Epic Money Shot Fail

Yves Smith is shocked that nobody's brought this up before about Andrew Ross Sorkin's book Too Big To Fail, but what it means about AIG is that former CEO Hank Greenberg could have been sitting on billions...with a B, folks...in unaccounted slush money.

So the story thus far is that AIG is a great big mess that will bring everyone down if it goes. Got that. Geithner accepts that picture, persuades Bernanke. AIG is on the verge of bankruptcy, according to Sorkin, mere “minutes away” (p. 399). The Fed agrees to extend a $14 billion loan to get it through the trading day but it wants collateral. Collateral? From a broke company? How is that going to happen?
Then we get this bit:

Wilmustad understandably wondered how they were supposed to come up with $14 billion in the next several minutes. Then it dawned on them: the unofficial vaults. The bankers ran downstairs and found a room with a lock and a cluster of cabinets containing bonds – tens of billions of dollars’ worth, dating mostly from the Greenberg era. They began rifling through the cabinets, picking through fistfuls of securities that they guessed had gone untouched for years. In an electronic age, the idea of keeping bonds on hand was a disconcerting but welcome throwback. (p. 400)

WTF? This is a company about to go out of business, then it suddenly remembers it has a secret stash….worth at least 1/6 of the initial government rescue commitment? $14 billion was only what they coughed up to satisfy the Fed. How much more was left in those cabinets?

And more important, WHO SUPPOSEDLY OWNED THIS PAPER? This wasn’t held by the subsidiaries; otherwise, AIG would not have been able to pledge it to the Fed. And if it was a parent company holding, why wasn’t it repoed or sold earlier? What entity took the semi-annual interest payments? Take the $14 billion we know about, and assume a 5% interest rate. That’s $700 million. Where did it go? Was it reinvested? Disbursed?

The language further suggests that bonds in this secret trove, while mainly accumulated under Greenberg, had more recent additions, presumably under Martin Sullivan, perhaps Wilmustad. This “unofficial vaults” designation strongly implies this was a secret, off balance sheet cache that threw off a hefty amount of annual income by virtue of its staggering size. That would mean it could be used by the CEO at his sole discretion, for anything from bribes to unreported executive payments that might then be used to open foreign bank accounts or pay for personal or business expenses.

WTF indeed. I mean honestly, guys?  Now we have a secret vault downstairs with tens of billions in off the books stuff in a secret vault and the Fed was okay with this?

Perhaps there is an innocent explanation for this huge stash. However, but in all my years in financial services (and having had billionaire clients who would be completely within their rights to run their enterprises as personal cookie jars to the extent the law allows), I have never heard of anything remotely this suspect. Given AIG’s history, there is every reason to believe this is what is appears to be: a slush fund created for Greenberg’s personal use that was never accounted for properly.

The simple test of whether this arrangement is proper or not is whether the cache was fully accounted for on AIG’s balance sheet. If not, no wonder Greenberg had to go to such lengths to boost reported earnings. He would have needed to hide the truly remarkable amount of skimming needed to put these reserves aside.

Well gosh, graft of that magnitude strongly implies that somebody upstairs in Treasury looked the other way on this.  Just how much of this secret stash is there?  Is it still there while Americans are paying for billions in AIG bailouts?

Where the hell is Geithner and Bernanke on this?  Jesus, like we needed another reason to get rid of the Helicopter Ben and Timmy Show?

EPIC FAIL.  To the tune of tens of billions.  Secret vault my ass.