Why Is The AIG Bailout Money Being Given To Banks?

The Wall Street Journal recently unleashed a wave of anger by reporting that much of the $173 billion given to nationalized insurer AIG went to banks — including billions to European institutions like Societe Generale and Barclays.

Here are the significant banks that were named in the report:

  • Goldman Sachs,

  • Morgan Stanley
  • Societe Generale
  • Calyon
  • Deutsche Bank
  • Barclays
  • Rabobank
  • HSBC
  • Wachovia
  • Merrill Lynch
  • Banco Santander
  • and Royal Bank of Scotland

The problem, of course, lies in the fact that AIG had written insurance policies that far outweighed its total assets — even at its peak. So bailing out AIG means that taxpayers are bailing out its customers, says the New York Times.

How much money has gone to counterparties since the company’s collapse? The person briefed on the deals put the figure at around $50 billion.

Unfortunately, that is likely to rise.

According to its most recent financial statements, A.I.G. had $302 billion in credit insurance commitments at the end of 2008. Of course, the company is not going to have to make good on all that insurance: the underlying securities are not all going to zero.

But as the economy deteriorates, A.I.G.’s insurance bets certainly become more perilous. And because most of A.I.G.’s swaps are known as the “pay as you go type,” collateral must be supplied when the underlying debt declines in value. Swap arrangements made by other insurers require payments only if a default occurs.

So the meter is constantly running at A.I.G. Just as quickly as taxpayer funds flow into the firm, chunks of it go right out the door to settle derivatives claims.

So it goes.

A.I.G., Where Taxpayers’ Dollars Go to Die [NYT]
Europe banks silent on reported AIG bailout gains [Reuters]

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  1. usa_gatekeeper says:

    Isn’t this what AIG is supposed to do with the money, i.e., cover obligations to counterparties wherever they are?

    • Corporate_guy says:

      @usa_gatekeeper: Well they should be considered bankrupt. These banks get nothing without our bailout money. So it stands to reason everyone should be taking a hit and that AIG shouldn’t be shoveling out bailout money to pay full claims. That does not help them survive unless we bailout 100% of the claims. These banks at best should be getting a fraction of what they are supposed to get. Otherwise this is just going to be a scheme where the best clients get paid out first and everyone else gets nothing.

  2. Snarkysnake says:

    Rage is so inadequate. There must be a higher level of angst that we can experience over this disaster.

    AIG was essentially allowed to create its own casino and gamble recklessly, secure in the knowledge that any losses would be covered by…Anyone reading this that pays taxes.I am not mad at these foreign banks that are getting this bailout money. They are just redeeming the markers laid down by AIG back when the party was still going strong. Fun’s over. Time to pay up.

    Maybe we taxpayers should pay closer mind to the people that we empower to oversee entities like AIG. The ones that we had back then didn’t do too good a job,don’t you think ?

    • Corporate_guy says:

      @Snarkysnake: You should be mad at the banks. They insured their reckless actions against AIG. Without the insurance giving them the ability to not care, we probably wouldn’t be in this mess. The banks don’t deserve to be paid. They got insurance and used that as an excuse to be reckless.

  3. OMAC says:

    I think the problem is that no one realized how much of the money would be going overseas. If all the money went to US banks and institutions then at least the money would be staying in the country, but if the article is accurate then those of us that are US Taxpayers are bailing out overseas banks.

    • cf27 says:

      @OMAC: Why worry if it goes overseas? There are only two things that those countries can do with our greenbacks: invest them in US securities or buy American products. Either one of those is a good thing.

      Recognize that when you “convert” money to, say, Euros, there is some bank out there that has a bunch of Euros which it is willing to trade for Dollars. It makes the trade and then has a bunch of Dollars, which it thinks that some of its European customers will use, either to buy US products or to invest in US securities.

  4. JohnDeere says:

    wow. i didnt realize that there was any question as to where its going. its an insurance company. lol

    • OMAC says:

      @JohnDeere:

      Most Americans are only familiar with Insurance companies in the context of providing health care, car or home insurance. If the true beneficiaries were known to these same people before the bailouts happened, then they would have been much more vocal in their opposition of it, and the bailouts would not have happened.

      Domino effects aside, it’s hard to explain to anyone that lost their jobs why giving French banks billions in American bailout money is important. This is a global problem, and everyone needs to pitch in.

      I think it would be a great idea to hold off on any more bailout money for anyone until there is full disclosure on where the funds are going AND how much these foreign governments are pitching in. If these foreign banks are relying SOLELY on US funds to stay afloat then they can go to hell. Let their own respective governments bail them out. We have our own problems to deal with.

  5. Skankingmike says:

    So wait I read back before the first bailout by Bush, how we had to pass it for the Foreign investors who threatened sanctions and war against us if we did not pass the plan. Thus in turn give the foreign investors their money back.

    I mean in this day and age why are people still shocked that “OMG foreign people buy our bonds and invest in our company’s?” We force nations into buying into this notion that the only good system is Free Trade with democracy then when shit hits the fan we just hand money over to company’s like we’re socialists.

    I just don’t get it. when did free trade = nationalization?

    and why are people upset over AIG? did they think that a corrupt company would magically change it’s ways because you gave it government money?

    NOBODY IS TOO BIG TO FAIL! It’s a scare mongering tactic that both parties use and I’m sick of hearing it.

    lets be honest ok i thought this new government that people said they wanted Openness so lets be frank and open, FOREIGN INVESTORS OWN THIS COUNTRY.

    the end.

    • Corporate_guy says:

      @Skankingmike: We don’t need to protect foreign investors. They have no where else to put their money. China and the middle east has to reinvest back into the U.S. It’s all they can do with all of the dollars we send them.

      • SynMonger says:

        @Corporate_guy: China has plenty of places to invest in their economy.

        • cf27 says:

          @SynMonger: True, but except for things that China buys from other countries, Chinese investment is done in the Yuan. A big stack of dollar bills is only useful for either buying US-made goods or investing in the US. If China is just sitting there collecting green pieces of paper with pictures of presidents on it, then we’re getting a free ride (remember that the gov’t is just printing these things out of whole cloth.)

      • Skankingmike says:

        @Corporate_guy: Well if you really want to start a trade war with the largest country in the world, you can be my guest.

        So yes we do have to pay them back, or our allies in the Middle East will sell us out, China would alienate us and most of Europe would shut us out as well.

        Not the wisest decision we could make.

        BTW both the Middle East and China have been threatening to change over to the Euro which is one more reason why WE HAD to protect their investments first.

  6. GreatCaesarsGhost says:

    I think we all knew about this from the start, and that is why AIG couldn’t be allowed to fail. The domino effect would hit all these other banks.

    At any rate, more proof that the free market doesn’t sort things out for itself. We need regulation to prevent such situations.

    • SynMonger says:

      @GreatCaesarsGhost: It’s not always that we need MORE regulation. Rules, regulations, laws, whatever you want to call them don’t do any good if nobody enforces them.

      It’s great to sit back and yell “Hey! Why wasn’t this regulated?!” Congress works just like the military in that the military is always arming itself for the previous war. You can regulate until you think you’ve covered every possible angle and then something like this comes along.

    • failurate says:

      @GreatCaesarsGhost: Shouldn’t the banks take the hit? They had the ability to research AIG’s position and could have seen that AIG was insured beyond their assets. Had one of these banks requested an audit from AIG before just diving in they could have saved themselves.

      Instead, they just took AIG’s word for it. Just like they took all those home buyers’ words that they did in fact earn $100,000 a year on the line in a meat processing plant/washing cars/sweeping floors/painting houses.

  7. Jim Topoleski says:

    wow WSJs reporting is getting as bad as CNBC and Fox’s. You would have to be a idiot not to know that 50% or more was going overseas. That was the WHOLE point, that a ton of banks overseas invested in AIG and needed to be paid off first before the American banks where.

    Seriously has Wall Street become THIS blazingly stupid in the last 2 years?

  8. ojzitro says:

    @bachya: Not necessarily:

    Although there were no strings attached, thanks in whole to Hank “Used to work for Goldman Sachs” Paulson, the intention was to relieve AIG of it’s toxic holdings, by directly purchasing it’s assets, and allowing them to use that money earned from the sales to our Government to recapitalize their balance sheet.

    Now….they used that money to “pay back bets”. Essentially, they created derivatives on “sure things”, that were not a lock. The rub comes in the form of our Government using this transaction, to funnel money into houses that should not be receiving any “cheap money”. Those counter parties pay executives enormous amounts of money to realize these investments were poor, possibly debilitating investments.

    You’re right that this is what some of this money is supposed to do, but no one was minding the store on that first batch of the bailout, and no one is certain what AIG is paying off. How do we(taxpayers), as the lender, no what sort of transactions are going on?

  9. ojzitro says:

    Loading lifeboats onto an already sinking ship is a sad event to witness. The lower the markets go, the higher the chance that AIG just keeps bleeding money.

  10. chrisjames says:

    Aren’t they raging because some of these banks are, in a way, double-dipping? They get bank bailout money either directly or by getting bought up, then they cash in insurance policies against failure. It’s just that the bailouts were, effectively, an emergency insurance cashout, removing the need to inconspicuously prop them through AIG. Was it necessary to pay AIG? No, not ever. Are we losing anything by giving them money? Yes, but it’s relatively small compared to how much is funneling through AIG, which would likely be spent anyway.

    Not that it really matters, as the financial sector as a whole is being thrown more and more wads of cash (domestic and international, the global economy is now tightly coupled). It’s the source of the money that’s the issue, not the conduit.

  11. Trai_Dep says:

    Foreign banks are perfectly justified in lining up for AIG dollars. After all, it wasn’t their Potemkin village regulatory regimes and zany trust-us-we’re-bankers approach to oversight that made it possible for AIG to crater a hole large enough to drive Pluto through.
    Imagine the situation were reversed, and you’ll have to agree.

    It’s bitterly amusing how quickly “we’re too innovative to sensibly regulate” became “we’re too intertwined in the global financial system to let crash and burn because of our own incompetence”.

    • sleze69 says:

      @Trai_Dep: I disagree. They invested and lost their investment. If they want to beg a government to reimburse them for their losses, they should be begging their own governments.

      I invested in Sirius and lost 90% of it. Who do I beg for my money back?

      • From the cubicle of PGibbons says:

        @sleze69: whomever you bought insurance on that investment with. Oh, you DIDN’T buy insurance? Guess you lost it then…

  12. ojzitro says:

    @ Trai_Dep: I think helping foreign banks is ABSOLUTELY necessary. Where else will we get our next loan from otherwise?

    I’m not being sarcastic either, I’m 100% serious.

  13. absentmindedjwc says:

    No problems here, move on people. This is what the money was for, banks insured their money through AIG, AIG is paying on their policies.

  14. tailstoo says:

    The free market is a great thing… oh, wait…

  15. johnva says:

    I though this was obvious, and it was clearly explained when they first mentioned bailing out AIG. Again, the credit derivatives market is the real source of the problem.

  16. Trai_Dep says:

    Out of all this carnage and tears, I’d demand to see a law passed that outlawed third-party derivative contracts. They’re the equivalent of Vegas roulette wheels.

    • From the cubicle of PGibbons says:

      @Trai_Dep: Wrong. In Vegas, the government doesn’t ignore your winnings and write you a check at 100% when you lose.

    • johnva says:

      @Trai_Dep: Is that crap STILL legal? They should make outlawing it a priority while it’s still politically viable.

      What I would REALLY like to see is a law that RETROACTIVELY nullifies those contracts. It would wipe out all of the gambling speculators right there.

  17. lancepeeples says:

    Any business too big to fail is too to exist.

  18. Canoehead says:

    What is “overseas” – take Credit Suisse for instance – a Swiss bank, right? Well, it also includes the former First Boston Bank – with lots of employees and operations here in the US. It is also a big lender here in the US – providing credit to all sorts or US companies, including many in the rust belt. Ok, so who owns it then? Well, they are a public company, and their shares trade in NY as an ADS. It is a pretty safe bet that lots of US pension funds and others own stock in it – so are they overseas or domestic?

    With big banks like CS, SG, HSBC, UBS and others, the “domestic or local” question is increasingly nuanced. Now, this is not an argument for or against bank (or AIG) bailouts, but rather to say that you really cannot just divide banks into foreign and domestic so simply. There are also various Euro banks like RBS, Santander and Dexia which have been seriously bailed out by their home countries – those banks had significant obligations to US institutions, and they were paid with their bailout money.

    Here’s another datapoint – GM, Ford and Chrysler are US companies, right? So why are Canada and various European governments providing assistance to them? Not out of love, but because they don’t want to lose all their local operations and the jobs that go with them – but ultimately they are helping these companies, and taking some of the burden off of the US government.

  19. econobiker says:

    I still want AIG’s synthetic coal tax credits…

    [www.washingtonpost.com]

    “Financial Products’ drive to keep ahead of its competitors took the firm in unexpected directions. It developed a reputation as an innovator with one of the most diverse toolboxes in the derivatives business.

    That’s how Cassano and his Transaction Development Group found coal.

    For a group of financial wizards, the coal business seemed an odd turn. But it was a logical extension of what the firm had been doing all along: discovering gaps in regulations and markets.

    A 1980 law, generated by the Carter administration, offered tax credits to companies as incentives to design and use synthetic fuel systems. The aim was to reduce U.S. dependence on foreign oil.

    Associates at the Transaction Development Group had discovered that many energy companies were not making enough money to benefit from the tax breaks. But Financial Products’ profitable parent, AIG, could use those credits to reduce its tax bill.

    “One thing AIG had was ample income,” Savage said. “So what we did is, we went out and we bought synthetic coal facilities.”

    The firm had no intention of becoming coal processors. Instead, it arranged to install the equipment — bought for more than $225 million, as Savage recalls — at coal facilities and power plants. The facilities leased and operated the machines at a discount, while AIG got millions in tax credits.”

    From 2005:
    [www.msnbc.msn.com]

  20. vladthepaler says:

    It’s not enough for American taxpayers to bail out rich irresponsible Americans, now we have to bail out rich irresponsible foreigners? Our generosity knows no bounds. It’s ok for millions of Americans to be jobless as long as Europe’s richest citizens get to stay on top.

    • From the cubicle of PGibbons says:

      @vladthepaler: rich people move themselves and their assets all over the world. The rich own the banks. Therefore, we are just bailing out the rich, regardless of their country.

      Have another shoe leather sandwich.

  21. Ryan Orman says:

    ok i give up. aig doesnt deserve the money. just let aig crash and burn. they deserve it.

  22. papahoth says:

    Better article on this in New York Times yesterday. What’s amazing is the braniacs at AIG bet at least twice what AIG was worth in credit swaps. [www.nytimes.com]

  23. bobloblawsblog says:

    @ vladthepaler : im sorry, when some one rear-ends you, you DO call the insurance company you paid to insure your car , right? is THAT a bail out? you obvy don’t understand AIG’s business model. banks PAID for the insurance; whater that is right or wrong has nothing to do with the claimants.

  24. INsano says:

    “Of course, the company is not going to have to make good on all that insurance: the underlying securities are not all going to zero.”

    Well I’m glad there is one optimist in the market…

    Seriously though, this 30 billion here, 80 billion there to AIG is kiddy stuff. The real concern are the 3/4 of a *quadrillion* in derivatives.

    [www.marketwatch.com]

  25. u1itn0w2day says:

    What was going to be done in detail with the initial charity or bailout package should’ve been elaborated on in much more detail before this handout .

    But everyone gets all paniced and politically correct with an election and yet those elected and paid to represent us in this crap disclose this now .

    I wonder how politician have a basic understanding of accounting( which they should since they handle budgets all the time ) . failurate said it best when noting AIG was insuring beyond their assets .Now wouldn’t reading a basic balance sheet such liabilites and assets atleast made someone question this corporate welfare .

  26. Posthaus says:

    I think I’m suffering from Outrage Fatigue.

  27. krom says:

    With all the newspapers threatening to stop printing these days, it’s too bad WSJ can’t follow suit.

  28. DimitroffVodka says:

    Oh Shit! We are in way more trouble than we though. AIG actually has $1.6 trillion in outstanding derivatives exposure. This is from a leaked memo of AIG were they are begging the govt for more money.

    [www.scribd.com]