Was the AIG bailout used by the Treasury Department as a way to get more funds to financial institutions and avoid public scrutiny, which continues to turn increasingly negative toward such activity?
American International Group Inc. (AIG) disclosed its list of counterparties who received $95.9 billion of the reported $160 billion in government bailout funds received by the company. I was very surprised to see Goldman Sachs at the top of the list, especially considering that the Treasury Secretary at the time was the former CEO of Goldman Sachs.
AIG was a traditional insurance company that moved aggressively into the business of issuing credit default swaps. A credit default swap, in very simple terms, is insurance provided to a holder of a certain security against default or loss in that security. For example, if I own a security, and purchase a credit default swap from AIG protecting me from loss on that security, I can recover my loss on that security from AIG. With respect to many of the banks on the list of counterparties, the securities protected by AIG through the credit default swap market were, most likely, bonds backed by subprime mortgages (such as collateralized debt obligations). As we have all heard in the news recently, collateralized debt obligations have suffered significant losses due to the decline in the housing market. These losses triggered equally significant claims on AIG to the extent covered by AIG. These claims, in turn, caused the approximately $62 billion dollar AIG fourth quarter loss (the biggest loss in history!), and the need for cash from the government.
AIG was given money under the Treasury's Systematically Significant Failing Institution Program. Basically, the Federal Reserve (chaired by Ben Bernanke), the New York Federal Reserve (headed by Timothy Geithner at the time), and the Treasury Department (headed by former Goldman Sachs CEO Henry Paulson at the time) agreed that AIG's failure would pose a systemic risk. In other words, AIG's failure would likely have severe repercussions for global financial markets and the economy.
I have listed, in the chart at the top, banks who received funds under the Treasury Departments Troubled Asset Relief Program (TARP). Next to this, I have listed AIG's counterparties. A number of key names, such as Goldman Sachs, are prominent on both lists.
Eliot Spitzer, in his article for Slate Magazine, raises some very valid observations and key questions related to the just-released list of AIG counterparties. Spitzer states that, in his opinion, "AIG was just a conduit for huge capital flows to the same old suspects, with no reason or explanations." Given the now apparent conflict of interest with regard to Henry Paulson, key questions need to be answered. Did the Treasury and Federal Reserve already know the counterparties and exposures of each when they made the decision to fund AIG? Why weren't the names of the counterparties disclosed immediately?
I am still forming my opinions on all of this, but right now, I think that there was an obvious conflict of interest due to the Treasury Secretary's relationship with the largest counterparty. However, I also think that the failure of AIG truly represented systemic risk to the global economy. The credit default swap market had grown to $70 trillion (to put this amount in perspective, it is roughly five times the amount of goods and services produced by the U.S. in a year, or, put another way, it is almost nine times the amount of the total currency and bank deposits held by all Americans!). Given the effect of the Lehman Brothers bankruptcy, it is not hard to imagine how the collapse of AIG could shock the market; an important market if not only based on its size. But, the Treasury Department should have compelled AIG to release the list of counterparties before any bailout funds were disbursed. This would have caused some uproar at the time, but it would have increased transparency and reduced the appearance of favoritism among Wall Street and former Wall Street folks in the government.
I say " a pox on all their houses", The Administration (not much pox as they have huge issues to deal with),the Congress and Wall Street. For months, it wasn't and still isn't transparent what "Wall Street" was and is doing with the taxpayer dollars that the Congress handed over to them without the most obvious conditions attached. For instance, how they intended to use taxpayer money since their recklessness had caused the economy to collapse. There had been consistent discomfort bordering on outrage that taxpayers should provide "Corporate Welfare" and prop up the very entities that caused the economy to fail. Now we see, as per your article where some of it went and Goldman Sachs seems to have double dipped, at the least. It has also come to light that taxpayer money went to French and German Banks, among others.
ReplyDeleteFor months, it wasn't clearly explained what the government was doing except giving taxpayers money away and I, for one, couldn't understand why the Congress; first, didn't address the issues before the money was given, when it had the most leverage and second, why they didn't demand answers after the money was given. Who has the power here, main street or wall street?
The furor over the AIG bonuses brought the issue to an head because even though it's a "small" part of the bailout it was something that everyone can clearly understand and express outrage over; the straw that broke the camel's back.
It is difficult to believe that the Congress is so incompetent that they would give away our money and not have some idea what would be done with it. Now it comes to light regarding the bonuses that they did know; addressed it, unaddressed it; and now choose to play the Washington game of being surprised. They bloviated, expressed outrage and held Hearings in an attempt to show they were concerned. In this case the House passed a bill to tax the bonuses (I assume that the bill would apply to Merrill Lynch's Billion(s) of dollars of bonuses) A bill that may or may not be constitutional. If it passes the Senate, it will probable be tested in the Courts, which is where the AIG bonuses should have been tested. Congress is full of lawyers and still bought AIG and apparently Geitner's rationale that the AIG contracts were untouchable. They never considered fraud in the making, the impossibility of performance (since AIG had no money other that taxpayer money) or that the contracts were against public policy. I, for one, would be against offsetting the bonuses against future bailout money because the gist of what was done was to unjustly enrich the bonus recepients.
I love your Blog.