Flawed $36 billion AIG bailout would have paid for 47 years of breast cancer research or eight Nimitz-class aircraft carriers

Today the Congressional Oversight Panel released a new report on the fall 2008 bailout of AIG, and its findings are damning for the federal regulators responsible for the bailout. The report claimed that the bailout has had a "poisonous" effect on markets, and released this laundry list of regulatory malfeasance, from the Huffington Post:

· Policymakers had several options to resolve the firm's troubles, rather than a "binary" choice of bailout or failure;

· Federal regulators could have acted earlier, potentially saving taxpayers from a $182 billion investment in the giant insurer;

· The government-led private-sector effort to save the firm primarily relied on just two financial firms and a small group of law firms rife with conflicts of interest;

· Policymakers involved in the rescue continue to change their public rationale for rescuing AIG with taxpayer cash, perhaps for political considerations;

· Even more foreign banks than previously disclosed were direct beneficiaries of the taxpayer bailout;

· It was "unlikely" a more muscular regulatory agency would have caught the insurer's problems given that the firm's own management didn't know what was going on;

· And despite the panel's mission of auditing how the government responded to its biggest intrusion in the financial markets since the Great Depression, some firms, including Goldman Sachs, which taxpayers bailed out with $10 billion in cash and nearly $21 billion in debt guarantees, continue to refuse to turn over key documents, the panel said in its report. Goldman faces a multitude of investigations regarding its subprime-era practices.

One of the Panel's members, J. Mark McWatters (who replaced Rep. Jeb Hensarling), added some details about the AIG bailout's cost to taxpayers in the report:

Other than the bailouts of Fannie Mae and Freddie Mac, the rescue of AIG has required the allocation of more taxpayer funded resources than any other similar action undertaken by the government since the inception of the current economic crisis.

McWatters then notes that the CBO has quadrupled its estimate of the cost of the TARP investment in AIG just in the past few months, from $9 billion to $36 billion, a troubling fact considering that market conditions have only improved since the bailout was initiated. He also adds some context to those numbers:

As I have done in prior reports, I think that it is instructive to add some perspective to the magnitude of the loss the taxpayers may suffer as a result of the AIG bailout. By comparison, for fiscal year 2011 the National Institute of Health (NIH) has requested $765 million for breast cancer research, and the latest Nimitz-class aircraft carrier commissioned by the Navy cost approximately $4.5 billion. It is entirely appropriate for the taxpayers who funded the TARP program to ask if the bailout of AIG with a CBO estimated cost of $36 billion merited 47 years of breast cancer research or eight (8) Nimitz-class aircraft carriers. The "guns v. butter v. AIG" comparisons clearly demonstrate that our national resources are indeed limited and that the bailout of AIG will require the government to reduce expenditures, increase tax revenue or both.

How "the most nauseating giveaway in the history of the country" came about

When the historians finally finish sorting through the appalling decisions that have been made in the past two years, this one will probably be at the top of the heap.

Last fall, as AIG began to realize how screwed it was, it started negotiating with the counterparties to all the credit default swaps it had written. One of the AIG's goals was to persuade these counterparties--including Goldman Sachs--to accept buyouts as low as $0.40 cents on the dollar.

These sorts of negotiations are exactly what should happen when a company gets in trouble. It goes to its creditors and says, look, we can't pay you everything, so here's your choice: Take something, or take your chances in banktuptcy court. (And, in this case, this wouldn't have been much of a choice, given the standing of CDS holders in the liquidation line).

But then Tim Geithner, head of the New York Fed, stepped in.

A few weeks later, the counterparties--all of whom voluntarily did business with AIG and understood the risks--were bailed out at par: 100 cents on the dollar.

Thus began the most nauseating giveaway in the history of the country.

As raid on taxpayers grows, value of AIG tumbles

"In September 2008, Geithner engineered the government's purchase of an 80% share in AIG for the handsome sum of $85 billion, the amount necessary to prevent the company from entering bankruptcy. Losses continued to mount, however, and more federal dollars were needed.

Total cost of AIG's bailout to date? A staggering $185 billion -- or roughly $1400 per U.S. taxpayer. Yet today, according to AIG's own numbers, the company is worth less than $6 billion, and this after posting the largest quarterly loss in corporate history. Nevertheless, the problems at AIG extend beyond the balance sheets.

In March of this year, we learned what the Obama administration already knew -- that after receiving bailout funds, AIG paid $165 million in executive bonuses to employees of its troubled financial products division. Additionally, more than $30 billion in counterparty payments were made to Goldman Sachs, Bank of America, Citigroup, J.P. Morgan and Wachovia -- all of which received separate bailout funds directly from the government -- and foreign banks like Deutsche Bank, Société Générale and UBS, who received counterparty payments in excess of $50 billion.

The public was beyond outrage. They were sold something they didn't want for more than it was worth in a midnight fire sale of busted corporations over-leveraged in troubled, toxic assets. And yet, taxpayers are still kept in the dark about the management of their controlling interest in AIG."

http://spectator.org/archives/2009/06/08/a-tale-of-two-treasuries

Risk analysts say insurance industry at risk due to heavy reliance on risk offset scams

"The picture we have assembled is frightening and suggests that, far from just AIG, much of the insurance industry has been drawn into the world of financial engineering and has thus become part of the problem. Below we present our preliminary findings and invite your comments.

One of the first things we learned about the insurance world is that the concept of "shifting risk" for a variety of business and regulatory reasons has been ongoing in the insurance world for decades. Finite insurance and other scams have been at least visible to the investment community for years and have been documented in the media, but what is less understood is that firms like AIG took the risk shifting shell game to a whole new level long before the firm's entry into the CDS market.

In fact, our investigation suggests that by the time AIG had entered the CDS (credit default swaps) fray in a serious way more than five years ago, the firm was already doomed. No longer able to prop up its earnings using reinsurance because of growing scrutiny from state insurance regulators and federal law enforcement agencies, AIG's foray into CDS was really the grand finale. AIG was a Ponzi scheme plain and simple, yet the Obama Administration still thinks of AIG as a real company that simply took excessive risks. No, to us what the fraud Bernard Madoff is to individual investors, AIG is to the global financial community.

As with the phony reinsurance contracts that AIG and other insurers wrote for decades, when AIG wrote hundreds of billions of dollars in CDS contracts, neither AIG nor the counterparties believed that the CDS would ever be paid. Indeed, one source with personal knowledge of the matter suggests that there may be emails and actual side letters between AIG and its counterparties that could prove conclusively that AIG never intended to pay out on any of its CDS contracts.

The significance of this for the US bailout of AIG is profound. If our surmise is correct, the position of Fed Chairman Ben Bernanke and Treasury Secretary Tim Geithner that the AIG credit default contracts are "valid legal contracts" is ridiculous and reveals a level of ignorance by the Fed and Treasury about the true goings on inside AIG and the reinsurance industry that is truly staggering."

http://us1.institutionalriskanalytics.com/pub/IRAstory.asp?tag=351

Obama crams down some contracts, not others

"...has anybody asked Team Obama why it is more than willing to break mortgage contracts with a bankruptcy-judge cram-down, but won't cram-down compensation agreements for AIG, despite the fact that the U.S. government owns the company? Kind of odd, don't you think?

The Wall Street Journal editors get it right when they ask: Who's in charge and what's the game plan? The whole AIG story is an outrage.

What's more, AIG is acting as a conduit for taxpayer money that is being sent to dozens of derivative counterparties, including foreign banks and American banks like Goldman Sachs. If we're going to bail out all these other firms, why not bail them out in full taxpayer view? Why is the money being laundered furtively through AIG? And where exactly is the end game for AIG? How are the taxpayers going to be repaid?"

http://www.realclearpolitics.com/articles/2009/03/the_aig_outrage.html

Did AIG engage in pay-to-play scheme with Obama

"Senator Barack Obama received a $101,332 bonus from American International Group in the form of political contributions according to Opensecrets.org. The two biggest Congressional recipients of bonuses from the A.I.G. are - Senators Chris Dodd and Senator Barack Obama.

The A.I.G. Financial Products affiliate of A.I.G. gave out $136,928, the most of any AIG affiliate, in the 2008 cycle. I would note that A.I.G.’s financial products division is the unit that wrote trillions of dollars’ worth of credit-default swaps and "misjudged" the risk.

The Washington Post reports a "mob effect" at A.I.G financial products division:

A tidal wave of public outrage over bonus payments swamped American International Group yesterday. Hired guards stood watch outside the suburban Connecticut offices of AIG Financial Products, the division whose exotic derivatives brought the insurance giant to the brink of collapse last year. Inside, death threats and angry letters flooded e-mail inboxes. Irate callers lit up the phone lines. Senior managers submitted their resignations. Some employees didn't show up at all.

With the anger and rage that is being exhibited against A.I.G., perhaps the bonuses Obama received from A.I.G. explain Obama's A.I.G crocodile tears."

http://www.examiner.com/x-268-Right-Side-Politics-Examiner~y2009m3d17-Obama-Received-a-101332-Bonus-from-AIG