AIG Needs Transparency, Now

On Thursday, I appeared on Warren Olney's To The Point radio show, urging transparency on the subject of AIG's counterparties and speculating that the real reason their identities were being kept so quiet was that no one in the US government wanted to face the inevitable firestorm when it emerged that many of those counterparties were European and not American.

The release of today's WSJ story on those counterparties only serves to underline my point. The story is vaguely sourced, and it's not at all clear what the "large payouts from AIG" that the story talks about actually are. But no matter: a glance at the Calculated Risk comment thread is sufficient to see that the firestorm is building.

At this point, the government -- which owns AIG and therefore knows exactly who the counterparties are -- must start getting much more transparent, and very quickly. The cat is more or less out of the bag anyway, and intelligent conversation is always preferable to ill-informed speculation.

A lot of banks used AIG to insure themselves against a global financial meltdown. When that meltdown happened, even the mighty AIG was incapable of paying out on its obligations, so the US government stepped in to backstop them. Is it a scandal that many of AIG's insureds were European? I don't think so. But it does imply that maybe some European governments should be sharing with the Obama administration the burden of backstopping AIG's obligations.

Disclosure: No positions

Comments

[bonddude:]

I would be shocked, of course, to see Mr. Soros' hedge fund at the top of the list.

Mar 07 03:47 PM

[Dave Wrixon:]

Sounds fair if you believe in punishing the victims.

At some point Wall Street needs to restore some level of credibility if it is to continue trading. If AIG was nothing more than a Ponzi game, then I suppose it is fair that the Europeans should shoulder the loss. That is what happens in a Ponzi scheme. But one characteristic of a Ponzi scheme is that once it unravels there is no more future business ever under any circumstance. If that is good for New York, then so be it.

Mar 07 03:48 PM

[AlphaDude:]

Outrageous suggestion. AIG is a top American financial operation, supposedly regulated by the American authorities.

The American government is morally obliged to cover any losses that this American owned/run/regulated company has as they took the tax on profits quickly enough.

Mar 07 04:07 PM

[Big Al45:]

The identity of the counterparties is not the only issue. I would like to know how many of these counterparties actually owned the assets for which they bought CDS's.

The American public would be outraged if they find out that most of AIGs book was naked CDSs' and that our billions are being spent to cover "side bets" made by hedge funds and other speculators.

Bernanke and Geithner are obviously engaged in a cover up. So much for transparency, accountability, and "change you can believe in."

I just hope somebody in Congress has the guts to make them release the identities of the counterparties. If not, its time to start a third party.

Mar 07 04:14 PM

[Duude:]

I'm still trying to understand how it is that AIG isn't being indicted for fraud. I understand that the cds market wasn't regulated, but it was marketed as insurance. If they don't have anywhere near the assets to back the insurance they wrote, that's fraud. Its not hardly any different from Madoff's ponzi scheme. If the money recovered from the Madoff scheme doesn't cover all those scammed, are we going to bail them out too?

Mar 07 04:29 PM

[davidbdc:]

this was nothing more than bets placed on banks failing. who does it harm when the trades simply disappear?

thats right the rich politicians need to look out for their rich banker friends.

Traitors!!!!!!!!!

Hang them High!!

Mar 07 05:01 PM

[User 283977:]

A Rant:
Felix, I believe you will find the same situation with Citi. The people that have the most to loose are foreign investors in the American safe investment harbour. The pirates on Wall Street designed a Ponzi scheme selling fraudulent securities, securities rated AAA by the equally fraudulent rating agencies, securities backed by AIG. AIG had to know that the true rating of those mortgage backed securities were NOT AAA, but they went along for the ride because they did not have the moral fortitude to say no.

Propping AIG up destroys our economy and eventually robs Americans of their savings through hyperinflation. You think you have $10,000 safely invested in a CD… see what happens to the VALUE of that $10,000 when hyperinflation occurs. The actual dollars will still be there, but the value of those dollars will be sharply decreased.

Letting AIG go under destroys the financial safe harbour set up by the pirates in Wall Street with the active collaboration of the thieves in Washington for the past two decades. That financial system was designed to systematically transfer wealth out of this country through the mechanism of vastly increasing the amount of less costly imports, and of course foreign oil. In order to facilitate the transfer of wealth, the manufacturing sector in this country was effectively destroyed. Now a lot of companies are happy because they get to increase their profitability while no longer having to invest in pesky things like plant upgrades, costly American employees, and R&D for innovations. The American financial system is happy because they created supposedly "SAFE" investments for all of that wealth that was transferred out of the country and then reinvested in those fraudulent securities the pirates of Wall Street were selling. How much of the wealth transferred out of the country was then re-captured by the pirates of Wall Street?

Everything is golden, until the housing market turns, and it becomes patently obvious that those AAA rated investments were not worth spit. Now AIG is on the hook and they can't pay. They can't pay because they don't have sufficient REAL assets to cover the loss. That's an interesting way to run an insurance business. My bet is a lot of the "assets" on their books are more of those fraudulent securities… so what happened to the real assets? The only advantage of propping AIG up with a never ending supply of freshly minted money is it delays the carnage. The hope is to pump enough money into the economy to get it re-booted so the value of those mortgage based securities can be somehow re-inflated. If the market values of homes cannot be increased, than…. .

With respect to moral obligations, the last person holding the bag in a Ponzi scheme eats it. Why should that be the American taxpayer? A fraud of colossal extent has been perpetrated. Once fraud has occurred there are no more "moral obligations" to be fulfilled other then to find, convict and punish the guilty. Is the federal government backing up the investors defrauded by Madoff? No, but I do note that Mr. Madoff is still living comfortably in his luxury condominium while no one knows how many people's lives he has destroyed. But when you put it in perspective, the pirates of Wall Street make Mr Madoff look like a choir boy, and these guys have not even been charged with what is probably one of the greatest looting jobs of all time. The more money that is stolen, the less effective law enforcement ….

Mar 07 05:44 PM

[Bill Herbert:]

>>The identity of the counterparties is not the only issue. I would like to know how many of these counterparties actually owned the assets for which they bought CDS's.

The American public would be outraged if they find out that most of AIGs book was naked CDSs' and that our billions are being spent to cover "side bets" made by hedge funds and other speculators.<<

You could even go one giant step farther.

How do we know if some of these contracts are even legitimate?

It seems the American taxpayer is being used like an endless charge card for the fraudsters in the hedge fund community and the leveraged speculators in the banks.

The Fed is an absolute joke, stuffed with chalkboard economists, most of whom have never run anything - including Bernanke, who has done nothing more than draw diagrams on chalkboards at fancy universities, and published a bunch of murky academic studies.

Yet these people are signing the checks for their crooked masters/future employers, and they won't even tell us who is getting paid, or how much is foreign vs. domestic, or if they have even bothered to verify that many of these CDS contracts EVEN EXISTED before the US Govt started being played for a fool by the Wall Street crooks.

i mean, these people have a long, sordid record of defrauding the public in everything from the muni-bond market - that was Hank's 'specialty' - to dotcoms, late-trading, massive front-running scams, back-dated stock options, and God only knows what else.

Many of the top people on Wall Street obviously have a self-dealing, criminal mindset. So why should we trust them to be honest in presenting us with a number that they have "lost" in the latest accounting period?

Mar 07 07:24 PM

[Jackson Cash:]

Here you go:

online.wsj.com/article...

Yep, foreign banks. Wealth to the wealthy - duh.

Mar 07 09:07 PM

[klarsolo:]

Okay, so what if some of the counterparties are foreign banks? Are you going to say that then AIG should have been allowed to go bankrupt? Or maybe they should have only bailed out national policyholders and let the rest of the world fend for themselves? Is that the attitude that gets anybody out of this mess?

Mar 07 09:49 PM

[Jolly_Rancher:]

I don't think we need transparency per se. I think we need Congress to give Bernanke the power to take over AIG's and C's bad assets and sell of the parts. He specifically told Congress he needed this power to act to solve once and for all the credit problems, but Congress has not acted. Could it be that zombies continue to pull strings in Congress. Wouldn't surprise me.

Mar 07 10:29 PM

[WMBANZAI7:]

I love watching Deutsche Douchebankers slap their lederhose while they prance around bragging that they don't need bailout dough.

I love being lectured about financial excess by French politicians while their show piece banks decorate their capital budoirs with AIG toilet paper.

I love listening to Barclay's tell us that they don't no bailout money.

Most of all I love listening to Lloyd Blankfein tell us the Goldman model still works.

Mar 07 11:22 PM

[Moon Kil Woong:]

The issue is not who they wrote them to but why a select few got massive payouts where others got pennies or nothing on the dollar. In fact, keeping AIG from failing allows AIG to illicitly payout its little funds to its most favored while depleting its asset base to payout other insurance claims. Who loses, ultimately all those who have legitimate insurance claims who may get nothing. All those complicit in allowing AIG to deplete their funds on derivitaves contracts are complicit in fraud if it should ever go bankrupt.

Mar 07 11:54 PM

[nova:]

AIG was a private company. It supposed to stay that way: if it becomes bankrupt then so be it.

As soon as our government got involved in there, it became a problem for all taxpayers. It is one more example of government's interference in private company operations that created lots of troubles for everybody.

Mar 08 01:22 AM

[Lilguy:]

Without very thorough transparency on the uses of taxpayer money in ALL the businesses into which that money has been pumped--from AIG to CITI to GM and onward--investors will not have confidence in the market and citizens will not trust their political leadership.

This is a certain formula for an economic train wreck. While transparency may cast an even darker shadow over the recipients and show huge flaws in federal policy, opacity assures economic depression, political paralysis, and possibly social unrest.

Turn on the light! It's far better than cursing the darkness.

Mar 08 11:38 AM