Quelle Surprise! Who Gained From AIG Rescues? Goldman (and Deutsche) Tops the List (and Willer Buiter is REALLY Angry!)

Even though I often take on the Wall Street Journal’s depiction of new stories, the flip side is that it does break significant news stories. Today is one of those days, although I wonder about an item this juicy hitting the wires on a Friday evening.

Remember that the reason for shoring up AIG was its credit default swaps portfolio, in which it had written lots of unhedged guarantees on the cheery assumption that there was tantamount to no risk. Insurers are state-regulated in the US, and subject to a host country requirements overseas (and AIG has substantial foreign operations). Uncle Sam has no regulatory responsibility for AIG, but was hit up nevertheless as the most logical deep pocket that could prevent a financial train wreck.

Gretchen Morgenson reported in September that Goldman was the only financial firm that had a seat at the table during the AIG rescue talks. We noted at the time:

This is special dealing, pure and simple. Even if AIG needed to be salvaged (there was considerable agreement on this point), having Goldman deeply involved in the process is cronyism. But that’s been a staple of this Administration.

Another reason for the bailout was that AIG’s guarantees allowed European banks to circumvent minimum capital requirements, which means the AIG salvage operation was a backstop to European financial firms.

The Wall Street Journal story, “Top U.S., European Banks Got $50 Billion in AIG Aid” peels back another layer in this sorry affair:

The beneficiaries of the government’s bailout of American International Group Inc. include at least two dozen U.S. and foreign financial institutions that have been paid roughly $50 billion since the Federal Reserve first extended aid to the insurance giant.

Among those institutions are Goldman Sachs Group Inc. and Germany’s Deutsche Bank AG, each of which received roughly $6 billion in payments between mid-September and December 2008….

The names of all of AIG’s derivative counterparties and the money they have received from taxpayers still isn’t known, but The Wall Street Journal has identified some of them and is publishing others here for the first time….

In a Senate Banking Committee hearing in Washington on Thursday, Fed Vice Chairman Donald Kohn declined to identify AIG’s trading partners. He said doing so would make people wary of doing business with AIG.

But Mr. Kohn told lawmakers he would take their requests to his colleagues. The Fed, through a new committee led by Mr. Kohn to discuss transparency concerns, is now weighing whether to disclose more details about the AIG transactions.

Yves here. One would infer that someone who was privy to the details is mighty unhappy with what went down.

The story also includes this text box:

Some banks that were paid by AIG after it was bailed out by the government

Goldman Sachs Deutsche Bank Merrill Lynch Société Générale Calyon Barclays Rabobank Danske HSBC Royal Bank of Scotland Banco Santander Morgan Stanley Wachovia Bank of America Lloyds Banking Group Source: WSJ research

Update 10:50 PM: Readers suffering from bailout fatigue are wondering why this is a biggie. By the time you are talking AIG level numbers, does it matter where the money went, really? Willem Buiter begs to differ (hat tip Ed Harrison). Bottom line: covert subsidies were given to bank via AIG. Remember, Henry Paulson, who had perilously few inhibitions about shoveling money at banks, even when the pretexts were often dubious and the checks non-existent, nevertheless was afraid to overpay openly for dud assets, which is why he retreated from his original conception of the TARP as as way to hoover up bad debt.

But AIG? No problem. CDS are arcane, and these were bi-lateral contracts (while the dud TARP asset were in most cases securities, so in many cases, third parties could formulate a rough view as to where they might trade).

Wake up and smell the coffee. The public purse is being looted and we the great unwashed are being fed pablum. Just because the perps work for once esteemed institutions and are typically treated with deference does not change the nature of the undertaking.

From Buiter:

The reports on the evidence given by the Vice Chairman of the Federal Reserve Board, Don Kohn, to the Senate Banking Committee about the Fed’s role in the government’s rescue of AIG, have left me speechless and weak with rage. AIG wrote CDS, that is, it sold credit default swaps that provided the buyer of the CDS (including some of the world’s largest banks) with insurance against default on bonds and other credit instruments they held. Of course the insurance was only as good as the creditworthiness of the party writing the CDS. When it was uncovered during the late summer of 2008, that AIG had nurtured a little rogue, unregulated investment banking unit in its bosom, and that the level of the credit risk it had insured was well beyond its means, the AIG counterparties, that is, the buyers of the CDS, were caught with their pants down.

Instead of saying, “how sad, too bad” to these counterparties, the Fed decided (in the words of the Wall Street Journal), to unwind “.. some AIG contracts that were weighing down the insurance giant by paying off the trading partners at the full value they expected to realize in the long term, even though short-term values had tumbled.”

An LSE colleague has shown me an earlier report in the Wall Street Journal (in December 2008), citing a confidential document and people familiar with the matter, which estimated that about $19 billion of the payouts went to two dozen counterparties between the government bailout of AIG in mid-September and early November 2008….With the US government (Fed, FDIC and Treasury) now at risk for about $160 bn in AIG, a mere $19 bn may seem like small beer. But it is outrageous. It is unfair, deeply distortionary and unnecessary for the maintenance of financial stability.

Don Kohn ackowledged that the aid contributed to “moral hazard” – incentives for future reckless lending by AIG’s counterparties – it “will reduce their incentive to be careful in the future.” But, here as in all instances were the weak-kneed guardians of the common wealth (or what’s left of it) cave in to the special pleadings of the captains of finance, this bail-out of the undeserving was painted as the unavoidable price of maintaining, defending or restoring financial stability…

I am deeply worried that other people may, as a result of this, be willing to do business with other U.S. financial institutions on the same ludicrous terms that brought us the current crisis,,,,

Unless the counterparties pay the full price for their hubris and recklessness, they will be back for more. It is therefore tragic that central banks and governments everywhere are going out of their way to protect and shelter the unsecured creditors of the banks (holders of junior and senior debt among them), by raiding the tax payer or the credit and reputation of the central bank. Significant mandatory debt-to-equity conversions and large write-downs of (haircuts on) the claims of other unsecured creditors should be an integral part of any financial assistance package.

There’s more good stuff here. Buiter also questions conventional wisdom about the Lehman failure.


Originally published at Naked Capitalism and reproduced here with the author’s permission.

2 Responses to "Quelle Surprise! Who Gained From AIG Rescues? Goldman (and Deutsche) Tops the List (and Willer Buiter is REALLY Angry!)"

  1. paul94611   March 7, 2009 at 11:16 pm

    As long as the regulatory, legislative and executive government bodies are beholden to the major financial firms there will never be the prospect of true loss in the economic equation. Without the prospect of loss the economic model of capitalism fails. It is especially troubling that government ceded regulatory oversight of finance to finance.What is noteworthy is how quickly these titans of finance and their shills in the major financial media cry when faced with the specter of enforcement of standards upon their own conduct. Standards they refuse to enforce upon themselves with the power that government handed to them. What is especially troubling is the apparent inability of government to pick up the pieces and reestablish control over the situation. What we are left with is a quasi never world where the only folks expected to shoulder the failures of government & finance are the citizens themselves who have been deliberately shut out of and kept in the dark regarding the trillions that have been committed in their name.Confidence? The only confidence being engendered by this process is a game of confidence. There is no remaining value in the franchises of the major financial firms or the government that supposedly regulates them.

  2. Anonymous   March 8, 2009 at 6:54 pm

    Got gold?