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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 - 11:01am
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 sanctity of contract. If AIG's contracts turned out to be shaky, the theory goes, then the whole edifice of the financial system would collapse.
What was the precise conversation among Bernanke, Geithner, Paulson, and Blankfein that preceded the initial $80 billion grant?
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?
This type of elitist, insider, chummy behavior is exactly how we got into this mess
Originally posted by Karlhungis Unless there is a MAJOR distraction in the near future, the elaborate ponzi scheme that we used to call an economy will no longer work...
I really do worry about what they have in store to distract us so they can "get back to business".
...Of the capital injections into financial institutions, the most damaging of all, [...] , has been the $180 billion injected into the insurance company AIG.
Not only has this subsidized the continuation of AIG's financial products operation, about the most wealth-destructive participant in a highly wealth-destructive era on Wall Street, but it also has subsidized by some large fraction of $180 billion the wholly unsound credit default swaps business.
Had AIG been allowed to fail, the CDS market, the dangers of which I wrote about last week, would have been exposed as the destructive scam it is.
Those AIG counterparties who themselves survived would have fired their CDS dealers and redeployed resources into more productive – or at least, less destructive – operations.
As it is, the CDS market has been artificially endowed with a new lease of life, and will no doubt cause further even more expensive financial catastrophes down the road.
Originally posted by Skydancer
What about the bonus's for Fannie May executives?
Everyone is focused on AIG while forgetting if it weren't for Freddie and Fannie
none of this crap could have happened.