As pundits and politicians bloviate about retention bonuses and the citizenry storm the citadels of Wall Street and any other place they can find an AIG executive, the financial mice, i.e. Treasury officials, are scurrying about delivering financial plague to the world’s population.
Well not exactly a plague, more of a Madoffian disease that, if detected early enough, could have been cured – sort of like an STD caught early. As the AIG mess plays out, it seems that the American people look to be the odd men (and women) out in this financial scam. They get the cure, we get . . . well, you know what I mean.
What I am speaking of here in real terms is the gargantuan payouts made by AIG using taxpayer money to the recipients of the financial insurance policies AIG has written to banks around the world. These policies, which we all now know as credit default swaps, are being paid in full to the institutions that have screwed up in investing in bad real estate securities.
After considerable cajoling by the U.S. government, on March 15th AIG disclosed the names of counter-parties receiving more than $108 billion in taxpayer funds. Of that amount, $52 billion was used to satisfy or exit credit default swaps, insurance contracts on securities, which are at the heart of the problem with the failing insurer.
A counter-party, it should be noted, is the insurer provided coverage by the insurance company (in this case, AIG) for its losses suffered from its bad investments, like, securitized mortgages.
In other words, AIG provided insurance to protect the best and the brightest on Wall Street and in other capital markets around the world in the event they did something really stupid. Ooopsie! My bad.
“Though it is now known who the counter-parties are, AIG refused to itemize what exactly it is each of them brought to the table. As a result, it’s impossible to know if some firms got better deals than others, or if taxpayers got a raw deal all together.” Forbes.com
European banks lead the list with Societe Generale receiving $6.9 billion, Deutsche Bank walked away with $2.8 billion; UBS did a little two-step with $2.5 billion. Back at home, Goldman Sachs received $5.6 billion and Merrill Lynch locked up a paltry $3.1 billion.
Per existing swap agreements, AIG had to post $22.4 billion in collateral where the underlying investments were downgraded. Societe General received $4.1 billion; Deutsche Bank, $2.6 billion; Goldman, $2.5 billion; and Merrill, $1.8 billion. Forbes.com
AIG also had to post $43.7 billion during the quarter to unwind its securities lending business and $12.1 billion to different municipalities that had guaranteed investment policies. California and Virginia received $1 billion each.
Great.
As Elliot Spitzer, former N.Y. Governor and Wall Street pit bull noted yesterday on Slate.com:
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 workweeks so that colleagues won’t be laid off. Why can’t Wall Street royalty shoulder some of the burden?
Good point Elliot. Everybody is expected to make some sacrifices here. Oh, except for the banks.
It was only a few weeks ago when investors and “concerned” business leaders were condemning the autoworkers union and its members for having the temerity to maintain their collective bargaining agreements with the U.S. automakers. The average autoworker was making a whopping $70 an hour benefits included. Now, the Treasury Department has somehow overlooked the fact that the counterparties are getting paid in full, no questions asked. Take at $70 and hour, slap nine zeros on it and nobody is the wiser.
Apparently contracts only matter when Geithner’s pals over at Goldman need protection. After all, the world is at risk. What about contracts to protect you and me (think taxes, collective bargaining agreements, and so on). Don’t they matter? Not so much.
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This month the UK-based NGO Global Witness issued a new report asserting that major international banks perpetuate corruption in the world’s most fragile countries. This is not a new assertion by any means, but in these times when the nefarious impact of unbridled greed has put the global economy in jeopardy, it is a particularly urgent message. The demand by shareholders for corporate responsibility is growing, but it still has a long way to go.
