AIG Reveals Beneficiaries Of Bailout Funds On Derivatives

Yielding to congressional demands, American International Group last week revealed the U.S. and foreign financial institutions to which it paid some $120 billion in taxpayer bailout money to settle its controversial derivatives trades, announcing that it now sees that use of such money should be public.

The disclosure of its derivative counterparties was largely overshadowed by the firestorm from AIG's payment of $165 million in retention bonuses to its Financial Products unit last week.

But the counterparty payments did come under fire in Congress and the media–including a March 17 column by New York's former governor and attorney general, Eliot Spitzer, in the online publication Slate, headlined: "The Real AIG Scandal."

AIG's release of bailout money payouts indicated that between Sept. 16 and Dec 31, 2008, about $120 billion in aid to AIG has been distributed in the form of cash, collateral and other payouts to banks, municipalities and other institutions in the United States and abroad.

This includes $52 billion to repay banks and securities firms that bought credit default swaps from AIG to ensure their residential mortgage-backed securities.

Another $43.7 billion was used to repay banks and brokers that were customers of AIG's securities-lending business. In this case, AIG collateralized its investments in residential mortgage-backed securities with top-quality securities issued by its life insurance subsidiaries.

Of the $120 billion AIG has paid to financial institutions, the top-five were Goldman Sachs ($12.9 billion), Societe Generale ($11.9 billion), Deutsche Bank ($11.8 billion), Barclays ($8.5 billion) and Merrill Lynch ($6.8 billion).

Tops among the 20 largest payouts to states were California ($1.02 billion), Virginia ($1.01 billion), Hawaii ($770 million), Ohio ($490 million) and Georgia ($410 million).

Meanwhile, the leadership of the Senate Banking Committee urged overseers of the Troubled Asset Relief Program to investigate why AIG paid back investors in troubled AIG mortgage security offerings on a dollar-for-dollar basis even though the securities had not yet defaulted.

Sen. Chris Dodd, D-Conn., chair of the panel, raised the issue at a hearing last week on insurance regulation. He said he was very interested in determining why the counterparties to the AIG credit default swaps were paid 100 percent of the insurance AIG had provided to guarantee collateralized debt obligations.

Sen. Richard Shelby, R-Ala., ranking minority member of the committee, asked Sen. Dodd to have the Inspector General for the TARP program look into "where all this [TARP] money is going."

In releasing its list of entities that received bailout money, AIG said it "recognizes the importance of upholding a high degree of transparency with respect to the use of public funds. As a result, after close consultation with the Federal Reserve, AIG is disclosing information identifying certain credit default swap counterparties, municipal counterparties and securities lending counterparties."

AIG said before making its disclosure it had "consulted with the Federal Reserve about the potential public benefit of counterparty disclosure and the potential that such disclosure would cause competitive harm to AIG or its counterparties."

AIG Chairman and Chief Executive Officer Edward Liddy also said the identity of the bailout money recipients came after conversations with those "counterparties" and "recognition of the extraordinary nature of these transactions." He said the move will "not change AIG's commitment to maintaining business transaction confidentiality."

The AIG bailout began when the company was forced to come up with collateral to cover severe losses on the credit default swap portfolio of AIG Financial Products Corp. The company said the government aid in exchange for a 79.9 percent interest in AIG "helped avoid severe financial disruptions by providing liquidity to important financial institutions and municipalities."

AIG said it has used the balance of the public aid it received for debt repayment and capital support for some of its businesses.