The Real AIG Scandal

[FieldsBlank]

what an absolute black hole this company is

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

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.

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

[NJmaverick]

1. This might seem like a silly concept, but I am in favor of insurance companies actually covering

their claims. If another company is cautious enough or required by law, to limit liability by taking out and paying for insurance, I just don't see any compelling excuse for the insurance company not to pay. To suggest that they should would rock one of the bedrocks of how business is conducted.

[FieldsBlank]

2. sure

on house, car, fire or life insurance - which is what an insurance company is designed to do

but to insure these man made 'financial weapons of mass destruction'?
I don't think so

[NJmaverick]

5. The concept of insurance goes beyond your limited definition

[FieldsBlank]

6. guess not

Do you think its acceptable that I could buy a life insurance policy on my neighbor,
and then sit around and hope he dies?

[Po_d Mainiac]

8. FB Glad to see you understand what a CDF is...more should do the same n/t

[AndyA]

3. It's too bad Spitzer couldn't keep his zipper zipped, he might have been able to

do something about this before it got to this point. I wonder if some of the people he was after knew it, and found a weakness in him that they took advantage of?

Good grief, the good news just never stops coming, does it? (And I'm sure we haven't seen the end of it yet, not by a long shot...) :shrug:

[Skink]

4. I almost wish this crisis had happened after Bush.

"What was the precise conversation among Bernanke, Geithner, Paulson, and Blankfein that preceded the initial $80 billion grant".<[br />
Having Paulson, a Bush crony, in there at that time most certainly gave us today's result. And who was behind taking Spitzer down. AIG?

[OllieLotte]

7. This is spot on.

AIG should go under. Then we can pick and choose who we should bail out. Why should US taxpayers bail out a foreign hedge fund or bank? I'm not sure we should bail out US banks, but I know it's dumb for us to be helping out the foreign guys.