bets with AIG (and the question was only how much), how is it possible that Mssrs. Viniar and Lehman of Goldman knew nothing about AIG funds landing in the bank’s private coffers?

Inquiring minds would like to know.

Full email follows (it appears for the first time outside of the Commission's website, though parts of it were summarized in various articles praising Warsh for his concerns over Fed "gifts"):

goldman short FRBNY-TOWNS-R1-204748

100% of Last Month's Money Printing Went Back to the Fed

According to the Federal Reserve's latest H.3 "Aggregate Reserves of Depository Institutions and the Monetary Base" statistical release, over the four week reserve period of January 12 to February 9, 2011, non-borrowed bank reserves increased by $112.5 billion, from $1.032 trillion to $1.114 trillion. During the same time period, the New York Fed purchased a total of $112 billion in Treasurys from the primary dealers (actually about 5% more, as the purchase amounts are reported at par). Accordingly, the latest round of money printing has been a wash, as non-borrowed reserves on deposit at the Fed are not eligible for lending or use as collateral (though they do earn 0.25% interest).

Fed to Print [Only] $97 Billion Over Next 30 Days

After last month's record printing performance of $112 billion, the NY Fed will scale down and print only $97 billion over the next 30 days. In actuality, total purchases pursuant to QE2 will remain the same at $80 billion; however, the purchases needed to compensate for maturing assets (QE Lite) are dropping from $32 billion to $17 billion--in part, because of fewer Agency (Fannie/Freddie) securities maturing, but primarily because of lower MBS principal payments.

Mortgage rates have been climbing over the last few months, reaching the highest level since April 2010 only today. Rising mortgage rates mean fewer refinances, which require payouts to the MBS holders (including the Fed) of the full value of the repaid mortgages. Inasmuch as rising long term interest rates are testament to the resounding success of the Fed's purchase program (just ask Brian Sack), thanks to Fed profligacy, it is slightly less profligate this month.

Full schedule:

Tentative Outright Treasury Operation Schedule

Across all operations in the schedule listed below, the Desk plans to purchase approximately $97 billion. This represents $80 billion in purchases of the announced $600 billion purchase program and $17 billion in purchases associated with principal payments from agency debt and agency MBS expected to be received between mid-February and mid-March.

Printer version

	OPERATION DATE1	SETTLEMENT DATE	OPERATION TYPE2	MATURITY RANGE	EXPECTED PURCHASE SIZE
	February 11, 2011	February 14, 2011	Outright Treasury Coupon Purchase	08/15/2016 – 01/31/2018	$6 – $8 billion
	February 14, 2011	February 15, 2011	Outright TIPS Purchase	04/15/2013 – 02/15/2040	$1 – $2 billion
	February 15, 2011	February 16, 2011	Outright Treasury Coupon Purchase	02/28/2015 – 08/15/2016	$5 – $7 billion
	February 16, 2011	February 17, 2011	Outright Treasury Coupon Purchase	05/15/2021 – 11/15/2027	$1.5 – $2.5 billion
	February 17, 2011	February 18, 2011	Outright Treasury Coupon Purchase	05/15/2018 – 02/15/2021	$6 – $8 billion
	February 18, 2011	February 22, 2011	Outright Treasury Coupon Purchase	08/31/2013 – 02/15/2015	$5 – $7 billion
	February 22, 2011	February 23, 2011	Outright Treasury Coupon Purchase	08/31/2016 – 02/15/2018	$6 – $8 billion
	February 23, 2011	February 24, 2011	Outright Treasury Coupon Purchase	08/15/2028 – 02/15/2041	$1.5 – $2.5 billion
	February 24, 2011	February 25, 2011	Outright Treasury Coupon Purchase	08/31/2012 – 08/15/2013	$4 – $6 billion
	February 25, 2011	February 28, 2011	Outright Treasury Coupon Purchase	05/15/2018 – 02/15/2021	$6 – $8 billion
	February 28, 2011	March 1, 2011	Outright Treasury Coupon Purchase	08/31/2013 – 02/15/2015	$5 – $7 billion
	March 1, 2011	March 2, 2011	Outright Treasury Coupon Purchase	08/15/2028 – 02/15/2041	$1.5 – $2.5 billion
	March 2, 2011	March 3, 2011	Outright Treasury Coupon Purchase	03/31/2015 – 08/31/2016	$5 – $7 billion
	March 3, 2011	March 4, 2011	Outright Treasury Coupon Purchase	05/15/2018 – 02/15/2021	$6 – $8 billion
	March 4, 2011	March 7, 2011	Outright TIPS Purchase	04/15/2013 – 02/15/2041	$1 – $2 billion
	March 7, 2011	March 8, 2011	Outright Treasury Coupon Purchase	09/15/2013 – 02/28/2015	$5 – $7 billion
	March 8, 2011	March 9, 2011	Outright Treasury Coupon Purchase	09/30/2016 – 02/28/2018	$6 – $8 billion
	March 9, 2011	March 10, 2011	Outright Treasury Coupon Purchase	03/31/2015 – 08/31/2016	$5 – $7 billion

The next release of the approximate purchase amount and tentative outright Treasury operation schedule will be at 2 p.m. on March 10, 2011. At that time, the Desk will also publish information on prices paid for securities included in the operations listed above.

______________________________
¹Operations are tentatively scheduled to begin around 10:15 AM and close at 11:00 AM unless noted otherwise.
²Nominal coupon operations are specified as “Outright Treasury Coupon Purchase” and TIPS operations are specified as “Outright TIPS Purchase”