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Guardian.co.uk – No single hedge fund today poses a systemic risk to the global financial system, said a former partner at Long Term Capital Management (LTCM), as lawmakers continue to hammer out rules to control the industry.
Even though many funds are now much larger than LTCM, which collapsed in 1998 and received a $3.5 billion bailout to avert widespread financial chaos, Hans Hufschmid, currently chief executive at fund servicing firm GlobeOp, said prime brokers now act as an effective brake on hedge fund risk. "I find it hard to believe — I don’t think a hedge fund today is big enough to pose a systemic risk," he said.
Atlantic Online – For all the talk these last few years about the risks to investors of "secretive, unregulated" hedge funds, they certainly haven’t turned out to be the big problem, have they? Thousands of hedge funds lost, in the aggregate, hundreds of billions of dollars last year, and hundreds have shut down. But nobody in government is calling for a hedge fund bailout because hedge funds losses, however painful to investors, don’t create systemic risks to the nation’s financial apparatus. As it turns out, it was the big regulated entities, the banks and investment banks, that were the problem, not the unregulated hedge funds.
The battered insurance giant AIG returns to Capitol Hill Wednesday facing another frosty reception in Congress – where three AIG trustees appointed by the U.S. government will make their public debut amid growing skepticism over their role at the company.
House Oversight Committee Chairman Edolphus Towns (D-N.Y.) is questioning whether the Federal Reserve Bank of New York – which installed the handpicked trustees in January – is doing enough to protect taxpayers footing the bill for the $182.5 billion bailout.
And POLITICO has learned that one of those trustees has another role – as chairwoman of a Bermuda-based firm that administers hedge funds based in the Cayman Islands and other global tax havens.
President Obama’s harsh attack on hedge funds he blamed for forcing Chrysler into bankruptcy yesterday sparked cries of protest from the secretive financial firms that hold about $1 billion of the automaker’s debt.
Hedge funds and investment managers were irate at Obama’s description of them as "speculators" who were "refusing to sacrifice like everyone else" and who wanted "to hold out for the prospect of an unjustified taxpayer-funded bailout."
"Some of the characterizations that were used today to refer to us as speculators or to say we’re looking for a bailout is really unfair," said one executive who spoke on condition of anonymity because of the sensitivity of the matter. "What we’re looking for is a reasonable payout on the value of the debt . . . more in line with what unions and Fiat were getting."
Moneycontrol.com – Joseph Stiglitz, a professor at the Columbia University and the 2001 Nobel Prize winner, said the US government’s bailout packages designed for financial institutions may not work. “It is a peculiarly-structured programme,” Stiglitz said, “The government puts in 92% of the money, the private sector walks away with 50% of the profits and the government absorbs almost all the losses. What kind of partnership is that?”
The Nobel Prize winner said the financial system in the US engaged in too much risk-taking. “If you are a bank too big to fail, you have a one-sided bet. If you win, you walk off with the profit. If you lose, you are too big to fail, so the government picks up the losses.
Bloomberg – The Obama administration will announce details of a plan today to expand the $700 billion rescue of the financial system that will rely on enticing private investors to buy the troubled assets clogging banks’ balance sheets.
Treasury Secretary Timothy Geithner, who will unveil the Public Private Investment Program today, has crafted an approach using up to $100 billion of bailout money to spur investment funds to purchase — and banks to unload — the illiquid securities and loans that have caused credit to dry up. The Treasury, Federal Reserve and the Federal Deposit Insurance Corp. will all play a role alongside private investors in aiming to buy between $500 billion and $1 trillion of troubled assets.
“By providing a market for these assets that does not now exist, this program will help improve asset values, increase lending capacity by banks, and reduce uncertainty about the scale of losses on bank balance sheets,” Geithner said in an op-ed piece published in today’s Wall Street Journal. “The ability to sell assets to this fund will make it easier for banks to raise private capital.”
Business week – The idea certainly seemed all right to throngs of Americans who were outraged by news that American International Group (AIG) paid out millions of dollars in executive bonuses after it was rescued with taxpayer cash.
But would no bailout be even worse? Financial analysts and federal officials have warned that doing nothing to save AIG—or banks or the auto industry—would be a catastrophe, an economic domino effect of bank losses, stock market chaos, and job cuts. No one—at least no one in the government—has the stomach for that.
Newsday – A tough-talking President Barack Obama moved yesterday to block the $165 million in bonuses for American International Group executives that prompted a new wave of outrage at corporate America and taxpayer bailouts.
Despite the aggressive approach, it’s unclear whether he can get the payments back. But the White House said it would modify the terms of AIG’s pending $30-billion bailout installment to at least recoup the $165 million the bonuses represent. That wouldn’t rescind the bonuses, just require AIG to account for them differently.
Separately, state Attorney General Andrew Cuomo said he will subpoena the names of AIG officials involved and copies of their employment contracts to determine whether the bonuses are legal, given the firm’s weak finances.
Manhattan-based AIG was saved from insolvency by $170 billion in taxpayer-backed loans – and reported a $61.7-billion loss in the fourth quarter last year. It revealed on the weekend that it used more than $90 billion in its federal aid to pay out banks, some of which had received their own U.S. government bailouts.
New York (HedgeCo.Net) - After handing AIG another $30 billion in taxpayer-funded, government bailout funds, U.S. Federal Reserve Chairman Ben Bernanke defended the decision, with the worn-out argument that the insurer’s failure may trigger an economic domino effect.
“We know that failure of major financial firms in a financial crisis can be disastrous for the economy,” Bernanke said in a testimony to the senate Budget Committee on Tuesday. “We really had no choice.”
So far, the government has come to AIG’s rescue four different times, pumping over $160 billion into the insurance giant. In an attempt to appease furious lawmakers who disagree with the latest handout, Bernanke said, "If there’s a single episode in this entire 18 months that has made me more angry, I can’t think of one (other than) AIG."
AIG reported an industry wide record $61.7 billion quarterly loss this week, attributing that to losses on their credit default swaps; worthless pieces of paper that “guarantee” mortgage-backed securities. AIG sold these credit default swaps, which supposedly insured about $440 billion in bonds. In reality, AIG did not have the funds to cover these investments. When the securities inevitably plummeted in value, AIG couldn’t cover what they promised. Unfortunately, credit default swaps, which were invented in the late 90’s by several employees at J.P. Morgan Chase as a means to make quick cash, are not regulated by the U.S. government.
Many feel AIG has acted irresponsible, and that no amount of government funds will turn the poorly run business around. AIG even “cleverly attached a hedge fund to their insurance company, taking advantage of a gap in federal and state oversight,” Bernanke added.
In exchange for the funds, the government will receive $26 billion in preferred stock in two AIG subsidiaries – American Life Insurance Co. and American International Assurance Co. AIG will not have to pay interest on the outstanding loan.
Julie Scuderi Senior Editor for HedgeCo.Net Email: julie@hedgeco.net
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Bloomberg – Federal Reserve Chairman Ben S. Bernanke said American International Group Inc. operated like a hedge fund and having to rescue the insurer made him “more angry” than any other episode during the financial crisis.
“If there is a single episode in this entire 18 months that has made me more angry, I can’t think of one other than AIG,” Bernanke told lawmakers today. “AIG exploited a huge gap in the regulatory system, there was no oversight of the financial- products division, this was a hedge fund basically that was attached to a large and stable insurance company.”
Bernanke’s comments foreshadow tougher oversight of systemically important financial firms, and come as President Barack Obama seeks legislative proposals within weeks for a regulatory overhaul. The U.S. government has had to deepen its commitment to prevent AIG’s collapse three times since September as the company accumulated the worst losses of any U.S. company.
The company “made huge numbers of irresponsible bets, took huge losses, there was no regulatory oversight because there was a gap in the system,” Bernanke said. At the same time, officials “had no choice but to try and stabilize the system” by aiding the firm.
AIG is getting as much as $30 billion in new government capital and relaxed terms on its bailout announced yesterday.
In another sign of tighter regulation to come, Bernanke said supervisors should have authority to bar new financial products that may be destabilizing to markets.
Bernanke made the AIG comments in response to a question from Senator Ron Wyden, an Oregon Democrat, at a Senate Budget Committee hearing today in Washington.
Bloomberg – General Motors Corp. said its European Opel unit risks running out of cash next quarter, threatening three factories with closure and imperiling as many as 300,000 jobs across the region.
Opel, based in Ruesselsheim, near Frankfurt, is struggling with 30 percent overcapacity as sales slide, GM’s European chief, Carl-Peter Forster, said today in a press briefing at the Geneva International Motor Show. He didn’t specify which sites might close. The U.S. company has major plants in Germany, Spain, Poland, Belgium and the U.K.
GM expects European governments to reach decisions in “days or weeks” on aid the carmaker is seeking to help save operations in the region, Chief Operating Officer Fritz Henderson said. Any interest in the Saab brand depends on a bailout from the Swedish government, according to the executive, who said GM is determined to eliminate failing units in order to channel resources toward more successful models.
“GM will be global, we think,” Henderson said in an interview earlier. “But we have to be realistic, and the environment today requires us to take a lot of tough measures. We need to focus our brand portfolio. We need to get down to fewer brands that can focus very clearly on the market.”
Hummer, Saturn and Saab may all be surplus to requirements and will play “a diminished role,” Henderson said, while Pontiac will be reduced to a niche brand in the U.S. GM, already relying on $13.4 billion in government loans to survive, said Feb. 17 it needs as much as $16.6 billion in additional funds to avoid bankruptcy, including $2 billion by the end of this month.
“We’re quite confident that we can execute a product program and build a brand to be successful going forward,” Henderson said. “After all, it’s about revenue.”
Reuters – President Barack Obama has decided to launch a government task force for restructuring the struggling U.S. auto industry instead of naming a "car czar" with sweeping powers, a senior administration official said on Sunday.
Obama is appointing Treasury Secretary Timothy Geithner as his "designee" for overseeing auto bailout loans and as co-head of the new high-level panel together with White House economic adviser Lawrence Summers, the official said.
But Obama, who took office on January 20 and last week won congressional approval of a $787 billion economic stimulus program, has dropped the idea of having a single appointee empowered to handle the politically sensitive task of revamping America’s once-mighty auto sector.
"There is no ‘car czar,’" the official said, speaking on condition of anonymity.
