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]