Saturday, September 27, 2008

Goldman Sachs the U.S. Treasury? Few knew of Goldman’s exposure to A.I.G.

Behind Insurer’s Crisis, Blind Eye to a Web of Risk

September 27, 2008

The New York Times
Copyright 2008

(Correction Appended)

“It is hard for us, without being flippant, to even see a scenario within any kind of realm of reason that would see us losing one dollar in any of those transactions.” — Joseph J. Cassano, a former A.I.G. executive, August 2007

Two weeks ago, the nation’s most powerful regulators and bankers huddled in the Lower Manhattan fortress that is the Federal Reserve Bank of New York, desperately trying to stave off disaster.

As the group, led by Treasury Secretary Henry M. Paulson Jr., pondered the collapse of one of America’s oldest investment banks, Lehman Brothers, a more dangerous threat emerged: American International Group, the world’s largest insurer, was teetering. A.I.G. needed billions of dollars to right itself and had suddenly begged for help.

One of the Wall Street chief executives participating in the meeting was Lloyd C. Blankfein of Goldman Sachs, Mr. Paulson’s former firm. Mr. Blankfein had particular reason for concern.

Although it was not widely known, Goldman, a Wall Street stalwart that had seemed immune to its rivals’ woes, was A.I.G.’s largest trading partner, according to six people close to the insurer who requested anonymity because of confidentiality agreements. A collapse of the insurer threatened to leave a hole of as much as $20 billion in Goldman’s side, several of these people said.

Days later, federal officials, who had let Lehman die and initially balked at tossing a lifeline to A.I.G., ended up bailing out the insurer for $85 billion.

Their message was simple: Lehman was expendable. But if A.I.G. unspooled, so could some of the mightiest enterprises in the world.

A Goldman spokesman said in an interview that the firm was never imperiled by A.I.G.’s troubles and that Mr. Blankfein participated in the Fed discussions to safeguard the entire financial system, not his firm’s own interests.

Yet an exploration of A.I.G.’s demise and its relationships with firms like Goldman offers important insights into the mystifying, virally connected — and astonishingly fragile — financial world that began to implode in recent weeks.

Although America’s housing collapse is often cited as having caused the crisis, the system was vulnerable because of intricate financial contracts known as credit derivatives, which insure debt holders against default. They are fashioned privately and beyond the ken of regulators — sometimes even beyond the understanding of executives peddling them.

Originally intended to diminish risk and spread prosperity, these inventions instead magnified the impact of bad mortgages like the ones that felled Bear Stearns and Lehman and now threaten the entire economy.

In the case of A.I.G., the virus exploded from a freewheeling little 377-person unit in London, and flourished in a climate of opulent pay, lax oversight and blind faith in financial risk models. It nearly decimated one of the world’s most admired companies, a seemingly sturdy insurer with a trillion-dollar balance sheet, 116,000 employees and operations in 130 countries.

“It is beyond shocking that this small operation could blow up the holding company,” said Robert Arvanitis, chief executive of Risk Finance Advisors in Westport, Conn. “They found a quick way to make a fast buck on derivatives based on A.I.G.’s solid credit rating and strong balance sheet. But it all got out of control.”

The London Office

The insurance giant’s London unit was known as A.I.G. Financial Products, or A.I.G.F.P. It was run with almost complete autonomy, and with an iron hand, by Joseph J. Cassano, according to current and former A.I.G. employees.

A onetime executive with Drexel Burnham Lambert — the investment bank made famous in the 1980s by the junk bond king Michael R. Milken, who later pleaded guilty to six felony charges — Mr. Cassano helped start the London unit in 1987.

The unit became profitable enough that analysts considered Mr. Cassano a dark horse candidate to succeed Maurice R. Greenberg, the longtime chief executive who shaped A.I.G. in his own image until he was ousted amid an accounting scandal three years ago.

But last February, Mr. Cassano resigned after the London unit began bleeding money and auditors raised questions about how the unit valued its holdings. By Sept. 15, the unit’s troubles forced a major downgrade in A.I.G.’s debt rating, requiring the company to post roughly $15 billion in additional collateral — which then prompted the federal rescue.

Mr. Cassano, 53, lives in a handsome, three-story town house in the Knightsbridge neighborhood of London, just around the corner from Harrods department store on a quiet square with a private garden.

He did not respond to interview requests left at his home and with his lawyer. An A.I.G. spokesman also declined to comment.

At A.I.G., Mr. Cassano found himself ensconced in a behemoth that had a long and storied history of deftly juggling risks. It insured people and properties against natural disasters and death, offered sophisticated asset management services and did so reliably and with bravado on many continents. Even now, its insurance subsidiaries are financially strong.

When Mr. Cassano first waded into the derivatives market, his biggest business was selling so-called plain vanilla products like interest rate swaps. Such swaps allow participants to bet on the direction of interest rates and, in theory, insulate themselves from unforeseen financial events.

Ten years ago, a “watershed” moment changed the profile of the derivatives that Mr. Cassano traded, according to a transcript of comments he made at an industry event last year. Derivatives specialists from J. P. Morgan, a leading bank that had many dealings with Mr. Cassano’s unit, came calling with a novel idea.

Morgan proposed the following: A.I.G. should try writing insurance on packages of debt known as “collateralized debt obligations.” C.D.O.’s. were pools of loans sliced into tranches and sold to investors based on the credit quality of the underlying securities.

The proposal meant that the London unit was essentially agreeing to provide insurance to financial institutions holding C.D.O.’s and other debts in case they defaulted — in much the same way some homeowners are required to buy mortgage insurance to protect lenders in case the borrowers cannot pay back their loans.

Under the terms of the insurance derivatives that the London unit underwrote, customers paid a premium to insure their debt for a period of time, usually four or five years, according to the company. Many European banks, for instance, paid A.I.G. to insure bonds that they held in their portfolios.

Because the underlying debt securities — mostly corporate issues and a smattering of mortgage securities — carried blue-chip ratings, A.I.G. Financial Products was happy to book income in exchange for providing insurance. After all, Mr. Cassano and his colleagues apparently assumed, they would never have to pay any claims.

Since A.I.G. itself was a highly rated company, it did not have to post collateral on the insurance it wrote, analysts said. That made the contracts all the more profitable.

These insurance products were known as “credit default swaps,” or C.D.S.’s in Wall Street argot, and the London unit used them to turn itself into a cash register.

The unit’s revenue rose to $3.26 billion in 2005 from $737 million in 1999. Operating income at the unit also grew, rising to 17.5 percent of A.I.G.’s overall operating income in 2005, compared with 4.2 percent in 1999.

Profit margins on the business were enormous. In 2002, operating income was 44 percent of revenue; in 2005, it reached 83 percent.

Mr. Cassano and his colleagues minted tidy fortunes during these high-cotton years. Since 2001, compensation at the small unit ranged from $423 million to $616 million each year, according to corporate filings. That meant that on average each person in the unit made more than $1 million a year.

In fact, compensation expenses took a large percentage of the unit’s revenue. In lean years it was 33 percent; in fatter ones 46 percent. Over all, A.I.G. Financial Products paid its employees $3.56 billion during the last seven years.

The London unit’s reach was also vast. While clients and counterparties remain closely guarded secrets in the derivatives trade, Mr. Cassano talked publicly about how proud he was of his customer list.

At the 2007 conference he noted that his company worked with a “global swath” of top-notch entities that included “banks and investment banks, pension funds, endowments, foundations, insurance companies, hedge funds, money managers, high-net-worth individuals, municipalities and sovereigns and supranationals.”

Of course, as this intricate skein expanded over the years, it meant that the participants were linked to one another by contracts that existed for the most part inside the financial world’s version of a black box.

Goldman Sachs was a member of A.I.G.’s derivatives club, according to people familiar with the operation. It was a customer of A.I.G.’s credit insurance and also acted as an intermediary for trades between A.I.G. and its other clients.

Few knew of Goldman’s exposure to A.I.G. When the insurer’s flameout became public, David A. Viniar, Goldman’s chief financial officer, assured analysts on Sept. 16 that his firm’s exposure was “immaterial,” a view that the company reiterated in an interview.

Later that same day, the government announced its two-year, $85 billion loan to A.I.G., offering it a chance to sell its assets in an orderly fashion and theoretically repay taxpayers for their trouble. The plan saved the insurer’s trading partners but decimated its shareholders.

Lucas van Praag, a Goldman spokesman, declined to detail how badly hurt his firm might have been had A.I.G. collapsed two weeks ago. He disputed the calculation that Goldman had $20 billion worth of risk tied to A.I.G., saying the figure failed to account for collateral and hedges that Goldman deployed to reduce its risk.

Regarding Mr. Blankfein’s presence at the Fed during talks about an A.I.G. bailout, he said: “I think it would be a mistake to read into it that he was there because of our own interests. We were engaged because of the implications to the entire system.”

Mr. van Praag declined to comment on what communications, if any, took place between Mr. Blankfein and the Treasury secretary, Mr. Paulson, during the bailout discussions.

A Treasury spokeswoman declined to comment about the A.I.G. rescue and Goldman’s role. The government recently allowed Goldman to change its regulatory status to help bolster its finances amid the market turmoil.

An Executive’s Optimism

Regardless of Goldman’s exposure, by last year, A.I.G. Financial Products’ portfolio of credit default swaps stood at roughly $500 billion. It was generating as much as $250 million a year in income on insurance premiums, Mr. Cassano told investors.

Because it was not an insurance company, A.I.G. Financial Products did not have to report to state insurance regulators. But for the last four years, the London-based unit’s operations, whose trades were routed through Banque A.I.G., a French institution, were reviewed routinely by an American regulator, the Office of Thrift Supervision.

A handful of the agency’s officials were always on the scene at an A.I.G. Financial Products branch office in Connecticut, but it is unclear whether they raised any red flags. Their reports are not made public and a spokeswoman would not provide details.

For his part, Mr. Cassano apparently was not worried that his unit had taken on more than it could handle. In an August 2007 conference call with analysts, he described the credit default swaps as almost a sure thing.

“It is hard to get this message across, but these are very much handpicked,” he assured those on the phone.

Just a few months later, however, the credit crisis deepened. A.I.G. Financial Products began to choke on losses — though they were only on paper.

In the quarter that ended Sept. 30, 2007, A.I.G. recognized a $352 million unrealized loss on the credit default swap portfolio.

Because the London unit was set up as a bank and not an insurer, and because of the way its derivatives contracts were written, it had to put up collateral to its trading partners when the value of the underlying securities they had insured declined. Any obligations that the unit could not pay had to be met by its corporate parent.

So began A.I.G.’s downward spiral as it, its clients, its trading partners and other companies were swept into the drowning pool set in motion by the housing downturn.

Mortgage foreclosures set off questions about the quality of debts across the entire credit spectrum. When the value of other debts sagged, calls for collateral on the securities issued by the credit default swaps sideswiped A.I.G. Financial Products and its legendary, sprawling parent.

Yet throughout much of 2007, the unit maintained that its risk assessments were reliable and its portfolios conservative. Last fall, however, the methods that A.I.G. used to value its derivatives portfolio began to come under fire from trading partners.

In February, A.I.G.’s auditors identified problems in the firm’s swaps accounting. Then, three months ago, regulators and federal prosecutors said they were investigating the insurer’s accounting.

This was not the first time A.I.G. Financial Products had run afoul of authorities. In 2004, without admitting or denying accusations that it helped clients improperly burnish their financial statements, A.I.G. paid $126 million and entered into a deferred prosecution agreement to settle federal civil and criminal investigations.

The settlement was a black mark on A.I.G.’s reputation and, according to analysts, distressed Mr. Greenberg, who still ran the company at the time. Still, as Mr. Cassano later told investors, the case caused A.I.G. to improve its risk management and establish a committee to maintain quality control.

“That’s a committee that I sit on, along with many of the senior managers at A.I.G., and we look at a whole variety of transactions that come in to make sure that they are maintaining the quality that we need to,” Mr. Cassano told them. “And so I think the things that have been put in at our level and the things that have been put in at the parent level will ensure that there won’t be any of those kinds of mistakes again.”

At the end of A.I.G.’s most recent quarter, the London unit’s losses reached $25 billion.

As those losses mounted, and A.I.G.’s once formidable stock price plunged, it became harder for the insurer to survive — imperiling other companies that did business with it and leading it to stun the Federal Reserve gathering two weeks ago with a plea for help.

Mr. Greenberg, who has seen the value of his personal A.I.G. holdings decline by more than $5 billion this year, dumped five million shares late last week. A lawyer for Mr. Greenberg did not return a phone call seeking comment.

For his part, Mr. Cassano has departed from a company that is a far cry from what it was a year ago when he spoke confidently at the analyst conference.

“We’re sitting on a great balance sheet, a strong investment portfolio and a global trading platform where we can take advantage of the market in any variety of places,” he said then. “The question for us is, where in the capital markets can we gain the best opportunity, the best execution for the business acumen that sits in our shop?”

This article has been revised to reflect the following correction:

Correction: September 30, 2008
Because of an editing error, an article on Sunday about the financial problems of American International Group referred incorrectly to the timing and participants at meetings at the New York Federal Reserve between Saturday, Sept. 13, and Monday, Sept. 15. Although there were indeed meetings that weekend, there was also a separate meeting on Monday to discuss financial aid for A.I.G. Lloyd C. Blankfein, the chief executive of Goldman Sachs, was the only Wall Street chief executive who attended the Monday meeting, not the only chief executive who attended weekend meetings. Also, Henry M. Paulson Jr., the Treasury secretary, did not lead or attend the Monday meeting. (Both Mr. Blankfein and Mr. Paulson did attend the weekend meetings.)

© 2008 The New York Times:

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Friday, September 26, 2008

"Act ethically and can the special-interest garbage...Governing isn’t an entitlement. "

Will the Republicans discuss issues that matter?


by William Lutz

Volume 13 Issue 8
The Lone Star Report
Copyright 2008

Why should anyone vote Republican for Texas Legislature this cycle?

That’s not meant as an attack, but rather a serious question. If the people of Texas continue to elect Republicans, what will they do?

While the GOP base has reengaged to some extent as a result of the naming of Sarah Palin as the vice-presidential nominee, when I ask the above questions among Republicans, a long pause is the usual answer.

That’s the problem with power. There are hundreds of nice people who are paid good money to visit legislative offices and talk about industry issues that, while they are important, the average person on the street hasn’t bothered to understand and probably doesn’t care about. Spend too much time at the Capitol, and any human will think those are the defining issues of the day.

Some of these issues are indeed important to the state’s economy and deserve thoughtful consideration. The problem arises when the technical lobby squabbles consume the legislature to the exclusion of core matters of principle.

Let me give a few examples.
  • How come low-level nuclear waste dumps, tax abatements, corporate subsidies, and permitting bills get on the front burner, while controlling taxes for everyone and protecting private property rights stays on the back burner?
  • Why did a telecommunications bill make it to the governor’s desk in the 2005 special sessions but not the school finance bills?
  • How come tort reform, rather than taxes, has become the defining issue that differentiates the main factions in the Texas Legislature?
The voters in suburbia are growing weary of poll-tested sound-bites and other slick political gimmicks. That’s, in part, why the Democrats are making inroads in places like Arlington and North Dallas and the suburbs of Austin. The disengaged voter can’t tell the difference between the parties.

Here’s what the GOP needs to do to fix this mess:

Do something about taxes. When Republicans cut taxes, they win. Some in the GOP are so afraid that their local mayor or county judge might run against them that they’ve thrown conservatism out the window. Given the way property taxes have gone up recently, it might be the mayors and county judges that get thrown out the window if they continue to waste taxpayer dollars in Austin lobbying for unlimited tax increases. The people of Texas deserve a record vote on taxpayer protections, so they can hold tax-increasers accountable.

Protect private property rights. For the first time in decades, the Democrats have put the words “private property rights” in their platform. During the mid-1990s, the GOP pummeled Democrats on this issue, which is one of the primary reasons rural America flipped from Democrat to GOP. The legislature was right to send a private property rights protection bill to the governor’s desk, and it should be the first order of business in 2009. They correctly figured out that protecting farms and ranches from unjustified use of eminent domain is more important than letting a few foreign companies and Wall Street middlemen make a buck they didn’t earn through the Trans-Texas Corridor scheme. Voters really do care about private property rights, and the GOP will pay dearly if this issue is abandoned to Democrats.

Remember middle –class pocketbook issues. Real people want their kids in schools that work, low taxes, tuition that’s affordable so their kids don’t have to become indentured servants, crime controlled, and transportation policies that work without taking the public to the cleaners. The last three sessions, middle class families were an afterthought.

Act ethically and can the special-interest garbage. The voters of Texas can’t cite chapter and verse like I can, but they know something is amiss in this area, both in Austin and Washington DC. It has cost Republicans seats.

Yes, some in the press invent a few scandals to suit their own ideological purposes. But some of the fouls the press calls are real. The number of blatantly special-interest laws that have cleared the legislature in the last three regular sessions are too numerous to mention here. If it continues, the consequences will become more severe over time.

Simply stated, GOP legislative candidates need an agenda. They need to remind people why the Republican Party is different.

In other words, governing isn’t an entitlement. In the last days of the campaign, it’s time for the Republican leadership to earn people’s votes by promising real action on issues that matter to Texans.

© 2008 The Lone Star

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Thursday, September 25, 2008

"Greedy, unethical, self-serving, un-American and unpatriotic 'Conservatives' really have very little to do with traditional conservatism."

Privatized profits, socialized risk


Jon Monday
Fallbrook Village News
Copyright 2008

Reagan’s most feared words were, “I’m from the government and I’m here to help.” What happened to Republicans and the Conservative movement? It’s been taken over by greedy, unethical, self-serving, un-American and unpatriotic individuals claiming to be Republicans and Conservatives but really have very little to do with traditional conservatism.

Last week we saw the Bush administration put taxpayers on the hook for as much as $2 trillion to bail out Wall Street. Where is the money to bail out those families that are facing bankruptcy due to our scandalous healthcare system, or the failing infrastructure of our nation, or to address the ever-increasing national debt, or to support the commitment to Social Security and Medicare?

By pumping taxpayer dollars into Wall Street (most of which enriches the top one percent), the administration is diluting the American dollar and increasing the national debt, which puts a burden on all Americans.

There would have been a ripple effect that would reach all Americans if nothing was done, but can we at least learn a lesson from this mess? The deregulation of financial institutions combined with naked greed and unethical behavior has brought ruin to our country. It’s the fault of the economic policies of the “Republican” party, which McCain heartily supported until last week. Phil Gramm, the architect of the system that has now collapsed, was McCain’s principle financial advisor until his revealing comments about America’s “mental recession” and how we’re a “nation of whiners.”

Who’s whining now?

© 2008 Fallbrook Village

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Tuesday, September 23, 2008

Cat. 4 Narcissism: Why would Gov. Rick Perry equate his moving problems with Galveston evacuees?

Poor Rick Perry: He's stuck in a great big house with a swimming pool


By John Kelso
Austin American-Statesman
Copyright 2008

If you squint real hard and play stupid, you can see why Gov. Rick Perry would equate his moving problems with those of the Galveston evacuees.

The Galveston folks had to move because they lost their homes to a hurricane. Meanwhile, Perry had to move to a great big house in the Estates Above Lost Creek because he lost his home for a while to a remodel. Making matters even tougher, Perry's return to the Governor's Mansion in downtown Austin has been delayed by arson.

Last week, Perry explained his anxiety about not being able to move back into the Governor's Mansion by comparing his situation to the Hurricane Ike victims.

"I absolutely understand they want to get back to their homes ... I'd like to get back to the mansion," Perry said.

Our governor sure has a way with the common man, huh?

But you can see the common thread. Perry had to move out of the Governor's Mansion to a million-dollar 4,602-square-foot home with a swimming pool and an award-winning kitchen. Meanwhile, the Galveston people had to move from their homes and travel hundreds of miles across the state to sleep on the likes of gym floors with hundreds of strangers.

By the way, Perry has an 1,100-square-foot guest house at his temporary digs. A PR-savvy governor would have stuck a couple of evacuees back there and held a press conference.

But give Perry a break. We all know the anguish that comes with having to sleep in a strange bed. Besides, the bedroom at Perry's temporary home probably has less square footage than a gym floor.

Sure, there are more people standing in line to use the john out at the evacuation center, but what the heck?

You could point out that the Perrys didn't have to travel hundreds of miles across the state in a massive traffic jam.

On the other hand, the Perrys face the Austin commute. While waiting for their mansion to be refurbished, the Perrys have to pile in a great big car with air conditioning and power windows and then travel 14 miles from their home southwest of town to get to downtown Austin.

I'll betcha sometimes they even have to sit through a light.

While the Perrys are waiting to go home, the state is paying their $9,900-a-month rent. Meanwhile, the evacuees are waiting to go home, to see if they still have one.

When the evacuees go home, they face the possibility of rodents, raw sewage, a curfew and no electricity. When Perry returns home, he faces the possibility of the new carpet not matching the drapes.

I wonder if Perry has ever had to live out of an Igloo cooler? Probably only while fishing.

John Kelso's column appears on Sundays, Tuesdays and Fridays. Contact him at 445-3606 or

© 2008 Austin

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Sen. Carona: "You could be paying as much as $10 to $15 a day in tolls to go across town to see family, to go to your job."

Sen.: Gas tax goes up or prepare to pay the toll

Tuesday, September 23, 2008

By David Schechter
Copyright 2008

There's an easy way to lose an election in Texas, raise taxes. But some transportation leaders say it's time to raise the gas tax.

Without more road money, they say the future looks like a giant toll road.

Here's something people can count on, the price of stamps will always go up. In 1991, a stamp cost 29 cents. Eighteen years later, it now costs 42 cents to deliver a letter.

Just like a stamp is supposed to cover the cost of mailing a letter, the state gas tax is supposed to cover the cost of building roads. Eighteen years ago, the gas tax in Texas was 20 cents. Today, it's still 20 cents.

"We're really headed for a transportation calamity, if you will," said Sen. John Carona.

Adjusted for inflation, that 20 cents is now worth about 14 cents. Now, subtract a nickel that the state constitution dedicates to education.

"Now, you're down to nine cents," Carona said.

And here's where the nickel-and-diming really starts.

The gas tax funds the entire operation of the Department of Public Safety, at $600 million a year. Also, $52 million goes to transport Medicare patients to their appointments. There is also money for drunk driver revocation hearings, school buses for rural districts and even promoting arts and tourism.

In Austin, they're called diversions.

In the last 20 years, they've drained $18 billion from gas tax revenues.

"We're basically in the maintenance business," said Michael Morris, a North Texas transportation czar.

Morris coordinates road projects across the region. Of the 35 major projects on the books, every one is being reviewed as a possible toll road. There is simply not enough money to build free ones.

"I think everybody wants to stand up and say I want something and I don't want to pay for it," Morris said.

Everybody, it seems, except Carona, a Republican and chairman of the powerful Senate Transportation Committee.

Carona said he wants to end diversions and, hold your breath, raise taxes. He's obviously not worried about losing an election.

"Nobody wants a tax increase on their record no matter how small it is, and no matter how much it represents the most fiscally responsible choice," he said.

He said he is sticking his neck out "because somebody needs to."

Carona's plan would tie the gas tax to increases in construction costs.

The average Texan would pay another $15 a year, which he says will soon be a real bargain.

"The effect will be in another 10 to 15 years," Carona said. "You could be paying as much as $10 to $15 a day in tolls to go across town to see family, to go to your job."

Carona said while most North Texans get that, will legislators? Last session, Carona called a news conference on the gas tax and invited his fellow lawmakers to stand with him. No one showed up. This year, he said, he'll try again.


TxDOT: Market Value Tracking (XLS)

© 2008

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"The sad part of this is there are so many other pressing projects that could be addressed with this money they're wasting."

Williamson County's hiring of PR firm for controversial road project upsets some

County may pay as much as $1 million to firm helping with Texas 29 expansion.


By Melissa Mixon
Austin American-Statesman
Copyright 2008

The hiring of a public relations firm by Williamson County commissioners has drawn the ire of some residents and a political hopeful, who say that the contract is a waste of taxpayer money and that the timing is suspicious in light of controversial plans for expanding Texas 29.

County officials contend otherwise, saying Martin & Salinas Public Affairs Inc. was hired in late March to create more openness and to get more information to residents about the county's $228 million road bond package, approved by voters in 2006.

The commissioners voted to pay up to $1 million to the firm to handle seven or eight projects left over from the bond. The proposed expansion of Texas 29, a major east-west thoroughfare between Georgetown and Liberty Hill, was not explicitly part of the bond proposal approved by voters because the county was still studying the project. Texas 29 has since been added to the firm's responsibilities, which angered the project's critics.

Commissioners say the $1 million price tag is a ceiling amount and that the county probably won't spend that much on the firm, which is expected to finish its work in the next 18 months. County Judge Dan A. Gattis said the county's attempt at more openness may have backfired with the public, mainly because of the backlash over the $1 million cap.

"I don't know what a good amount would be, but $1 million set off a lot of light bulbs or rockets in people's minds," Gattis said.

That was the case for J.T. Cox, who owns land south of Liberty Hill. Commissioners announced Sept. 3 that the Texas 29 expansion will run south of the city and current road, probably going through Cox's land.

The proposed 19-mile expansion, though not final, would convert the four-lane road into 12 lanes. County officials said they hope to avoid congestion on Texas 29 similar to what's already bogged down other roads in the county, such as RM 620 in Round Rock.

Cox and other residents say the expansion is not needed, and some fear it is part of a bigger effort to push a major toll road corridor through the western part of the county.

"If they can't sell something on their own, why do they need to hire someone to do it for them?" Cox said about the firm and fears of a possible corridor. "Something is going on, and no one is being honest and truthful with us."

Commissioners, engineers working for the county and officials with Austin-based Martin & Salinas say there are no plans to turn the expansion into a toll corridor. And last week, Commissioner Cynthia Long said construction on the expansion is still 20 to 25 years away.

"There's a lot of anxiety, but I can tell you we're not doing anything with regards to pushing toll roads. ... We've not been asked by anybody" to push them, said Jed Buie, president of Martin & Salinas.

Since the firm was hired in March, it — along with other subcontractors hired by Martin & Salinas — has been paid almost $50,000 by the county.

Invoices obtained by the American-Statesman under the Texas Public Information Act show that Buie was paid $150 an hour to call residents concerned about the Texas 29 expansion, review a Web site that was created in opposition to the expansion and "discuss strategy" with engineers about an article that an American-Statesman reporter was writing on Texas 29.

Commissioners say the hiring was necessary because the job of issuing public notices, hosting town hall meetings about roads, developing Web sites and returning phone calls and e-mail from residents — among other things — is too much for the county's one public information officer, Connie Watson, who earns $55,971 annually.

In Travis County, public outreach on road projects is done in-house with its 12 road staff workers, often with residents talking directly to the road engineer or project manager. Hays County has historically left public outreach on roads to the four commissioners and county judge. This year, however, it is using a consulting firm to distribute information about a $207 million road bond package that the county is putting before voters in November. The firm's costs are estimated to be $65,000, said Hays County Judge Liz Sumter.

In Travis and Hays most of the projects have been county roads, not state roads as in Williamson County. State roads come with federal rules and more formal proceedings, which can increase the need for outside help, said Mike Weaver, a transportation consultant of Prime Strategies, who heads the county's road bond projects.

"That's an entirely different ball of wax," said Joe Gieselman, executive manager of Travis County's transportation and natural resources department. "It's probably a good reason to (hire outside help), to make sure you do it right."

Connie Watson, a spokeswoman for Williamson County, said that the county's road department has 17 employees but that those employees do little work on bond projects. That work would require hiring more engineers, she said.

Gattis said having a single firm keeps residents from having to go to multiple places for information. He said the county considered hiring additional people to help Watson. But he said it didn't make economic sense to pay three to four additional salaries (at roughly $50,000 and up) that would not be needed after the bond projects are complete.

"Then you've got to lay people off," he said.

At the time the commissioners approved the $1 million cap, Gattis said the transaction seemed normal.

"I don't remember keying on the $1 million," he said.

Hiring a public relations firm to do outreach for county road projects is not unethical, said University of Texas law professor Daniel Rodriguez. He could not speak specifically on Williamson County's situation, but he said in general any hired outside counsel — especially that of public relations firms — can raise red flags with constituents. Often the perception is that the firms are hired to push an agenda or plan that's already been derived by municipalities or counties, he said.

"They sort of have this whiff of publicity and Madison Avenue and even spin control that we'd like to think our local officials de-emphasize" Rodriguez said. "When you're in PR, you're in the business of getting things past the public."

Some of the Williamson County critics point to campaign donations from developers and engineers who have ties to toll roads as one of the reasons to worry. The county has had some controversial experiences with consultants, who were also political contributors.

For example, in 2002, a previous commissioners court hired a public relations consultant for a massive road bond project who had once worked pro bono on the campaigns of three commissioners and the county judge. The consultant, Amos "Pete" Peters, earned about $4,000 a month from the county's bond budget and had previously helped lead a political action committee that promoted the same bond package.

It was later alleged in news reports based on a review of public records that Peters billed the county for meetings that never occurred. The Texas attorney general's office investigated him, but a Williamson County grand jury did not indict him on charges of submitting false bills to the county.

County officials said at the time that his hiring was fair and that Peters was qualified for the work and did the work.

Peters said he is working for private public relations and graphic design clients in Texas and four other states.

Commissioners say contributions don't sway their votes, nor did they influence the hiring of Martin & Salinas, which did public outreach in 2004 for the Central Texas Regional Mobility Authority, an independent government agency that builds toll roads. (Don Martin, a partner at Martin & Salinas, donated $100 each to Gattis and Commissioner Ron Morrison.)

The situation is common in local politics, where groups that do business with the county are often the ones who donate to campaigns. Even so, some residents are worried.

Greg Windham, a Democrat running for county commissioner in November, has opposed the expansion of Texas 29 and the county's hiring of Martin & Salinas, calling it a "propaganda initiative" and part of "backroom" deals.

"When you're running a campaign, the scope of services are eerily similar to the scope of services being provided by Martin & Salinas," he said. "The sad part of this is there are so many other pressing projects that could be addressed with this money they're wasting."

mmixon@statesman; 246-0043

© 2008 Austin

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"It's a sad story, but the American taxpayer is already on the hook."

Bailout faces delays as Goldman gets boost


By Mark Egan
Copyright 2008

NEW YORK - Architects of a $700 billion bailout plan urged U.S. lawmakers to act swiftly or face dire economic consequences as global stock markets fell for a second day on growing concern the rescue may be delayed.

But financial markets got a shot in the arm late Tuesday when one of America's most-respected investors, Warren Buffett, bought a stake in Wall Street's most powerful firm, Goldman Sachs Group Inc. Berkshire Hathaway's surprise $5 billion deal for about 9 percent of Goldman helped U.S. stock futures pare losses.
Treasury Secretary Henry Paulson told lawmakers during five hours of grueling hearings on Tuesday that the bailout was "sad" and "embarrassing," but needed to stave off a deep recession and restore confidence in markets.

While he spoke, the U.S. Federal Reserve was forced to inject another $2 billion into the troubled financial system to help mutual funds scrambling to raise cash to meet heavy withdrawals by rattled customers.

After lawmakers scoffed at the proposed bailout's enormous size and the lack of details, U.S. stocks closed down about 1.5 percent on uncertainty over when and how Washington would act.

U.S. House Financial Services Committee Chairman Barney Frank warned the plan might not pass until Monday, adding that the Democrat-controlled Congress needed limits on compensation for executives of firms offloading bad assets.

"I just don't think the American public is sold," said David Dietze, chief investment officer at Point View Financial Services in Summit, New Jersey. "They are skeptical of the need, and they are fearful of the cost."
"The skepticism is that this is going to help the Wall Street financiers and do nothing for the little guy other than saddle them with a big tax bill," he said.

The financial crisis has become the No. 1 issue leading up to the November 4 presidential election, and many lawmakers seeking re-election to Congress want to appear vigilant.

The bailout, potentially the United States' biggest ever, could cost every American man, woman and child $2,300.
Even for the world's richest country, $700 billion would be a huge budget drain. Since 2003, the Iraq war has cost about $550 billion, or a little more than $100 billion annually.

Starting two days of hearings, Paulson and U.S. Federal Reserve Chairman Ben Bernanke said the plan might cost less once the government is able to resell toxic mortgage securities.

Paulson said the government would buy the securities in a reverse auction in which the roles of buyer and seller are reversed to ensure the lowest price is paid.

The transformation of global finance accelerated.
Once thought untouchable, Goldman was shaken last week by a sudden slide in its shares. It secured approval this week to become a commercial bank and Tuesday's transaction could help it forge an alliance with one of the banks partially owned by Buffett.

And Japan's largest brokerage agreed to buy bankrupt Lehman Brothers' European arm.

U.S. Securities and Exchange Commission Chairman Christopher Cox urged Congress to plug a regulatory hole in the $58 trillion market for credit default swaps, insurance-like products that many say pose a systemic risk.

President George W. Bush promised in his last speech to the United Nations that markets would stabilize but faced criticism over the excesses of what some have described as a culture of greed.


Paulson, a former Goldman Sachs boss reportedly worth about $700 million, told Congress, "I share the outrage that people have. It's embarrassing for the United States of America."
Sen. Charles Schumer, a New York Democrat associated with Wall Street's interests, pressed Paulson on if he could take the money in installments, starting with $150 billion. Paulson replied bluntly, "We need the full authority."

"What this is about is market confidence," he said. "It's a sad story, but the American taxpayer is already on the hook."

Congress and the Bush administration are under growing pressure to act following a rising tide of U.S. home foreclosures and loan defaults, and the failure of U.S. investment banks as well as the world's largest insurance company.
Some experts doubt Paulson and Bernanke can end America's worst crisis of confidence since the 1930s' Great Depression. "(They) have been wrong about nearly everything since this crisis began years ago," said Barry Ritholtz, director of research at New York investment firm Fusion IQ. "Why should we trust (their) judgment on the largest bailout in American history?"
With the elections looming, executive compensation is a hot-button issue, and appears to be the main bone of contention as Washington crafts the bailout.
Goldman Sachs paid Chief Executive Lloyd Blankfein about $54 million last year. Wall Street's last two independent banks, Goldman and Morgan Stanley, got approval days ago to convert to banks to shelter them from the crisis.
Merrill Lynch & Co Inc boss John Thain was paid $15 million to join the company last year. He could get another $10 million when Merrill's sale to Bank of America Corp goes through -- a sale prompted by Merrill's troubles.
The world's largest insurer American International Group Inc paid boss Martin Sullivan $14 million last year. AIG was rescued a week ago by an $85 billion federal loan.

A survey by the Pew Research Center for the People and the Press found 57 percent of Americans support the bailout, even though only 19 percent believe the government is doing a good job of handling the crisis.

At the New York Federal Reserve bank, 40 people protested with banners reading "Bail out Main Street, not just Wall Street" and "$700 billion for banks, $0 for homeowners."

An angry venture capitalist took a full-page ad in the New York Times, dubbing Bush, Paulson and Bernanke the "new Communists" in a cartoon where the trio planted a flag with a Communist hammer and sickle.


As the turmoil swirled, Japanese firms are snapping up U.S. assets. Nomura Holdings Inc agreed to buy bankrupt Lehman Brothers Holdings Inc's Europe and Middle East operations.

That came on the heels of Japan's top bank, Mitsubishi UFJ Financial Group Inc, agreeing to buy up to 20 percent of Morgan Stanley and Nomura planning to buy Lehman's franchise in Japan and Australia.

Singapore sovereign fund GIC said it still has plenty of cash after investing nearly $18 billion in UBS AG and Citigroup Inc, and would consider investing in U.S. distressed assets.

(Writing by Mark Egan; Reporting by Jason Neely, Glenn Somerville, John Poirier, Donna Smith, Patrick Worsnip and Matt Spetalnick; editing by John Wallace, Jeffrey Benkoe, Toni Reinhold)

© 2008 Thomson Reuters:

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Monday, September 22, 2008

Goldman Sachs alumni capitalize on bailout mess

Putting lipstick on an AIG


By Lila Rajiva
Online Journal Guest Writer
Copyright 2008

Hockey moms aren’t the only ones wearing Maybelline. Pigs come in cherry gloss too.

Like the porkers at Wall Street lining up with their lips in a pucker behind Washington’s plush behind. Having pigged out at the public trough for years, they now want their sticky little trotters washed down in the righteous waters of the Potomac.

Tarting up comes natural to our Wall Street-walkers. Turns out these great big masters of the universe were really, well, girly men who couldn’t balance their check-books and put out more than they took in . . . like any working girl.

Lipstick is especially right for Goldman Sachs, which likes to cross-dress as a devout public servant in after-hours and has at least one set of heels working the floor of the Treasury department during any crisis. Yep, I’m pretty sure Hank Paulson would look good in high-gloss plum. You see, lip shtick is just what Hank’s good at. He was out on Monday flapping his lips with the kind of plummy platitudes you’d expect from semantically challenged mental health workers, not from a Treasury Secretary. A Treas. Sec., mind you, who was once a Goldman CEO not above inserting carefully chosen knives into the ribs of colleagues.

“We need to put this behind us,” quoth Hank. “We must move forward.”

“We need to work through this.”

“We need to heal.”

We, of course, need to do nothing. There is no we here. This is a Wall Street crisis. And the usual suspects on Wall Street need to line up, bend over and get caned for their misdeeds. Barring that, they need to take the market’s medicine like men.

Instead, they were out in full therapeutic mode, pouting and whining for a change of their soggy diapers by dear Nanny Washington.

And Nanny obliged.

First there was Fannie and Freddie, the terrible twins, who were taken lovingly into the conservatorship of the state. Translation: they went belly up and the funeral expenses were billed to the tax-payer, though the estate had been sold at private auction a long time before.

Oh, those twins.

Inhaling the swampy fumes of government but croaking from the terra firma of the market. Owned by individuals, backed by the state. The formula of the managed economy - privatized profits and socialized losses.

Created by Congress to expand home ownership by making finance available to a bigger part of the population, the two companies own (or guarantee) around 40 percent of the $8.5 trillion U.S. residential mortgage market. They are the biggest single borrowers in the US, after the federal government. In 2006 they were hit with a $350 million dollar fine, one of the biggest ever assessed by the SEC, as a penalty for accounting malpractice. Then Fannie even got caught trying to pull Nanny’s strings to discredit the regulator. Which strings were those? We can only guess.

Quote: “Goldman Sachs was one of several institutions actively involved in the accounting fraud, its contribution being earnings manipulation through the creation of MBS’s - mortgage-backed securities - in Fannie’s portfolio, a strategy remarkably similar to Goldman’s actions on behalf of Enron. Of note also is the fact that in 2005, while the investigation was ongoing, Congress placed Fannie directly under the Federal Reserve, raising the specter of a surreptitious government bail-out outside the public eye, at some point.

[That’s from an investment report I did on Goldman Sachs in August 2006.
The only thing wrong in it was that the government bail-out took place in full view of the public].

That is to say, while Hank blubbers on about how we need more regulation, that’s only now, during bust-time. Way back in bubble-time, Hank’s old firm was busy dabbing rouge on the pork in Fannie’s books and playing hopscotch with regulations.

O tempora, O mores.

Why, back in bubble time, even the former Fed chairman, the all-but-sainted Alan Greenspan was more prescient. He noted that failure to smack down the bratty twins could lead to “systemic risk” in the capital markets.

Of course, he said that after first telling Jane Citizen to go forth and borrow. But that’s because, like the monetary philanthropist he was, Greenspan believed in the widespread giving of ARMs.

As public servant Hank today, so public servant Greenspan back then.

Greenspan too liked dabbing rouge on pork. He relished painting market bottoms with the varnish of cheap money. It made them look plumper and rosier than they really were. Eventually the bottoms looked up and turned into booms, he reminded us.

The rouge worked. Books got beautified. Risky turned risqué.

“The image of Fannie Mae as one of the lowest-risk and ‘best in class’ institutions was a facade,” said James B. Lockhart, the acting director of the Office of Federal Housing Enterprise Oversight (OFHEO) when it released its report in May 2006.

In other words Fannie was a pig, even with the lipstick.

Of course, Goldman’s not the only one on Wall Street with a wicked hand for make-up artistry. The ratings agencies haven’t been too bad themselves, with all that triple A gloss they plastered on gangrenous sub-prime debt. What was that about? A little make- over for the corpse before the public viewing?

Truth be told. Goldman got good at putting lipstick on porkers long before they dabbed it on Fannie and Freddie. They were doing it in 1999 in ole Hank’s CEO days. Goldman helped Enron’s “smart guys” conduct massive energy futures trading and its leverage, like Enron’s, ballooned. [They had their leverage thang going in those days too].

Then, in 1993 Goldman invented a special accounting scheme to perk up Enron’s books - “Monthly income preferred shares” (or MIPS) they called it. MIPS let Enron sell fifty-year securities through specially created off-shore companies. To the IRS, Enron described the preferred stock as “debt” and claimed tax deductions on the interest payments. To shareholders, Enron called the same stock “equity” and counted it in the company’s capital value. Goldman took home massive underwriting fees from the scheme

In one year, Goldman had helped 17 companies besides Enron sell 2.7 billion MIPS. There was an offering every week, each dodging IRS rules with more and more finesse. Average commission and interest rates on MIPS ran much higher than on normal debt - between 1 and 1.2%. Goldman made tens of millions.

When the IRS, Treasury and the SEC decided to plug the loophole that was costing them hundreds of millions of dollars a year, Goldman and Merrill Lynch, along with the industry trade group, the Bond Market Association, began big time lobbying. Then
Goldman CEO Jon Corzine (later a US senator and NY Jersey governor) made sure the legislation got nipped in the bud and Goldman’s little accounting number actually ended up a chart-busting hit on the financial circuit.

So when Hank Paulson rushes to put together a bail-out for Merrill Lynch but brushes Lehman aside, he’s just remembering who he used to jam with in the old days. (Of course, buying up Merrill shares trading at $17 for $29 might not be most people’s idea of a bail-out. But that’s another story).

It could be also that when he’s not actually slitting throats, Hank just likes to lend a helping hand to old Goldmanites, like Merrill’s John Thain (a Goldman COO, CFO and President). You see, our Hank is a helping kind of guy. Like the time he helped Thain help himself to Dick Grasso’s seat at the head of the New York Stock Exchange. Oh, those public servants. Never a moment of rest from the helping.

That’s probably why Hank is helping out A.I.G.

Turns out Maurice (“Hank”) Greenberg, the former chair of A.I.G., is an old friend of John Whitehead, another former Goldman head.

The pranks of these Hanks get to be almost as complex as those derivative deals that melt hedge-funds like marshmallows on a grill. But the short of it seems to be that Greenberg jumped ship at AIG after Eliot Spitzer, crusading heavy of the SEC, came sniffing around in 2005. Improprieties, . . . bid rigging . . . hissed Spitzer, turning on the heat. Hank (G.) denied it stoutly, but AIG had to restate some of its numbers. It got so warm that even Hank (P.) who left his roost at Goldman Sachs in 2006 to perch at Treasury could smell the flames.

The operative word here is Treasury. That is to say, in the normal run of things, hookers and pols having always gone together like dill and pickles, a married man’s booty calls would provoke no more than a yawn. They certainly wouldn’t have come to the attention of the revenue department. But Spitzer’s zeal had aroused the ire of the banking mafia. And thus it was that no sooner did things get really toasty on Wall Street, then along comes an IRS probe that turns up Spitzer’s sins of the flesh. And thus the public was regaled with the seedy drama of the Emperor’s Club and Eliot. And thus also Wall Street dethroned the hated securities czar and sent him scurrying back to his former life as a mere real estate billionaire.

But now, with Hank (G., not P.) defending AIG as a national treasure fully deserving of taxpayer TLC, you begin to wonder about it all. If AIG was such a treasure, why did Greenberg ever leave? Why did he rail against his successor? And why defend AIG now? Was he thinking about the shares he still has at AIG?

[Maybe he was taking a leaf out of the book of yet another Goldman CEO, Robert Rubin, slated to be Obama’s economic point man, a man who’s made an art out of jumping ship at the right time (read, Citigroup) leaving his successors to hold the sub-prime bag.

It’s a trick Rubin worked at as Secretary of the Treasury in the 1990s, when he (along with St. Alan) was responsible as much as anyone else for blocking regulation of the over the counter derivative trade and for consolidating the banks – misdeeds for which the rest of the financial industry is now paying].

And what about the Starr Foundation, the charity that Greenberg headed, and which Spitzer claimed he also misused? Turns out Spitzer wasn’t so wrong. Greenberg seems to have been using public funds to pursue his own agenda. Maybe Starr is another national treasure in the making . . . Or is national just what comes in after treasure goes out? You wonder some more.

Just this March, before AIG took ill, Hank (P, not G) came up with a proposal for insurance reform that amounted to an end run by the big insurance players around the state insurance system. Now your wondering becomes positively thunderous.

There is no bigger player than AIG. Yet no private bids were considered. Had they been, AIG would surely have found private buyers. Lehman did.

Instead the Fed bailed it out. Actually, it was the Federal Reserve Bank of New York, the most important of the 12 federal reserve banks and the one responsible for carrying out the Fed’s exchange rate policy, i.e. for buying and selling dollars. It was the same NY Fed which cobbled together the rescue of Bear Stearns. On NY Fed chairman Geithner’s board of directors sits another Goldman chief, Stephen Friedman. Geithner also takes unofficial advice from Goldman alums Gerald Corrigan and the aforementioned John Thain. Then, of course, there’s the man whose bidding Geithner is bound officially to do, the Treas. Sec. himself, His Holiness Hank, servant of the people.

However you cut it, that’s a lot of Goldman.

Which means that however you cut it, the bail-out of the giants of finance is not just a bail out of the economy . . . or of the banking system. . . .

It’s an evisceration of some banks by others. . . . a cannibalistic binge billed to the tax-payer.

No matter how much rosy gloss gets slathered on it, it’s a pig-out at the public trough.

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