[R-G] [BillTottenWeblog] The Real AIG Scandal

[Bill Totten]

It's not the bonuses. It's that AIG's counterparties are getting paid
back in full.

by Eliot Spitzer

Slate Magazine (March 17 2009)


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.

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?

-- 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?

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.

_____

Eliot Spitzer is the former governor of the state of New York.

Copyright 2008 Washingtonpost.Newsweek Interactive Co LLC

http://www.slate.com/id/2213942/

_____


The Real AIG Scandal, Continued!

The transfer of $12.9 billion from AIG to Goldman looks fishier and fishier.

by Eliot Spitzer

Slate Magazine (March 22 2009)


The AIG scandal is getting ever-more disturbing. Goldman Sachs' public
conference call explaining its trading relationship and exposure with
AIG established, once again, that Goldman knows how to protect itself.
According to Goldman, even if AIG had failed, Goldman's losses would
have been minimal.

How did Goldman protect itself? Sensing AIG's weakening capital position
through 2006 and 2007, Goldman demanded more collateral from AIG and
covered outstanding risk with instruments from other firms.

But this raises two critical questions. The first is why $12.9 billion
of taxpayer money went from AIG to Goldman. What risk - systemic or
otherwise - was being covered? If Goldman wasn't going to suffer severe
losses, why are taxpayers paying them off at 100 cents on the dollar? As
I wrote earlier in the week, the real AIG scandal is that the company's
trading partners are getting fully paid rather than taking a haircut.

Goldman's answer is that it was merely taking a commercial position -
trying to avoid any losses at all on its AIG positions. I suppose we can
hardly expect Goldman to reject government assistance in the form of
pure cash that seems to have had no strings attached.

But what were the government officials possibly thinking? The only
rationale for what we should call the "hidden conduit bailout" to AIG's
trading partners is that the cascading effect of AIG's inability to pay
would have been devastating. But Goldman has now said very clearly there
would have been no cascade. Not even a ripple.

Is the same true of AIG's other counterparties, including several
foreign banks? What examination of the impact of an AIG failure did
federal officials undertake before deciding to spend countless billions
bailing out AIG and its trading partners?

The government decision to bail out AIG was made after the private
parties, supposedly at risk, had declined to structure a private series
of investments that might have avoided the need for use of public money.
Perhaps they knew the impact of an AIG default would be small, or
perhaps they knew that the federal officials in the room would blink and
ante up. In a post-Lehman moment when panic, not reason, was dominating
the discussion, perhaps they figured they could walk away with extra
billions - and, indeed, they did.

This issue cries out for immediate government inquiry. Maybe one or two
of the more than two dozen government entities now beating their chests
about bonuses can redirect their energies to this much larger issue
confronting us: Who signed off on this $80 billion bailout - now
approaching $200 billion - and why?

The second question, of course, is why Goldman was wise to AIG's
declining position two years ago but nobody else appears to have known.
There is always the operating premise that Goldman is better than the
rest in the field, but where were the federal agencies that should have
been taking a look at AIG's leverage situation and general financial health?

And were AIG's public statements accurate in revealing a decline? Or did
Goldman, with its multiple trading relationships with AIG, get an early
warning? This series of questions also demands immediate inquiry and
resolution.

What continues to be fundamentally disappointing is that the "too big to
fail" institutions continue to absorb enormous sums of taxpayer support
without either demonstrating the genuine need for such support or
altering their behavior after receiving it.

After getting $12.9 billion in what now seems to be a mere gift, has
Goldman begun to lend in a way that will restore the credit markets?
Were they asked to do so?

It is time the government realizes it has two simple options: tightly
regulate entities that are too big to fail or break them up so they aren't.

_____

Eliot Spitzer is the former governor of the state of New York.

Copyright 2008 Washingtonpost.Newsweek Interactive Co LLC

http://www.slate.com/id/2214407/



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