It is now becoming clear why a high level New York Federal Reserve official named Brian Peters recently departed the Fed to join AIG, a company about which he possesses valuable and specific knowledge. Here, we will republish the SIGTARP documents that reveal Peters' direct involvement with AIG assets that would first be sold to the NY Fed in 2008 as the company teetered on the edge of bankruptcy, only to be sought once again by AIG in a sweetheart deal.
As Robert Wenzel wrote on February 4, 2011, in a post titled "The Revolving Door (Federal Reserve Edition)":
American International Group Inc.has hired Federal Reserve Bank of New York veteran Brian Peters to help manage risk.Peters is joining as a senior managing director in the enterprise risk management group, according to a Jan. 18 memo to staff from Sid Sankaran, chief risk officer, reports Bloomberg.The Fed bailed out AIG to the tune of billions in 2008. Thanks to Bernanke money printing, they repaid the last $21 billion it owed the Fed on Jan. 14.Peters was senior vice president in risk management at the New York Fed, where he helped oversee the 12 “largest and most systemically important financial institutions and industry utilities,” according to the memo.
At the time of Peters' passage through the revolving door, AIG had only the month prior (as Wenzel points out) paid down the remainder of its multi-billion dollar revolving credit line with the New York Federal Reserve, in part, through spin offs and asset sales. With about $20 billion in cash left over, it has been poised to bid for some of the vary assets that had led to its downfall in 2008--namely the Maiden Lane II portfolio, currently valued by BlackRock at $15.9 billion. AIG indeed sent the NY Fed an offer of $15.7 billion last December, which went unanswered.
Why would AIG want this portfolio? Now that non-performing assets have been written down or off entirely, the remaining performing assets, consisting in part of vintage subprime securitizations, pay a spiffy yield in the neighborhood of 8% to 10%. A nice return considering comparable securities of more modern creation are paying several percentage points lower.
After a series of recent debt and equity restructurings by AIG, the US Treasury now owns 92% of the company, and is keen on unloading its interest via a public stock offering. As the FT writes today, the inclusion of the high yielding ML II portfolio on AIG's balance sheet materially improves the offering price, and hence the amount received directly by the Treasury (brackets and italics ours):
At AIG, the plan to buy back the portfolio of mostly subprime mortgage securities has been part of its strategy as it emerges from government ownership.
The insurer has stockpiled about $20bn in cash to purchase the Maiden Lane II assets and similar securities.“It’s a very different story with or without these securities,” Robert Benmosche, AIG’s chief executive, told the Financial Times. “We can improve yields by 3-4 per cent.”The increase, Mr Benmosche said, would help AIG reap an additional $500m-$700m in annual income [which would surely increase the bonus pool for the AIG execs, including Peters].
Writes ZeroHedge:
It appears that the Treasury had been hoping to quietly get the deal done where AIG buys the toxic mortgages at a preferential price so that Geithner can than proceed to sell off bits and pieces to bankers at a lowball IPO valuation where the deficit would once again be borne out by US taxpayers.
As the FT reports, the NY Fed looks to be increasingly image-conscious (emphasis ours):
People familiar with matter said the Treasury had sought to help broker a deal between the insurer and the New York Fed, reasoning that management’s knowledge of the some 800 securities might help squeeze more profits out of them and maximise taxpayers’ returns on their AIG investment. Fed officials remain concerned how a quick deal with AIG might appear to the public, the people said.
Concerned, indeed, as Brian Peters, a senior risk manager at the NY Fed, would in the end leave the Fed's payroll to get on AIG's. The following two documents are internal emails from the NY Fed produced as part of the SIGTARP investigation. Both demonstrate Peters' involvment in the creation of Maiden Lane II from the then-toxic AIG assets. The first email chain (presented in reverse chronological order) reveals Peters was involved in an important, unmentioned policy decision that depended on whether or not the specific securities that were to be purchased by ML II would be made public on the SEC's EDGAR website. [As an aside, this request, by an SEC feeling tremendous public heat at the time, generated much internal consternation at the NY Fed, as revealed by other emails (not shown).]
The second email is from Peters to then-current NY Fed president Timothy Geithner (approximately two months prior to him being nominated as Obama's Treasury Secretary), which conclusively demonstrates Peters was in the AIG asset pricing loop.
Yves Smith at Naked Capital writes:
So we have a former NY Fed official, deeply involved in the exchanges among the Fed and AIG and almost certainly the Treasury as well, now joining AIG. It isn’t hard to imagine that the reason he was hired was due to his intimate knowledge of how to move things along at the NY Fed and Treasury, and in particular, what Blackrock had told the NY Fed about Maiden Lane II and what the NY Fed’s return and political considerations were. The Treasury is not trying to protect the NY Fed from any information advantage AIG might have regarding the Maiden Lane II assets; Blackrock is certainly up to that task. It’s entirely about appearances of cutting a deal that favors AIG without that looking too bloody obvious.
So in this warped world of priorities, where giving financial firms great deals to “preserve the system” and cook the books on the TARP are top priorities, having an former insider grease the wheels is probably seen as really helpful. It’s merely another proof of what Simon Johnson pointed out in May 2009: the government is firmly in the hands of financial oligarchs.
To be fair, AIG spokesman Mark Herr said to Bloomberg regarding the Peters hire, “As is standard, he has agreed not to engage in business dealings with the FRBNY, the Federal Reserve Board or the U.S. Department of Treasury for six months.” However, "engage in business dealings" is sufficiently vague to allow Peters to use the inside knowledge he gained at the NY Fed to help AIG re-acquire the ML II portfolio.
As Barclays and other investors are now bidding for the assets (as reported by the FT), AIG might not end up with the portfolio after all--at least not on terms as favorable as it believed it could get last December. As to Brian Peters, we believe the relevant question is: if AIG does acquire the ML II assets, will he forgo (i) the portion of his 2011 bonus related to the $500m-$700m in annual income that said assets generate, and (ii) any shares that would be allocated to him in an offering, the valuation of which was enhanced by said asset acquisition?
The U.S.'s resemblance to a banana republic is becoming increasingly clear.
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