A.I.G: Part Trois – Paying Off the Gamblers

It just keeps getting worse.

If you’ll remember, Sunday night, as we all had our hair on fire over the news of the AIG bonuses, in an effort to douse the flames…..AIG finally forked over the list of the “counterparties” that lawmakers and reporters had been demanding for months.

The so-called counterparties are the financial institutions whose risky investments AIG insured, and to whom AIG gave 90 billion of the bailout money that we—the American taxpayers—gave to them.

Some of the biggest recipients of our AIG bailout money were Goldman Sachs, at $12.9 billion, and three European banks — France’s Societe Generale at $11.9 billion, Germany’s Deutsche Bank at $11.8 billion, and Britain’s Barclays PLC at $8.5 billion. Merrill Lynch (which has bonus giving problems of its own), received $6.8 billion.

Now remember, these are all folks who played high stakes poker with their investment pool and so partnered with AIG to insure their bets.

Gretchen Morgenson, the New York Times Pulitzer-winning financial writer, explains it well:

A.I.G., at one time the world’s largest insurer, sold contracts to these sophisticated counterparties that theoretically protected them from losing money if the debt they had purchased defaulted. Known as credit default swaps, the contracts offer the same kind of protection a homeowner receives from an insurance policy against fires and other unforeseen calamities.

The arrangements behind the deals produced fees for A.I.G. while the firms buying the contracts got peace of mind. No one thought A.I.G. might have to pay hundreds of billions of dollars in claims. Until, that is, A.I.G. came under financial pressure last year.

When the government stepped in to rescue A.I.G., its main and very reasonable concern was that a collapse of the insurer would drag down with it other big financial companies that were its customers. So the government shoveled taxpayers’ money into A.I.G., beginning with an $85 billion loan last September.

But maybe you knew all that.

However here’s what you may not know: While many of your fellow citizens have lost their jobs, and while your savings account or retirement fund or kids’ college fund or your 401K—or the value of your house, for God’s sake—has decreased by between 25 to 60 percent, these AIG “counterparts”—-whose Las Vegas gambler behavior is one of the prime causes of the the devaluation of our assets—-did not want to get only 30 cent or 60 cents back on each dollar they invested. That didn’t really…you know….work for them. They wanted 100 cents back on every dollar.

And so we gave it to them—through the conduit of the AIG bailout.

In other words, the guys who took BIG risks got made whole—with our tax money. They didn’t just get rescued from going under, which is what we had been led to believe. They got brought back to even. While average Americans who worked hard, saved their money and maybe even invested a bit of it conservatively—-got screwed. And then we got to pay off the gamblers.

Gretchen Morgenson was on Fresh Air on Monday afternoon with Terry Gross and she explained all of the above and more.

Here’s the link. The payout discussion starts at around the 6 minute mark.

AIG’s million-dollar-a-month consultant (see minute 17 or so)….is also quite a winner.