I want to write something about AIG, what got us into this mess, the initial bailout, the defenses and criticisms of the bonuses, the public’s outrage, the knee jerk reaction of politicians, the circling of the wagons by the elite, and how the plan rolled out by Tim Geithner enables socialism for the wealthy and insulates them from failure while fleecing everyone else. Barry Ritholtz at the Big Picture has some links to excellent reporting by Matt Taibi in Rolling Stone, another by Carol Loomis in Fortune, and yet another in the NYTimes by Gretchen Morgenstern.
It’s difficult to know where to stop and finish, although this infographic is a good start.
In the very beginning of AIG’s contribution to this financial quagmire, we were told that it was initially about mutual funds, said the WSJ:
The Federal Reserve appeared to be motivated in part by worries that Wall Street’s financial crisis could begin to spill over into seemingly safe investments held by small investors, such as money-market funds that invest in AIG debt.
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Money-market funds are supposed to be among the safest investments available. No fund in the $3.6 trillion money-market industry has lost money since 1994, when Orange County, Calif., went bankrupt. A number of money-market funds own securities issued by AIG. The firm is also a big insurer of some money-market instruments.
Clusterstock has one of the more concise takes on why we continue being held hostage by these institutions:
But let’s light a match rather than curse the darkness. To understand why AIG is special, you need to understand how credit default swaps wound up playing an important role on the balance sheets of banks all around the world. Basically, as banks loaded up on risky corporate loans and mortgage backed securities, they were forced with a choice: sock away more money against a rainy day or buy an umbrella from AIG. If you bought the umbrella, you were allowed to keep using your capital for investments.
Now that it’s rained for something like 400 days, it’s all too clear that AIG didn’t have enough umbrellas to go around.
Let’s drop the metaphor. Banks all around the world never fully-accounted for the losses they would have to take if their loans stopped paying off at expected rates because they had bought insurance against these losses from AIG. If the banks had to account for those likely losses, they would have to start socking money away. This is what regulators are trying to prevent by bailing out AIG.
This initial bailout was some $80 billion and ended up with the Government owning 80% of AIG. This infographic illustrates where the money went, via Flowing Data.
AIG stands before us again, wearing a suicide vest and holding a gun to its own head, Blazing Saddles-style. An AIG white paper [pdf] said the following regarding the systemic risk to the global economy should AIG be allowed to fail, due to cross-defaults of as much as $1.6 Trillion:
For example, AIGFP is a party to derivative and structured transactions, guaranteed by AIG, that allow counterparties to terminate in the event of a “cross default” by AIGFP or AIG. A cross default in many of these transactions is defined as a failure by AIGFP to make one or more payments in an amount that exceeds a threshold of $25 million.
In the event a counterparty elects to terminate a transaction early, such transaction will be terminated at its replacement value, less any previously posted collateral. Due to current market conditions, it is not possible to reliably estimate the replacement cost of these transactions. However, the size of the portfolio with these types of provisions is in the several hundreds of billions of dollars and a cross-default in this portfolio could trigger other cross-defaults over the entire portfolio of AIGFP.
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Departures also have regulatory ramifications. As an example, the resignation of the senior managers of AIGFP’s Banque AIG subsidiary would allow the Commission Bancaire, the French banking regulator, to appoint its own designee to step in and manage Banque AIG. Such an appointment would constitute an event of default under Banque AIG’s derivative and structured transactions, including the regulatory capital CDS book ($234 billion notional amount as of December 31, 2008), and potentially cost tens of billions of dollars in unwind costs. Although it is difficult to assess the likelihood of such regulatory action, at a minimum the disruption associated with significant departures related to a failure to honor contractual obligations would require intensive interactions with regulators and other constituents (rating agencies, counterparties, etc.) to assure them of the ongoing viability of AIGFP as well its commitment to honoring counterparty contracts and claims.
This brings us to Henry Paulson and his successor, Timothy Giethner. One oft made criticism of both men is that they come from institutions and are friends with some of the same suspects in the current crisis. To see how the Cargo Cult of the Wealthy comes into play, one need look no further into another possible motivator for the bailout and the bonuses – protecting the wealthy from risk. Elliot Spitzer may have fallen from grace, but he’s not wrong:
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.
The theme echoed in the business media that Wall Street can’t be run by anyone earning under $250,000 or dread a Wall Street on a $100,000 annual salary. Others on the right carp that blame lies at the feet of Dodd and Pelosi, ignoring the fact that the bailout was cooked in Dubya’s kitchen. Add to that the cognitive dissonance of the Conservative Holy Trinity of Rush, Beck, and Hannity coming out in SUPPORT of the bonuses. Former Bush flack Dana Perino said the following:
And the people who are working there that are middle-class people, are expecting to get this bonus. If they do not get it, maybe they won’t be motivated enough to try to help the company turn around and getting the company to turn around and be more profitable is important for all of us.
When the wingnut titans shriek of class warfare, then mean the rich against the poor, not the inverse, which is why AIG compensation contracts are sancrosant (except when they are not) while the UAWs are not. It’s also why the finance industry got bailed out while the automakers were forced to grovel and sacrifice. We are all equal, but some are more equal then others.
Geithner’s ideology has effectively given him cognitive biases and blind spots that you could walk an elephant through. His beliefs that the economy is stalling because banks aren’t lending, that ‘toxic assets’ are undervalued, and that once those same banks start lending again the markets will recover or only tangently connected to reality. You can see the themes repeated over and over in the Treasury’s fact sheet.
To further illustrate Geithner’s disconnect, he seeks to employ Rovian branding to the term “toxic assets” as “legacy securities”, hinting that this is a fiscal problem in need of a marketing solution.
The rage of the protesters is reminiscent of waking a sleeping monster, but their fury is blind, unfocused, and random. AIG is also using the populist uprising as a tool to keep employees quiet.  Meanwhile, the press sends a gazillion journalists and vans to cover a single bus of AIG protesters. Other populist noisemakers such as Glenn Beck and the NRA’s Wayne La Pierre take the opportunity to rouse up the militia.
To give you an idea of where we stand, compare and contrast these statements by Ben Bernake and Tim Geithner. Says Bernake, when asked on 60 Minutes what keeps him up at night:
“[That] we don’t have the political will. That we don’t have the commitment to solve this problem.”
Said Geithner, ‘off the record’ after the unveiling of his toxic asset plan, Anne Marie Cox:
“We are the United States of America, we are not Sweden.”
For the uninitiated, both Sweden and Japan faced similar crisis in the recent past. Sweden temporarily nationalized banks, wiped out those who took excessive risks, and then recapitalized them, emerging in short order. Japan did not, and their period of recovery through the 1990s is refered to as ‘the Lost Decade’.
As Matt Taibi said in the above linked Rolling Stone article, we are fucked.
Tags: AIGFP, Anne Marie Cox, Bank of America, Bank of America Corporation, Barclays, Barclays PLC, Barry Ritholtz, Ben Bernanke, Carol Loomis, CEO, chairman, Chase Manhattan Corp The, Dana Perino, Deutsche Bank, Elliot Spitzer, Federal Reserve System, Glenn Beck, Goldman Sachs, Goldman Sachs & Co., Gretchen Morgenstern, Henry Paulson, Japan, JPMorgan Chase, Matt Taibi, Merrill Lynch, Merrill Lynch & Co. Inc., Morgan Stanley, New York Fed, Rolling Stone, Sweden, Tim Geithner, Timothy Geithner, Timothy Giethner, Treasury Secretary, UBS, Wall Street, Wayne La Pierre
