The Real AIG Scandal:
It's not the bonuses. It's that AIG's counterparties are getting paid back in full.
By Eliot Spitzer
Posted Tuesday, March 17, 2009, at 10:41 AM ETAIG's Manhattan, N.Y., office
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?
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.
It all appears, once again, to be the same insiders protecting themselves against sharing the pain and risk of their own bad adventure. The payments to AIG's counterparties are justified with an appeal to the sanc y of contract. If AIG's contracts turned out to be shaky, the theory goes, then the whole edifice of the financial system would collapse.
But wait a moment, aren't we in the midst of reopening contracts all over the place to share the burden of this crisis? From raising taxes—income taxes to sales taxes—to properly reopening labor contracts, we are all being asked to pitch in and carry our share of the burden. Workers around the country are being asked to take pay cuts and accept shorter work weeks so that colleagues won't be laid off. Why can't Wall Street royalty shoulder some of the burden? Why did Goldman have to get back 100 cents on the dollar? Didn't we already give Goldman a $25 billion capital infusion, and aren't they sitting on more than $100 billion in cash? Haven't we been told recently that they are beginning to come back to fiscal stability? If that is so, couldn't they have accepted a discount, and couldn't they have agreed to certain conditions before the AIG dollars—that is, our dollars—flowed?
The appearance that this was all an inside job is overwhelming. AIG was nothing more than a conduit for huge capital flows to the same old suspects, with no reason or explanation.
So here are several questions that should be answered, in public, under oath, to clear the air:What was the precise conversation among Bernanke, Geithner, Paulson, and Blankfein that preceded the initial $80 billion grant?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.
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?
Except he oversimplifies it way too much. AIG defaulting would have triggered additional far reaching effects of other policies and other parts of AIG. It was far too interconnected to simply say they were giving money to these same parties TARP affected.
Also people don't seem to fathom the size of the US economy and how many trillions are involved. They are all in shock and awe over the number flying around because those numbers are never placed in a proper context.
The consideration received by Goldman was considerable, $14 billion or something like that. Their compe or Lehman was offed, or rather, permitted to die.
What's Hank Paulson's CV again? Neel Kashkari? Tim Geithner?
The scheme may not be actionable, but it fails the sniff test. The optics are really really bad, but it's no big surprise either. The possible conflicts of interest were pointed out early on. It's no wonder Geithner can't find a #2. Either nobody smart wants in on the scam, or they didn't pay their taxes. The last two nominees withdrew.
"AIG defaulting would have triggered additional far reaching effects of other policies and other parts of AIG."
Yeah, turns out those other parts of AIG might already be insolvent too. Something about the books being cooked and subsidiaries lending money to one another that they don't actually have. Like a nice big financial Enron.
WHEEEEEEEEEEEEEEEEEEEEEEEE!!!!!!!
Fixed.The banks held a gun to their own heads. So the government took the gun away and emptied the clip in the US taxpayer.
Last edited by Winehole23; 03-18-2009 at 05:18 PM.
I think this is what most people don't understand though. The more I read and see the more I comprehend that the administration hasn't explained the situation enough. When I saw Obama speak today I just kept thinking he needs to do more of THAT and less of the outrage bull .
This whole mess is ty, but the alternative was far more stark than any of this.
Why do people keep saying this? That was the path not taken. Are you 100% sure it wasn't the right path? I'm not. Why foreclose on the possibility? It may happen to us anyway. We can consider deflation from a safe distance only until it sucks us in.
Hasn't it sucked us in already? What was the 4th qtr GDP?
Because context matters when you evaluate your current path and future decisions and in today's environment people love to change the context every 5 minutes.
Please, do explain this... What, exactly, would have happened if AIG had filed for bankruptcy?
I thought Spitzer's take was obvious, if a bit lawyerly. But I agree, Manny, it doesn't matter very much if people don't pay attention in the first place. It's just tedious.
The current foofaraw over bonuses is flavor of the month populism, but it will recur endlessly now that it has been let out of the jar. It's a form of senility that in effect is mass produced and infinitely recurring. You have a fake recurring nightmare, instead of evaluating the case. If you prefer the dream to the reality, the reality of the dream gets exaggerrated while the reality itself is dismissed. The reality is ugly. Hank Paulson ran our country for what, four months?
WH, just look at the post right above the one of yours for proof of my earlier statement. The right is still clinging to the notion that the bailout in itself was horrible and use every opening to ram that message down peoples throats without regard to just how much harm those statements have.
Now don't get me wrong. I think there should be as much transparency as necessary to ensure everything is on the up and up but I am completely sick of seeing every asshole run their brand of populism with no regard to what they may do. And this includes the statements Obama made a few days ago.
You still haven't explained what would have happened if AIG had not received a bailoiut. In fact, no one has...beyond the "Financial Armaggedon" claims that were never explained.
WH, my main problem with the article is the statement below:
Correct me if I'm wrong, but the government has taken the assets in exchange for being bailed out, yes? So I think this statement is fairly false and simply feeds the notion that there are people getting rich through the bailout.
It all appears, once again, to be the same insiders protecting themselves against sharing the pain and risk of their own bad adventure.
I have. Its been discussed quite a bit on this board. If you look in the other AIG thread, I posted a through and simplistic post from - and you'll love this - a blog from back in September.
Here's a clue Yoni. It has to do with credit default swaps and how the AIG domino simply triggered further dominos. Did you just completely miss Lehman?
But, none of that explains exactly what will happen if AIG isn't bailed out.
I mean, now for this argument to be valid, it's got to be something more expensive than the few trillion dollars this mess is already costing the American taxpayer.
AIG is a conglomerate. Many of their subsidiaries are viable and profitable. If restructuring through bankruptcy hadn't worked, they could have been liquidated with many of the assets going off to other owners by which profits would continue to be realized.
WH, I think Yoni makes my earlier point better than I could ever have hoped to.
The point on your head.
Seriously, what would have happened if AIG was forced into bankruptcy? Where would we be right now?
Ask Bush -- he authorized the bailout after all.
Nothing, Yoni. Thats why they enacted the bailouts. For fun you now. The United States Government was bored last September.
Apparently. Well, they've managed to liven things up a bit, eh?
Again, ask Bush why it was necessary. Why do you pretend he didn't start the bailouts?
Lets get one thing clear Yoni. You would have preferred the government done nothing, correct?
I think Joe Biden's comments the other day are akin to the hyperbole we were fed last year over the dire cir stances at hand with an AIG failure...
Slow Joe said Obama, "has inherited the most difficult first 100 days of any president, I would argue, including Franklin Roosevelt."
Franklin Roosevelt? How about Abe Lincoln? Harry Truman? Ronald Reagan? But let's stay with Roosevelt. Comparisons between the present economy and the Great Depression are overblown, to say the least, as this chart showing job losses in the Depression and six subsequent recessions reflects:
In view of his recent change in tone, it seems likely that if Obama could have a do-over, he would rethink the "Never let a crisis go to waste!" strategy. So far, stirring up over-the-top hysteria about the economy hasn't worked out too well for the new administration.
They fooled us all on the AIG bailout but, as a great president once said, "Fool me once..."
Including not passing the Revitazation Act amendments of 1996 that caused financial ins utions to seek way to cover the losses Congress has legislated them into.
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