Gregory Cendana: Is college only for the wealthy?

Chief among America’s most revered ideals is that an education can propel anyone from the depths of destitution to the skies of achievement. This, along with socioeconomic reason, is why President Obama boldly announced in his first State of the Union address that the United States would once again lead the world in college graduation rates by 2020. Only three months later, the president took a major step forward in meeting this goal by signing historic student aid reform into law, investing about $40 billion in need-based federal financial aid over the next decade. The Georgetown Center for Education and Workforce recently concluded that the president’s goal will require about $110 billion more from state governments, an unlikely feet considering over 30 states are implementing higher education budget cuts next fiscal year.

For the sake of argument, let’s assume this goal is met, and more young people strut across American college graduation stages than anywhere else in the world. We still have to ask, who are these graduates?

The Advisory Committee on Student Financial Assistance recently found that, even with recent federal investments in financial aid, it is getting harder for low-income students to attend and graduate from college. In its most recent report, “The Rising Price of Inequality,” the committee found that an increasing number of low-income students, who are academically qualified to attend college, are prevented from enrolling due to ballooning costs and insufficient grant aid. For a country that prides itself on merit-based success, this is unacceptable.

The report begins by emphasizing

“our financial aid system is founded on the principle that any youth, regardless of family income, should have the financial opportunity to do so, if he or she has the aspiration and prepares adequately.”

Based on this principle, we are failing. Between 1992-2004, initial enrollment rates of academically qualified low-income high school graduates in four-year colleges dropped from 54 percent to 40 percent. Instead, they are beginning college at two-year institutions where they are over three times less likely to earn a bachelor’s degree than their peers who began at four-year institutions. Based on this enrollment shift away from four-year colleges, the percentage of low-income students who earn bachelor’s degrees will drop from 38 percent for those who graduated from high school in 1992 to 31 percent of those who graduate in 2004.

The cause of this drop, the committee found, was concerns about college expenses and insufficient financial aid. From 1992-2007, the net price of a four-year public college went from 41 percent of a low-income family’s annual income to 48 percent. That was before the financial meltdown and subsequent explosion of unemployment. Grant aid is not keeping up. The Pell Grant, the cornerstone of need-based federal aid, has seen its purchasing power plummet nearly 40 percent since it was created. State need-based aid has fallen victim to budget cuts as well.

All of these causes and effects of massive education divestment are leading to a university reality in which degree attainment is based not on intellect or determination, but on affluence. The rich are going to college; the poor are being left behind. Despite the federal government’s recent action around student aid reform, this situation will not change unless state governments stop using higher education budgets as their chopping blocks for deficit reduction. Even if it is not constitutionally mandated for a state to fund higher education, legislators have a duty to ensure their citizens are provided an opportunity to better themselves through a college degree regardless of income. At the very least it is sound, long-term fiscal policy to invest in college graduation rates.

The federal government isn’t completely blameless either. Because the Pell Grant program is a discretionary spending item, Congress is under no obligation to provide it with funding. Therefore, year after year, it relies on the political sympathy of appropriators and budgetary breadcrumbs of “more important” spending items such as national defense. This year, to fill a $5.7 billion shortfall, Congress is proposing to fund the Pell Grant through a bill financing war operations in Afghanistan. Is this really what it has come to? The United States government has so little investment in low-income students attending college it has to rely on a war spending bill to fund the most basic need-based grant program? We can do better than this.

Not only are low-income Americans being kept out of college, they are being prevented from entering the middle class because of this exclusion. In 1970, 26 percent of the American middle class had a post-secondary degree; today that number has jumped to 61 percent. 91 million jobs in 2007 required at least some college education. A college education is a must for low-income Americans to break into the middle-class.

The United States Student Association praises President Obama’s goal of having the United States leading the world in college graduation rates by 2020. However, we need to be mindful of who those graduates will be and vigilantly guard against policies that keep low-income, academically qualified high school graduates out of college. Education is right and if an individual works hard, as our financial aid system was built to ensure, that person deserves a chance to earn a college degree.

Read more: College Students, Financial Aid, Education, Higher Education, Economy, Home News

Charles Gasparino: How the Financial Crisis Inquiry Commission is Spinning its Wheels

Of all the events that led up the great financial collapse of 2008, in my mind, one truly stands out: The decision by super-bank JP Morgan to demand billions of dollars in collateral from the troubled Lehman Brothers in mid-September of that year. The move, according to senior Wall Street executives, was akin to a death knell for the firm, which was just about on life support already. JP Morgan demanded some $8 billion, it said, for clients that traded with Lehman. It didn’t even matter that Lehman couldn’t make the full payment. Once word went out that JP Morgan was nervous about Lehman’s ability to survive, a bank run ensued. Lenders pulled lines of credit; Lehman couldn’t trade with its counter-parties. In less than a week, Lehman had declared bankruptcy and the entire financial system began to implode, and would have, were it not for a massive government-led bailout.

You would think if you were investigating the root causes of the financial crisis and were ordered to prepare the definitive account of the collapse of Lehman (and the rest of Wall Street), investigating the circumstances behind JP Morgan’s collateral call would be high on your list, right? Well not if you’re Phil Angelides, the chairman of the Financial Crisis Inquiry Commission, the Congress-mandated body led by the former treasurer of California. The Commission’s website boasts a “nonpartisan mission to examine the causes of the financial crisis that has gripped the country and to report our findings to the Congress, the President, and the American people”; all of which makes it so irresponsible that the commission has no plans to seek testimony from senior officials at JP Morgan, including its CEO Jamie Dimon, about the now infamous collateral call that sent Lehman into oblivion, and nearly the rest of Wall Street as the markets crumbled during those dark days in the Fall of 2008.

Instead, the commission has been busy, of late, beating up on everyone’s favorite financial collapse villain, Goldman Sachs. Angelides and his people made headlines a few weeks ago when they disclosed that Goldman at first didn’t want to turn over documents to his committee, and then when it did, it basically backed up the truck and dumped thousands of pages of notes, emails and whatever else the firm kept records of during the past 10 years right on its doorstep. Okay, that was a little bit of an exaggeration. But Angelides, according to senior people at Goldman, asked for a lot of stuff, and then asked Goldman to give his committee a road map on the most incriminating emails and records. Goldman kind of refused, and Angelides went public with that refusal. And that makes Goldman a bunch of crooks, at least in the eyes of the committee, which today is taking testimony from the firm’s No. 2, the famously testy Gary Cohn. Both Cohn and CEO Lloyd Blankfein built the modern Goldman Sachs, the firm that doesn’t think twice about selling “crappy” investments to its clients; the firm that made gazillions shorting the housing market when everyone else was still buying those crappy mortgage bonds; and the firm that received a backdoor bailout from the AIG bailout. Goldman –despite its spin to the press and public statement to the contrary– really was bailed out because when AIG received public assistance, the insurance policies held by Goldman to cover its toxic debt investments were now money goods. As a result, Goldman was reimbursed 100 cents on the dollar for those policies, known as credit default swaps, after the taxpayer bailout of AIG.

All of this sounds like pretty sleazy stuff (Goldman has counter-arguments to each and every point I just made, which I won’t bore you with in this column), but it’s also ground that’s been covered time and time again; by the Angelides committee earlier in the year, but also by more than a handful of other investigative bodies not to mention just about every major news organization.

I’m not exactly an apologist for Blankfein & Co. In fact, late last year when it became clear that despite the company’s spin, Goldman was indeed bailed after the AIG rescue, I called for Blankfein’s resignation in a column for the Huffington Post, which didn’t exactly endear me to my former employer, particularly when I went on air and said basically the same thing.

Today, Blankfein is clearly in a more precarious state given the myriad of investigations swirling around the firm, the recent civil charges filed by the SEC accusing Goldman of civil securities fraud, and the non-stop bashing of the firm’s business practices under his watch by the press, Congress and now Angelides because he and his firm are easy targets. My dad, a former Marine, would call them “open wounds.” Unlike the great Jamie Dimon –the notoriously hot-headed King of Wall Street who has the ear of the president and takes no shit from anyone–, the people who run Goldman are a beaten and bruised bunch, and given the media frenzy surrounding the firm, easy to pick on. But then again what’s the point?

And that’s my problem with the Angelides Commission–there really isn’t any point to it. The commission’s hearings are nearly universally boring and bereft of new information. Blankfein testified earlier in the year, but if he said anything interesting, I can’t remember. A couple of weeks ago, he called Jimmy Cayne, the former CEO of Bear Stearns, to testify about the firm’s 2008 implosion only to hear tell Cayne that there “does seem to me that there was an extraordinary level of risk taken” by his firm. Cayne’s response: “That was business.”

Quick, stop the presses!

Maybe the commission, which has to conclude its work and provide its findings to the president and Congress, by December, should just start over, and begin to ask questions that matter. The JP Morgan collateral call might not sound sexy, but it was important. People at JP Morgan say they were simply doing their jobs, and holding Lehman financially accountable for its poor investment decisions.

But people at just about every other firm I know of say JP Morgan was being heavy handed; it didn’t need to turn the screws when it did, and only did so because Lehman wasn’t just a creditor who owed the bank money, but also a competitor, which vied for business with JP Morgan in the markets. (JP Morgan made a similar collateral call at that time on Merrill, also leading to that firm’s forced sale to Bank of America.) It’s one of the many downsides of the dissolution of the Glass-Steagall law, which once separated investment banking from commercial banking. Once the financial supermarkets were created, firms like Citigroup and JP Morgan could squeeze competitors like Bear Stearns and Lehman by refusing to lend them money.

I met Phil Angelides once, and he seems like a smart guy, but a little too nice, and kind of a wimp, which is why I will wager a nice meal anywhere in New York, that there’s a greater chance of Jimmy Cayne making a comeback on Wall Street, than Angelides’ commission forcing Jamie Dimon to testify about the Lehman collateral call.

Read more: Goldman Sachs, Wall Street Bailout, JP Morgan, Wall Street, Lehman Brothers, Economic Crisis, Aig, Business News

John R. Talbott: The Failure of Financial Reform, Itemized

It is really quite incredible that of all the things that went wrong to cause the latest economic crisis, the new financial reform bill does almost nothing with regards to the following key issues. Here are the original problems and the actions being taken.

1. Bank leverage: Very little done in new bill, still can do things off balance sheet (what is the business purpose of doing things off balance sheet except to deceive?), still using risk measurements based on historical volatility of assets, VAR, which can easily be gamed by managements rather than strict capital requirements based on actual ratios to real equity book capital. Needs to get from 35 to one before crisis to proposed 20 to one under this legislation, but really should be below 8 to one. Larry Kotlikoff of Boston University suggests one to one is the right ratio and calls the concept Limited Purpose Banking (LPB). Without bank leverage, it is hard to imagine how a small regional economic downturn in say, Houston oil markets or Silicon Valley’s semiconductor industry could ever spread contagiously nationally or internationally, thus stopping most recessions and depressions before they start.

2- Interest rates too low: Even lower today.

3- Lobbying and money in politics: Even worse today having been blessed by Supreme Court that corporations can fund campaign advertising directly and financial firms have stepped up with big donations and lobbying effort to stymie the reform bill itself.

4- Too much debt everywhere: Now, more, especially on local and federal governments including Europe and Japan and global banks. Banks slow to deleverage and consumers are not spending substantially less and saving more, they are just defaulting on their debts to lessen their debt loads.

5- Depositor insurance: Disguised as a benefit to depositors, it is actually a windfall to lower funding costs of banks and encourages stupid behavior by them because of the moral hazard with regard to riskiness of assets held, businesses entered and leverage undertaken. Increased permanently from $100K to $250K per account since crisis.

6- Bank consumer fees: Much higher now. Consumers and taxpayers are basically paying for a problem they had nothing to do with in creating. This was solely a banking and government problem. To blame homebuyers for accepting a no money down, 100% home loan at 2% per year to buy a home they never in their wildest dreams thought they could afford ignores the mistakes the banks made in offering these terms. Once you offer someone 100% financing, it is no longer his problem, it is yours. Individual home owners did not buy these properties, they were actually owned by the banks and their investors who put up all the money.

7- Predatory lending: Still active. Listen to the pitch for reverse mortgages to our seniors on television and try to explain how they actually work or try to calculate how much profit spread the banks have built into those transactions for themselves, then imagine having a touch of Alzheimer’s and doing it correctly.

8- Global investor diversification: No change, investors encouraged to hold thousands of assets around the world through mutual funds, index funds or well diversified institutional funds making supervision of managements impossible and encouraging the hiring of too many financial intermediaries and consultants as supposed experts.

9- Credit Default Swap (CDS) market: Was the prime reason everyone was too interconnected to fail as one domino sent them all crashing. Nothing new to report as they either need to be shut down or regulated like insurance companies because that is what they are. Should be shut down because they create too much systemic counterparty risk that can crash the entire system, but at a minimum, you should not be able to buy CDS’s naked, only as a hedge against a similar asset. It makes no sense to buy a company or its debt, buy CDS default insurance equal in value to a hundred times what you paid for the company, and then drive the company into bankruptcy, regardless of its financial health. This is the equivalent of buying fire insurance on your neighbor’s home and then lighting the arson yourself.

10- Criminal behavior: Banksters, realtors, appraisers, mortgage brokers, investment bankers all broke the law with their fraudulent and criminal and conspiratorial acts and many private and public funds failed to perform their fiduciary duties or required investment due diligence. The scale of the criminal enterprise is vast crossing many industries and country borders and the damages incalculable as globally we have lost over 50 million jobs, 20 million have lost their homes, $20 trillion of savings has been permanently lost to investors and more than 100 million people have been thrown back into the destitution and poverty of earning less than$2 a day. No arrests, no yellow crime scene tape around Goldman’s new office building, no seizing of computers and emails and phone records of the suspected banksters and their lawyers and accountants. Certainly, many congressmen should be imprisoned for taking bribes disguised as campaign donations that encouraged them to remove or ignore important financial oversight regulations, but since they write the laws I doubt this will ever happen.

11- Board control: Still dominated by CEO and company insiders and their friends as opposed to being controlled by shareholders directly. Get the CEO and other corporate executives completely out of the boardroom which should be run exclusively by genuine shareholder representatives.

12- Securitization: Little changed, talk of issuer having to hold 5% of securities issued, but this is still subject to how final regulation is written. Securitization market is dead until they straighten out the rigged ratings game and re-instill investors trust in banks and investment banks who purposely packaged the worst trash they had on their books, gift wrapped it as a CDO and laid it off on many of their biggest and best clients.

13- Ratings agencies: Reform ignored fundamental problem with issuers paying for ratings rather than investors.

14- Fannie Mae and Freddie Mac: So far, no change, their restructuring was not included in this bill, they are still making loans of which many are going to turn out bad as they are one of only a few institutions lending into areas that are experiencing steep price declines currently and the best predictor of future default is home price declines in a region.

15- Too many financial middlemen: Because of overemphasis on diversification, investors, both individual and institutional, hold such far flung and complex investments that they become overly dependent on a long list of financial advisors and consultants and managers. At best these advisors have different motivations than the primary investor, don’t care as much about protecting against losses since it isn’t their money, and increases the risk of fraudulent and criminal behavior somewhere in the long and complex investment food chain.

16- Who regulates?: Very little change, same guys in congress and at the Fed, Treasury and the FDIC who got us into this mess.

17- To big to fail (TBTF): Has gotten worse as the size and power of the biggest banks has increased dramatically.

18- Bank market concentration and monopoly power: Has become more concentrated.

19- Adjustable Rate Mortgages (ARM’s): Probably the biggest single cause of increased defaults as mortgage payments could jump as much as 50%, little to no change from bill.

20- Teaser rates: Still legal. Still a joke.

21- Low down payments required: Ads on radio still promoting the idea.

22- Personal bankruptcy law: Nothing done, judge needs authority to be able to adjust mortgage balance.

23- Regulating long maturity asset industries: Bank and insurance companies are long maturity asset and liability games with no short term implications to managements or their compensation from losses occurring long into the future. Needs special regulation of these markets but little has been done to address the problem.

24- Regulatory capture: The same, revolving door, industry groups and big money in politics writing our legislation and regulations, or in some cases, erasing them.

25- Managing risk: Need to separate principal investing, trading, investment banking and other risky activities within deposit taking commercial banks. No return to Glass Steagall or prohibition on these activities in the bill with the exception that foreign exchange, gold and silver trading will have to be done in a separate subsidiary or could be banned completely by banks.

26- Bankruptcy proceedings for banks and corporations: Plan addressed for FDIC banks to liquidate quickly if overseas subsidiaries do not create a problem, which they will, but still have to create an accelerated process for all corporations so debtors as well as stockholders can take a hit to their poorly invested debt capital rather than bailing all creditors out at par.

27- Hedge funds: Still no investigation of their role as counter-party and enabler to a lot of bank and derivative nonsense, still no bill to tax their managers at ordinary rates rather than capital gain rates.

28- Management incentives: Still not complete, no one has asked why if bank executives were given long vesting stock options before, why weren’t the managers thinking long term and thus be better aligned with shareholder perspective. Not just a question of when executive receives bonus, must also have skin in the game. All stock and options can’t be free or executives have no downside to worry about and act like pure upside option holders.

29- Complexity of mortgage and investment banking products: Banks introduced complexity to products on purpose to confuse investors, to reduce competition and increase profit spreads. This ends up reducing liquidity. Very little of the real problem has been addressed.

30- Bad bank loans: Most still on banks’ books and losses have not been realized. TARP was supposed to be used for this, but then Paulson decided not to. Fed trying desperate measures to hide bank problems on its balance sheet and eventually transfer the bad loans to Fannie and Freddie where they will never be seen again but taxpayer will pay for losses.

31- Government stimulus: Saved or created zero new or imaginary jobs, just an excuse to keep public employees fully employed. If state, local and federal governments hire and promote their workers during good times, but won’t lay them off during bad times, how do we ever make government smaller and more efficient. Simple math tells you that under this formulation, eventually, everyone will be working for the government, I don’t know how we will be able to pay our tax bill however.

32- Severity of new bank regulations: The stocks of the big banks went up on news that this financial reform package was going to pass. What does that tell you?

33- Bank executive compensation: The same, if not worse as the bonuses are just as big, but now there are losses at the banks rather than profits and much of this bonus pool money is coming directly from US taxpayer.

34- Undervalued Chinese currency: Extremely slow progress.

35- Globalization: Created vast inequality as American workers were forced to compete with workers from $1 an hour wage countries. Raghuram Rajan argues that inequality contributed to the financial crisis by encouraging our government (through Fannie and Freddie) to promote home ownership aggressively to make up for lost wages and benefits of the American worker. Globalization allowed US companies to avoid taxation and regulation (environmental, banking, disclosure, workplace rules, union rules, product safety, etc.) and geographic horizons of institutional and individual investors were stretched so far as to make investment analysis and supervision of management teams completely unmanageable.

36- Bank transparency: Probably worse given their derivative positions, their off-balance sheet shenanigans continue, and the fact that all the new regulation and bank mergers means lots of restatements and footnotes and asterisks and fine print in the financial reports.

37- Externality costs and collective action problems: Very little progress, still don’t know how you manage your risks and maintain market share when you as a banker are offering conventional 30 year fixed rate mortgages with a required 20% down payment to your customers and a new bank competitor opens across the street from you offering interest only, pay only if you feel like it, never repay the principal, zero down, zero closing costs, no income, no job, no problem, 2% teaser rate for five years, no prepayment penalty, no closing costs, feel free to take as much money out to buy that new car you always wanted, adjustable rate mortgages. Until long maturity industries like banking and insurance figure out this collective action problem and how to control it, they are doomed to these same crises in the future, The free market alone cannot address this unique type of problem where the dumbest makes the most and gains the most customers with losses postponed for decades.

38- Federal Reserve independence: We get a one-time partial audit and presidents of local boards no longer appointed by banks, but entire Fed continues to be dominated and controlled by banks and does their bidding rather than the people’s.

39- Response times to crises: Our understanding of how to respond quickly and effectively to systemic financial crises hasn’t improved. Not much learned, but we will get another chance real soon. Just look at the length of problems in this list and ask how many we really understand or believe we have solved for the future.

40- Underwater mortgage holders: No real help. Very few mortgage modifications. No mark downs of mortgage amounts. 25% of mortgages now underwater nationally where the mortgage balance is greater than the current home value and possibly as much as 50% of mortgages in California are already underwater.

41- Social Security (SS) and Medicare Impacts: Debt investor concerns on looming SS and Medicare blowup and potential insolvencies affects viability of entire financial system and the dollar. Not addressed by congress although it could be a $50 trillion problem that is a big enough number to cause the US to default on some obligations in the not too distant future.

42- The media: Corporate owned media dependent on corporate sponsored ads heavily biased on bullish buy side of market, always – Nothing’s changed. CNBC never saw a stock they didn’t like.

43- Insider trading and market manipulation: Policing and enforcement, especially at hedge funds, nothing to report.

44- Public reporting and transparency of publicly traded corporations: Derivative positions of $600 trillion notional amount make reading and analyzing an annual report almost meaningless as it is impossible to know the company’s exposure to risky events and assets.

45- Overnight repo market: Nothing done to prevent funding of banks and investment banks with many long term obligations with overnight borrowings. Could mean the start of another possible run on the banks from their overnight lenders similar to what happened in this crisis.

46- Corruption in government: Two party system encourages collusion when investigating ethical and legal oversights, money in politics distorts all votes, and gerrymandering election districts assures us that the Democrats and Republicans that survive their primaries will be so far to the right or left as to make cooperation and governance in Washington nearly impossible. Much of this crisis could have been avoided with more effective government supervision as market economies are poorly prepared to manage systemic risk, collective action problems, externalities and ethical questions a bank corporate charter has no opinion on. Corporations were created to make profits, governments were created to solve problems that markets have difficulty understanding. We are quickly becoming a banana republic where government and the media act as paid employees of oligarchs and big banks and corporations. We invented government and the corporate form, they are virtual entities, they exist only in documents in DC and in lawyer offices’ filing cabinets, and yet now we find ourselves controlled by them, a true Frankenstein horror.

47- Global banking system: In worse shape now given that Europe has sovereign debt crisis to deal with. Just like the AAA layers of Collateralized Debt Obligations (CDO’s) that European banks bought during the mortgage crisis and now are experiencing default rates of 93%, now we have trillions more of what were supposed to be AAA sovereign credits being held by the same European banks but represent countries with 14% government budget deficits (Greece), 20% unemployment (Spain), countries with banks that are eight times bigger than their entire GDP (Ireland) and whose populations are aging and retiring so rapidly they will not see big real GDP growth for generations. These countries, and many others in Europe, will certainly be downgraded significantly in the near future and outright government defaults are not out of the question. The problem is exasperated by the fact that Value at Risk (VAR) accounting allowed these European banks to hold AAA assets like CDO’s and sovereign debt with almost infinite leverage so they have very little equity standing behind these loans which means once again that the taxpayers throughout all the countries of Europe, and the US, will be picking up the tab when these countries do default or restructure their debt.

John R. Talbott is the bestselling author of eight books on economics and politics that have accurately detailed and predicted the causes and devastating effects of this entire financial crisis including, in 2003, The Coming Crash in the Housing Market. He is currently working on a new book that will be published in September 2010 entitled, The $200 Trillion Crisis. It will be published electronically and will be available for pre-order on Kindle and iPad starting in August 2010.

Read more: Financial Crisis, The Financial Fix, Financial Regulation, Financial Reform, Politics News

AIG’s Former Derivatives Chief Claims He Could Have Gotten Better Deal For Taxpayers Than New York Fed

AIG’s former derivatives chief said Wednesday that taxpayers overpaid Wall Street for their AIG-related holdings, telling a federal investigative panel that he could have gotten “a much better deal” than the Federal Reserve Bank of New York.

Joseph Cassano, the chief executive of AIG Financial Products from 2002 to 2008, told the Financial Crisis Inquiry Commission that the New York Fed’s rapid move to settle claims by counterparties to AIG’s derivatives deals at 100 cents on the dollar “made me scratch my head.”

“We had contractual rights,” Cassano said, explaining that the once AAA-rated insurer could have fought Wall Street counterparties like Goldman Sachs, which were using their contracts to exact concessions.

“I don’t understand why people didn’t look at the contracts,” Cassano said. “I don’t think taxpayers would have had to accelerate a $40 billion payment” to settle those claims.

The New York Fed, then led by current Treasury Secretary Timothy Geithner, quickly moved to pay AIG’s counterparties full value for the securities underlying the insurance-like contracts AIG had underwritten, paying out more than $40 billion. Wall Street and foreign firms ended up receiving and keeping more than $62 billion in what many in Congress have called a “backdoor bailout.”

“I would have been able to negotiate substantial discounts,” Cassano said, noting his own experience in exacting concessions from AIG’s counterparties during his time atop the firm’s derivatives unit.

Asked if he would have been able to settle those contracts without any taxpayer cash — had he not left in early 2008 — Cassano said, “I don’t want to say any money, but I think I would have been able to negotiate a much better deal than what the taxpayer got.”

Andrew Williams, a Treasury Department spokesman for Geithner who also served him during his time atop the New York Fed, dismissed Cassano’s claims.

“Two years after the financial conflagration began, every amateur firefighter has a theory about how it might have been done differently, but ideas from those who lit the kindling aren’t particularly disinterested or useful,” Williams wrote in an e-mail.

“Cassano did acknowledge that Treasury and the taxpayers (and not AIG) now stand to benefit from the significant upside in the ML III portfolios — even if he disagreed with the decision to take those assets out of AIG’s hands,” Williams added, referencing the New York Fed-created investment vehicle that purchased the underlying securities from AIG’s counterparties at full value and continues to manage those investments today. Officials from Treasury and the New York Fed claim taxpayers will be made whole on the AIG bailout, and may even turn a profit.

Market participants and independent analysts strongly dispute that claim. Cassano, though, said Wednesday that he believes those assets “will perform over the test of time.”

“If I was able to stay as chief negotiator of the collateral calls of these transactions, I would have used all of the rights and remedies available to us,” Cassano told the investigative panel. “And in that process I think we would not have had to forward the $40 billion the government did at that time, and I would have been able to negotiate deep discounts from counterparties.”

READ the FCIC’s timeline of Goldman Sachs’s calls for more collateral from AIG:

AIG-Goldman Sachs Timeline

Read more: Financial Crisis, Aig, Timothy Geithner, New York Fed, Federal Reserve Bank of New York, Wall Street Bailout, Goldman Sachs, Backdoor Bailout, Derivatives, Credit Default Swaps, Business News

Goldman Sachs ‘Most Aggressive’ In Demanding Cash From AIG

Goldman Sachs was the “most aggressive” financial firm to demand cash from AIG on what it viewed as souring deals during the financial crisis, the head of a federal investigative panel said Wednesday.

Goldman Sachs Group, the most profitable firm on Wall Street, was the “first in the door” in demanding collateral from the disgraced insurer — once one of the world’s most successful and creditworthy companies — on its derivatives deals, said Phil Angelides, chairman of the Financial Crisis Inquiry Commission.

Goldman comprised 27 percent of AIG’s derivatives portfolio at the end of 2007, yet held 89 percent of collateral that AIG posted to all of its counterparties, Angelides said, citing AIG documents.

Wall Street’s most successful firm was “way ahead of everyone else” on demanding collateral from the giant insurer, Angelides said. And Goldman was “much more aggressive” about marking down the value of those securities, he added.

Joseph Cassano, the former head of AIG Financial Products, the derivatives unit whose actions ultimately led to the firm’s taxpayer-financed government rescue, told Angelides’s panel Wednesday that he was “surprised” at the magnitude of Goldman’s increasing demands for collateral.

Goldman eventually received $14 billion through its insurance contracts — specifically its credit default swaps, an insurance-like derivative product — from AIG, according to a November report by the Office of the Special Inspector General for the Troubled Asset Relief Program. Of that, $8.4 billion was in the form of collateral payments that Goldman simply kept; $5.6 billion was from taxpayers through a special investment vehicle created by the Federal Reserve Bank of New York.

Taxpayers committed $182 billion to backstop AIG. Taxpayers own 79.9 percent of the insurer. The firm’s counterparties, like Goldman, were paid 100 cents on the dollar. It’s unclear whether taxpayers will be made whole.

Goldman consistently marked its contracts with AIG lower than any of the firm’s other counterparties, said Angelides and Cassano.

One example given was a collateral call of $1.8 billion. As the value of the securities fluctuated, the firms would post collateral to one another to cover their positions.

Cassano said that the $1.8 billion demand was surprising particularly due to its lack of “incrementality.”

“It went from nothing to $1.8 billion,” Cassano said, who left his position as head of AIG’s derivatives unit in early 2008.

AIG then went out and solicited prices from other counterparties to check if Goldman’s marks were accurate. Within a month or so, Goldman lowered its demand to $450 million.

Cassano said that a counterpart at Goldman told him, “I don’t think we covered ourselves in glory.”

Read more: Financial Crisis, Goldman Sachs, Aig, Derivatives, Credit Default Swaps, Wall Street Bailout, AIG Bailout, Backdoor Bailout, New York Fed, Timothy Geithner, Joseph Cassano, Fcic, Financial Crisis Inquiry Commission, New Pecora Commission, Phil Angelides, Business News

Hurricane Alex spins past oil rigs toward Mexico

PLAYA BAGDAD, Mexico (Reuters) – Hurricane Alex picked up strength in the Gulf of Mexico as it headed for land on Wednesday, flooding parts of the Mexican coast but staying clear of oil fields to the relief of crude markets.

BP relief well weeks away, hurricane hurts cleanup

HOUSTON/WASHINGTON (Reuters) – A relief well that might divert the gushing Gulf of Mexico oil leak is still weeks from completion, a top U.S. official said on Wednesday, as the season’s first Atlantic hurricane disrupted cleanup efforts.