Financial Crisis . . . continued

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

"The issue of AIG's payouts to trading partners remains one of the most controversial elements of the company's rescue. More than $62 billion flowed from the government through AIG and to its counterparties, which lawmakers have decried as 'backdoor bailouts'", says the Washington Post. "E-mails released earlier this month also showed that lawyers for the New York Fed advised AIG officials in late 2008 to withhold certain details in disclosures to the SEC, including information that could have revealed the names of banks receiving payments", continues the Post. Geithner reportedly recused himself from these (anti-)disclosure decisions, as he was then being considered for Treasury Secretary. (See also Reuters, "Lawmaker wants Geithner's AIG records, testimony" 1/14/10)

The Federal Reserve rescued A.I.G. in September 2008, loaning the huge insurance company billions of dollars, and effectively taking majority ownership of the company in exchange. (See Wall Street Journal, "U.S. to Take Over AIG in $85 Billion Bailout," 9/16/08) The cost of the A.I.G. bailout eventually soared to $182 billion, notes the Washington Post, with a bailout package that ultimately included funds from both the Federal Reserve and the U.S. Treasury, along with other assistance, according to Fortune.

The bailout also involved changes in A.I.G. management. "The AIG board had been told that the new CEO was to be Edward Liddy, who had decades before overseen a Sears Roebuck restructuring and then become head of a Sears spin-off, Allstate Insurance. More important to the crisis at hand, Liddy's career had made him a business friend of Secretary of the Treasury Henry Paulson and a member of the Goldman Sachs board", according to Fortune ("AIG's rescue has a long way to go," 12/29/08).

A.I.G. had gotten into deep financial trouble, in part because it was insuring billions of dollars of bad banking investments in subprime mortgage loans, by means of so-called "credit default swaps" (CDS). A.I.G. was "a major seller" of credit default swaps, which were "essentially insurance against default on assets tied to corporate debt and mortgage securities," says the Wall Street Journal. When these subprime mortgage investments tanked, A.I.G. was on the hook for billions of dollars in CDS payoffs to the banks that had made the bad subprime investments.

By bailing out A.I.G., so that it could pay off banks A.I.G. insured through its CDS's, the Federal Reserve essentially used a back door channel to transfer additional undisclosed cash to bailout the nation's top banks. This was on top of the "Troubled Asset Relief Program (TARP) and other bank bailouts by the government. One advantage to the bankers who benefitted from the A.I.G. bailout, however, is that the Fed kept secret the names of the banks indirectly receiving these additional billions of dollars in taxpayer-backed bailouts. In contrast, the TARP program published the names of each bank receiving government TARP bailouts, and the amount received.

In a Senate hearing in March, 2009, Federal Reserve vice-chairman Donald Kohn, refused to give the Senate Banking Committee the names of the banks and other financial instiutions that benefitted fromt he A.I.G. bailout. (See CNN.money / Fortune, "Revealed: 15 AIG bailout counterparties" 3/9/09). Fortune later obtained and published the names of some of the banks that benefitted from the A.I.G. deal, a list that included Goldman Sachs, Merrill Lynch International, Barclays, Deutsche Bank, UBS, Bank of America, and Royal Bank of Scotland, among others. ("Revealed: 15 AIG bailout counterparties")

<<< Back

Fore more background on the financial crisis, go to Resources on the Financial Crisis.

 

Page last modified 1/24/10