While everyone and theirgrandmother was getting in a lather about AIG paying $165 millionin retention bonuses to its notorious Financial Products unit,there wasn't nearly enough attention paid to the $120 billionchanneled by the beleaguered company to make good on all itsreckless derivatives trading. But one high-profile gadfly said thisis where attention should be focused.

AIG only grudgingly released the names of its counterparties oncredit default swaps backing subprime mortgage-based securities,butfinally did report that between Sept. 16 and Dec. 31, 2008, about$120 billion was distributed in the form of cash, collateral, andother payments to banks, municipalitiesand otherinstitutions–including nearly $13 billion to Goldman Sachsalone.

The industry's old nemesis, Eliot Spitzer–New York's formergovernor and crusading attorney general–called AIG to account in aMarch 17 commentary published by the online magazine “Slate” thatwas ominously headlined “The Real AIG Scandal.”

In his piece, Mr. Spitzer wrote that “everybody is rushing tocondemn AIG's bonuses, but this simple scandal is obscuring thereal disgrace at the insurance giant: Why are AIG's counterpartiesgetting paid back in full, to the tune of tens of billions oftaxpayer dollars?”

He goes on topoint out that most of those getting money from AIG–thanks to its$170 billion (and counting) federal rescue package–are the samefirms getting government bailout money directly from Uncle Sam viathe Troubled Asset Relief Program.

“So now we know for sure whatwe already surmised: The AIG bailout has been a way to hide anenormous second round of cash to the same group that had receivedTARP money already,” he wrote, adding that “it all appears, once again, tobe the same insiders protecting themselves against sharing the painand risk of their own bad adventure.” He charged that“the appearancethat this was all an inside job isoverwhelming.”

He goes on to ask a series ofquestions “that should be answered, inpublic, under oath, to clear theair”:

–What was the preciseconversation among Fed Chair Bernanke, Treasury SecretariesGeithner and Paulson and other federal officialsthat preceded theinitial $80 billion grant to bailout AIG last fall?

–Was it already known who thecounterparties were and what the exposure was for each of thecounterparties?

–What did Goldman, and allthe other counterparties, know about AIG's financial condition atthe time they executed the swaps or other contracts? Had they doneadequate due diligence to see whether they were buying realprotection? And why shouldn't they bear a percentage of the risk offailure of their own counterparty?

–What is the deeperrelationship between Goldman and AIG? Didn't they almost merge afew years ago, but did not because Goldman couldn't get its armsaround the black box that is AIG? If that is true, why shouldGoldman get bailed out? After all, they should have known as wellas anybody that a big part of AIG's business model was not to payon insurance it had issued.

–Why weren't thecounterparties immediately and fully disclosed?

He concluded that “failure toanswer these questions will feed the populist rage that ismetastasizing very quickly. And it will raise basic questions aboutthe competence of those who are supposedly guiding this economicpolicy.”

These are some pretty seriouscharges indeed! And the potential consequences dwarf any of theunderstandable but overheated reaction to AIG's bonus payments,which are tiny compared to the bigger picture Mr. Spitzerpaints.It's like worrying yourselfsick about losing a quarter because of a hole in your pants whensomeone is lifting a million bucks out of your back pocket.

What do you folksthink???

.

For the answerto this question, we need to go back to the very first decision tobail out AIG, made, we are told, by then-Treasury Secretary HenryPaulson, then-New York Fed official Timothy Geithner, Goldman SachsCEO Lloyd Blankfein, and Fed Chairman Ben Bernanke last fall.Post-Lehman's collapse, they feared a systemic failure could betriggered by AIG's inability to pay the counterparties to all thesophisticated instruments AIG had sold. And who were AIG's tradingpartners? No shock here: Goldman, Bank of America, Merrill Lynch,UBS, JPMorgan Chase, Morgan Stanley, Deutsche Bank, Barclays, andon it goes. So now we know for sure what we already surmised: TheAIG bailout has been a way to hide an enormous second round of cashto the same group that had received TARP money already.