Protesting the Wrong AIG Giveaway

March 18th, 2009 by Phil Mattera

Far be it from me to discourage the current populist outburst over the $165 million in employee bonuses paid out by American International Group, but I can’t avoid the feeling that this is drawing attention away from a much larger outrage.

The bonus controversy erupted just as AIG was forced to reveal the identities of the parties that were the biggest beneficiaries of the federal government’s massive bailout of the insurance company last fall. Billions of federal dollars flowed through AIG to make good on complex financial transactions with major banks. The institutions included ones that also received bailouts or capital infusions, including Goldman Sachs ($12.9 billion from AIG), Bank of America ($5.2 billion) and Citigroup ($2.3 billion). It also included foreign banks such as Société Générale ($11.9 billion), Deutsche Bank ($11.8 billion), Barclays ($8.5 billion), UBS ($5 billion) and BNP Paribas ($4.9 billion).

U.S. taxpayers were in effect preventing losses at firms that were also getting direct public financial assistance. The likes of Goldman Sachs, Bank of America and Citi were in effect double or triple dipping at the federal trough. By keeping the identity of the parties secret until now, AIG saw to it that these deals did not get considered when the bank bailouts were being debated. It also kept U.S. taxpayers in the dark on the extent to which the AIG rescue was actually a bailout of foreign banks.

More evidence of the coddling of financial institutions by AIG and the federal government came in a document quietly filed by AIG with the Securities and Exchange Commission on Monday. In it the insurance company gives details on the terms by which it resolved its credit-default swaps with major banks with the help of a financing entity called Maiden Lane III LLC, which was set up last fall by AIG and the Federal Reserve Bank of New York (then run by the current Treasury Secretary Timothy Geithner).

For example, the document shows how AIG and Maiden Lane helped Goldman Sachs recoup the full nominal value of nearly $14 billion on contracts whose market value had sunk to $8 billion. Merrill Lynch (now part of Bank of America) was made whole on $6 billion in contracts whose market value was only half that amount. A variety of foreign banks also enjoyed big recoupments.

Given the spectacular failure of AIG, the company’s bonus plan certainly deserves all the fulmination being directed at it by politicians of all stripes. But the few hundred million involved is inconsequential compared to the tens of billions in taxpayer money that went to AIG customers in sweatheart deals enabled by the Federal Reserve. Some of the effort now being exerted to recoup the bonuses should be put to work trying to claw back the much bigger misappropriation by the banking giants.

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