For anyone listening to Edward Liddy's testimony, yesterday, the key statement of the hearings came at about 2:50pm. "It appears," said Rep. Jeb Hensarling (R-TX), "that AIG has become a conduit for counter-party transfers of taxpayer money." Amidst all the anger over the $165 million in retention bonuses gifted to AIGs derivatives traders, Hensarling focused attention on the next AIG scandal: counter-party payments. In all likelihood, the counter-party payments will make the retention bonuses look like loose change that fell between the couch cushions.
Unlike the word 'bonus,' however, which has a crystal clear meaning in everyone's mind and requires no explanation, the phrase 'counter-party payment' means nothing unless it is defined. And that is a huge part of the problem: AIG in-house traders -- let's just call them "gamblers" -- gambled away trillions in company equity and assets using financial gimmicks called credit default swaps -- unimaginably risky get-rich stunts that they marketed to investors, to the U.S. government and even to their own bosses as 'products.' When those AIG gamblers ended up on the losing end of all those gimmicks, having brought down the entire AIG corporation in the process, the result was a mountain of outstanding counter-party payments owed to other gamblers in other large corporations.
Got that so far? AIG gamblers sat down at a table with gamblers from other companies, they made bets, AIG lost, and so AIG owes the other gamblers more money than most people can fathom.
This is where the counter-party scandal at AIG really begins to take on monstrous proportions.
If AIG had declared bankruptcy, a judge would have monitored all those counter-party payments, effectively telling all the other gamblers owed money by AIG to get in line, wait their turn, and be satisfied with whatever portion of payment the court allowed. The judge would have also berated AIG and every other company involve for turning a publicly traded company into a casino without rules. In monetary terms, a bankruptcy court would have forced the gamblers on the other side of the table from AIG to burden the share of the risk that they assumed when they walked up to AIGs credit default swap table at the casino and placed billion dollar bets, for example, on the U.S. housing market failing. It would have been painful, but it would have been relatively fair.
But that is not what happened.
Rather than allow AIG to fail, the Bush administration pumped more than $80 billion of our taxpayer dollars into AIG to allow the giant insurance-company-turned-big-stakes-casino to unload all its gambling debt. What that meant in real terms was that billions of taxpayer dollars were used to settle those counter-party payments with those other gamblers.
So, who got the money? Today, AIG released the list of counter-party payments and -- oh, my, dear, god. When the key points of the AIG counter-parties list finally sink in to the American population, there is going to be a run on torches and pitchforks at local hardware stores.
According to the list from AIG's press release, many of the largest counter-party payments were paid to gamblers in France, Germany, and the UK.
When AIG received U.S. taxpayer dollars to prevent them from going into bankruptcy, they put $6.9 billion in a brown paper bag and gave it to gamblers at Société Générale -- in France. Merci beaucoup!
When AIG received U.S. taxpayer dollars to prevent them from going into bankruptcy, they wrapped $2.8 billion in tin foil and gave it to gamblers at Deutsche Bank--in Germany. Danke schön!
When AIG received U.S. taxpayer dollars to prevent them from going into bankruptcy, they put $2.5 billion in shoe boxes and gave it to UBS -- in Switzerland. Merci vilmal!
Oh, but it gets worse.
Some of the biggest counter-party gambling debts U.S. taxpayers paid on behalf of AIG were to our very own Wall Street firms: $5.6 billion to Goldman Sachs and $3.1 billion to Merrill Lynch.
In other words, while American taxpayers are rightly up in arms about $165 million in bonus payments to a few compulsive gamblers at AIG, we have not even begun to get angry about the $27.1 billion we forked over in counter-party gambling debts to foreign firms and Wall Street companies engaged in the exact same game of credit default swap Russian roulette as AIG.
The reason the AIG bailout was structured so that taxpayer dollars would go towards paying off counter-party gambling debts is complicated. Before AIG failed, Lehman Brothers was brought down by its credit default swap gamblers. Rather than intervene to pay off Lehman Brothers counter-party debt, the Bush administration just let it collapse. As a result, all credit in the world froze. That was bad. When AIG failed, the idea was: try for a soft-landing of the company to avoid another systemic collapse in the financial market (e.g., like a run on the banks). Nobody knows for sure what that collapse would have been, but it would have been bad.
So, instead of widespread panic and possibly a run on the banks when AIG collapsed, we ended up with truckloads of taxpayer cash being dumped into the coffers of compulsive gamblers in the U.S. and foreign companies -- many of which will likely fail just like AIG.
Remember when President Obama told us that things were going to get worse before they got better? This is it.
Crossposted from Frameshop.
There is no excuse for TARP, which is why it seems so complicated. It is just a scheme for protecting big money from the consequences of its own mistakes. Years ago, U.S. citizens allowed their national public servants to take huge campaign contributions, and Wall Street had the money to contribute. Big money wanted tax cuts for itself; it wanted deregulation of everything; it wanted a low short-term interest rate. Politicians were paid a lot of money to oblige. Now, big money wants TARP, and the government is trying to figure out how to channel trillions more dollars to it while telling the public it is to save the system. Actually, the only way to save the system now is to let the free market sort it out, let capitalism really work, not socialize the loss. Guarantee the deposits and fund the lending, set up “good banks”, etc., but let the toxic assets and their holders take their own hit.
Individuals screwed up the regulatory system.
Individuals have pocketed the proceeds.
Name them and shame them.
Then, let the tumbrels roll.
The Wall Street Hedge Casino has a great deal for you!
Bet against Main street real companies with borrowed Shorting money.
Keep all your winnings, if the Main Street Companies fail the way you want them to.
Insure you loses with AIG Swaps insurance. Back by the Federal Government TARP program.
Be sure to stop by our "Easy Ratting" companies on the way to AIG.
It's Simple! You Can''t Lose!
http://www.huffingtonpost.com/users/profile/research?action=profile Proof and links
http://eye-on-washington.blogspot.com
To give you only a few examples - Robert Rubin was at Goldman Sachs for 26 years before he ran the Treasury for most of Clinton's administration. He's now a nebulous 'special adviser' at Citigroup where his main responsibility seems to be lobbying the government for special treatment - he's been paid $128 million to perform these duties.
Henry Paulson was head of the Treasury from 2006 to 2008 and is the architect of the bailout plan. Guess what? He moved to the treasury from Goldman Sachs where he was CEO after being with the company since 1974.
We now know that Goldman Sachs was the largest recipient of payments from AIG funded by bailout money. It received $12.9 BILLION in payments funded by you, the taxpayer. What were these payments for? They were for speculative credit default swap contracts which Goldman had taken out with AIG. These were essentially naked bets that the real estate market would weaken. These kind of credit swaps were originally used by banks to insure the value of their mortgage loans, however Goldman did not have underlying mortgages to insure - it was simply betting on the market.
We need to start getting angry about this.
http://seekingalpha.com/article/115795-is-tim-geithner-too-close-to-goldman-sachs
The pigmen own the Obama administration, you will get your change...in pennies
Then you say, we should have let AIG go bankrupt and settled up with all those counterparties for pennies on the dollar and everything would have been fine.
Don't get me wrong, I'm all for letting every one of them fail. But since AIG's exposure is 10 times that of Lehman, why was letting Lehman fail bad, but letting AIG fail would have been good?
Thank you Phil Grahm for pushing the enabling legislation through congress, just 8 1/2 years ago. How quickly your chickens have come back to roost. Prior to Phil Grahm's handy work credit default swaps were illegal in all 50 states under gaming legislation. It took Phil Grahm's legislation to override the wisdom of all 50 states.
Great post, Jeffrey, thank you.
Now, it's unfortunate that under the circumstances at the time there was no time to get Congress involved (which would have been necessary in order to put in various restrictions). But we knew the basic deal--we give AIG the money to make counter-party payments, and as a result those counter-parties don't collapse and the world financial system doesn't completely implode.
The bonuses? Frankly, if the financial geniuses at AIG who gambled away our economy "went Galt", then they'd be doing the world economy a favor. That's why we say "screw 'em".
But the only reason we bailed out AIG at all was so it could make these counter-party payments, and prevent global financial implosion. We can do better by moderating these counter-party payments to a fraction of the dollar, but it's not the same as the bonuses.