AIG Shows Us The Money!

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

AIG only grudgingly released the names of its counterparties on credit default swaps backing subprime mortgage-based securities,but finally did report that between Sept. 16 and Dec. 31, 2008, about $120 billion was distributed in the form of cash, collateral, and other payments to banks, municipalitiesand other institutions–including nearly $13 billion to Goldman Sachs alone.

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

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

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

“So now we know for sure what we already surmised: The AIG bailout has been a way to hide an enormous second round of cash to the same group that had received TARP money already,” he wrote, adding that “it all appears, once again, to be the same insiders protecting themselves against sharing the pain and risk of their own bad adventure.” He charged that “the appearance that this was all an inside job is overwhelming.”

He goes on to ask a series of questions “that should be answered, in public, under oath, to clear the air”:

–What was the precise conversation among Fed Chair Bernanke, Treasury Secretaries Geithner and Paulson and other federal officialsthat preceded the initial $80 billion grant to bailout AIG last fall?

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

–What did Goldman, and all the other counterparties, know about AIG's financial condition at the time they executed the swaps or other contracts? Had they done adequate due diligence to see whether they were buying real protection? And why shouldn't they bear a percentage of the risk of failure of their own counterparty?

–What is the deeper relationship between Goldman and AIG? Didn't they almost merge a few years ago, but did not because Goldman couldn't get its arms around the black box that is AIG? If that is true, why should Goldman get bailed out? After all, they should have known as well as anybody that a big part of AIG's business model was not to pay on insurance it had issued.

–Why weren't the counterparties immediately and fully disclosed?

He concluded that “failure to answer these questions will feed the populist rage that is metastasizing very quickly. And it will raise basic questions about the competence of those who are supposedly guiding this economic policy.”

These are some pretty serious charges indeed! And the potential consequences dwarf any of the understandable but overheated reaction to AIG's bonus payments, which are tiny compared to the bigger picture Mr. Spitzer paints.It's like worrying yourself sick about losing a quarter because of a hole in your pants when someone is lifting a million bucks out of your back pocket.

What do you folks think???

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