Reply #57: Bust-outs and the Paulson Mob [View All]

[Demeter]

http://skepticaltexascpa.blogspot.com/2008/11/bust-outs-and-paulson-mob.html

Yves Smith has a 9 November 2008 post at her Naked Capitalism that closely parallels my thinking about AIG'S bailout, i.e., it's a bankruptcy fraud. Here's a link: http://www.nakedcapitalism.com/2008/11/aig-looting-continues.html.

I describe a bustout at my 30 July 2008 post, http://skepticaltexascpa.blogspot.com/2008/07/london-banker-on-covered-bonds_30.html.

Bankruptcy fraud is a federal crime, 18 USC 152. Sometimes prosecuted, if small and the "perps" are not politically well connected. "The Beaux Art Dresses Inc., was a domestic corporation organized in December, 1920. ... In August, 1922, the corporation entered into an agreement with a discount company by the terms of which it assigned its accounts receivable to that company for advances of money. ... Within seven weeks before the failure, it purchased merchandise amounting to $47,000 a large part of which purchases were made in the three weeks before the failure. ... At bankruptcy it had liabilities of $67,435.25 and assets of $1,064.14", Beaux Art Dresses v. US, 9 F2d 531, 532 (2nd Cir., 1925). "A decrease of value--more than one-half in two months, after the purchase of new merchandise--under the circumstances disclosed in this record are not to be believed", 534. Ah, for "old time bustouts", when the "mob" did them for profit. They were modest, typically involving $2-$10 million in creditor losses in 2008 $ and easily understood as they used companies which dealt in tangible objects which "disappeared" in the middle of the night. The proof: circumstantial, unexplained asset losses. I estimate $67,000 1922$ is about $2.5 million today, peanuts, 3.7% of Lloyd Blankfein's 2007 bonus, not worth looking at.

Bust outs usually require cooked books to induce the "mullets" to extend credit to the company to be bankrupted and can be charged under 18 USC 1341 and 1343, mail and wire fraud. Insurance companies make ideal bust out candidates because they take in premiums today for a promise to pay claims in the future. Were AIG's books cooked? Was AIG insolvent before Uncle Sam extended it $123 ($150?) billion and if so, who knew? Would anyone have the nerve to conclude AIG was insolvent before its CDS counterparties got more collateral to support their CDSs? What would be the effects? How many billions could it cost Goldman Sachs?

"Appellant, individually and trading as Rand Manufacturing Company, was engaged in business in Philadelphia. On August 22, 1928, an involuntary petition in bankruptcy was filed against Rand, and he was adjudicated a bankrupt on September 12, 1928. To sustain the indictment, Joseph Karp was called as a witness, who testified that he was a certified public accountant living in Brooklyn, N.Y., and that he had considerable experience in examining books of account of garment manufacturers: that he had carefully examined the books of appellant for the purpose of ascertaining the amount of purchases of merchandise, its value and the amount and value of sales of merchandise and finished products, in order to determine if the bankrupt had concealed or disposed of any portion of the merchandise so purchased", Rand v US, 45 F2d 947, 947 (3rd Cir., 1930). "Deducting this amount from the total purchases of 70,574 yards leaves a balance of 22,744 yards of material unaccounted for. ... The witness Karp also testified to a state of facts showing the value of purchases, amount expended for labor, and total sales, which indicated that appellant should have had on hand at the time of bankruptcy, in cash and/or materials, a value amounting to $22,832.94, unaccounted for to the receiver", 948. "Large quantities of merchandise of appellant disappeared, He accounts for the disappearance by claiming a robbery, but the circumstances surrounding the alleged robbery are, to say the least, suspicious. It was proper to submit all of these facts to the jury to determine whether his statement as to the robbery was true or false, whether it led to the conclusion of guilt or innocence as to the charge of concealment", 949, my emphasis. To the jury! Got it yet, Mike Garcia, formerly SDNY US Attorney. Apparently Mary Jo White in her nine years as SDNY US Attorney never did.

What's apparently happening at AIG? First, keep AIG alive to try to "end run" the lookback periods. Next, create massive confusion to conceal what's happening. Which is? AIG's insurance subsidiaries were looted of tens of billions to support AIG's CDSs with the connivance of New York's insurance commissioner, the Fed and the Treasury. The relative positions of insurance policy holders and unsecured creditors were changed during insolvency. If AIG went bankrupt, the bankruptcy judge might let the unsecured creditors "retroject", Hassan v Middlesex, 333 F2d 838 (1st Cir., 1964) AIG's financial condition. If properly done, the scheme could collapse. That's how it looks from here. This secured-unsecured creditor issue sometimes arises in LBOs which later go bust. Neat huh? Bring back "old time" bust-out frauds, they were a relative "public service"; I mean what's a few millions between friends? Or even a few tens of millions?

More on this topic (What's this?)
"Goldman big winner in government's revised bailout of AIG" (naked capitalism, 11/11/08)
AIG Up to Its Old Tricks, Yet Another $10 Billion in Losses (naked capitalism, 12/9/08)
Modeling Failure (Financial Armageddon, 11/3/08)

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