Bailout money paying off fradulent contracts

How Much Risk Is the Treasury Really Assuming from Financial Institutions? (Part 2) -- Seeking Alpha:

"The key point is that neither the public, the Fed nor the Treasury seem to understand is that the CDS contracts written by AIG with these various non-insurers around the world were shams - with no correlation between 'fees' paid and the risk assumed. These were not valid contracts as Fed Chairman Ben Bernanke, Treasury Secretary Geithner and Economic policy guru Larry Summers claim, but rather acts of criminal fraud meant to manipulate the capital positions and earnings of financial companies around the world.

Indeed, our sources as well as press reports suggest that the CDS contracts written by AIG may have included side letters, often in the form of emails rather than formal letters, that essentially violated the ISDA agreements and show that the true, economic reality of these contracts was fraud plain and simple. Unfortunately, by not moving to seize AIG immediately last year when the scandal broke, the Fed and Treasury may have given the AIG managers time to destroy much of the evidence of criminal wrongdoing.

Only when we understand how AIG came to be involved in CDS and the fact that this seemingly illegal activity was simply an extension of the reinsurance/side letter shell game scam that AIG, Gen Re and others conducted for many years before will we understand what needs to be done with AIG, namely liquidation. Seen in this context, the payments made to AIG by the Fed and Treasury, which were then passed-through to dealers such as Goldman Sachs (NYSE:GS), can only be viewed as an illegal taking that must be reversed once the US Trustee for the Federal Bankruptcy Court for the Southern District of New York is in control of AIG's operations."

There is an assumption that many of the counter parties to these agreements knew they were a sham; and were using these agreements to move equity and/or losses and/or capital around in order to increase the level of risk the counter parties could take. Both sides knew of the fraud and participated willingly; so there is no need for any kind of bailout.

I doubt we have enough country club jails to hold all of the people that belong in them.

Finally, in addition to the direct impact of a potential unwinding of the AIG CDS contracts, there remains the larger issue raised by Chris Whalen: i.e. the potential unenforceability of many CDS contracts as a result of secret side letters. The OCC’s rationale for minimizing the potential credit exposure of derivative transactions to the financial institutions depends in great part on their ability to set off obligations to particular counterparties against balancing transactions. In the event contracts are held unenforceable as a result of side letters or other defects in their execution, the setoff rationale would no longer hold true and the overall exposure could be far greater than currently assumed. Presumably the Special Inspector General will be exploring these issues during his investigation. Should this activity prove to be pervasive and should these letters and emails extend beyond AIG to its counterparties, we could find the $16 Trillion notional amount of CDS contracts issued by the major financial institutions becoming a major Achilles Heel for the Treasury/Fed/FDIC’s efforts to save the wholesale banks.



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