Bank stocks have rallied hard off their lows on claims that they’ve been largely “profitable” in Q1, after quarters of losses.
January and February were apparently quite good for the likes of Citi (C) and JPMorgan (JPM), but as Jamie Dimon said Friday, March hasn’t been quite as hot.
But a trader who works for one of the major banks has made a shocking claim — that this profitability was solely due to exceptionally favourable trading with AIG (AIG).
The claim, which was made in an email Zero Hedge, is essentially that AIG has become a pure money laundering operation, and rather than unwind its trades at favourable terms for itself, it’s offering banks excellent trades on the taxpayer dime.
AIG, knowing it would need to ask for much more capital from the Treasury imminently, decided to throw in the towel, and gifted major bank counter-parties with trades which were egregiously profitable to the banks, and even more egregiously money losing to the U.S. taxpayers, who had to dump more and more cash into AIG, without having the U.S. Treasury Secretary Tim Geithner disclose the real extent of this, for lack of a better word, fraudulent scam.
In simple terms think of it as an auto dealer, which knows that U.S. taxpayers will provide for an infinite amount of money to fund its ongoing sales of horrendous vehicles (think Pontiac Azteks): the company decides to sell all the cars currently in contract, to lessors at far below the amortized market value, thereby generating huge profits for these lessors, as these turn around and sell the cars at a major profit, funded exclusively by U.S. taxpayers (readers should feel free to provide more gripping allegories).
What this all means is that the statements by major banks, i.e. JPM, Citi, and BofA, regarding abnormal profitability in January and February were true, however these profits were a) one-time in nature due to wholesale unwinds of AIG portfolios, b) entirely at the expense of AIG, and thus taxpayers, c) executed with Tim Geithner’s (and thus the administration’s) full knowledge and intent, d) were basically a transfer of money from taxpayers to banks (in yet another form) using AIG as an intermediary.
Could this be the subject of Andrew Cuomo’s latest subpoenas? We were a bit confused last week about a report which said he was looking into the unwinding of the CDS, and the extent to which the company was making its counterparties “whole”. If AIG is purposely trading “badly” to pump up its counterparties, it’s certainly a scandal — not just of the company but of all the regulators and politicians that have designed this process. Stay tuned on this.