The AIG/Bank Counterparty Scandal Escalates

In a letter released by Barney Frank, the Chairman of the Committee of House Financial Services is requesting information from Geithner and Bernanke as to how AIG (AIG) may have treated its U.S. bank counterparties differently from foreign banks.

Frank is referencing a letter by Spencer Bachus in which the latter raises yet another aspect of the AIG debacle, namely that disproportionate treatment by AIG may have benefited foreign banks by up to 70%.

Bachus claims that "in contrast with [AIG's] treatment of foreign banks [which were not asked to reduce the sum they received from AIG by any amount whatsoever], AIG is now attempting to force many of its creditors that are U.S. banks to accept severe reductions in the debt owed to them. I am told in some cases that these U.S. banks are being asked to accept reductions of over 70% of the total debt owed to them. The disparity in treatment between foreign banks and U.S. banks is troubling, particularly since the U.S. banks now being asked to take such reductions are some of the very same ones that taxpayers have been funding. In addition to the clear inequity involved, this conduct obviously runs counter to our efforts to stimulate credit in the U.S. economy through bank lending."

While not at the core of the problem, Zero Hedge discussed previously about improper liquidations from a "stable company" generating abnormal profits at banks, any discovery in this inquiry could potentially raise yet another significant problem, namely how the U.S. is willing to bend over backwards to not displease foreign entities (and potentially purchasers of U.S. Treasuries) at the expense of domestic banks. Then again, if ZH is correct in its prior claims, AIG made sure that even its U.S. counterparties would be more than compensated for any losses they may have had to take on the abovementioned obligation discounts. And all of this would occur, of course, with U.S. taxpayers footing the bill as is standard these days.

Comments

[Fighting Yoda]

AIG is a complete fiasco they need a special task force to deal with it.

AIG is being used as a conduit to bailout the system - that to some extent is foreign banks too.

Hank Greenberg, the Ex CEO and founder, is going to testify in Congress tomorrow. His argument all along has been all counter parties should take a haircut. I think that is only fair, it is normal practice - all GM bondholders are being forced into10-12 cent deals.

Overall this mess only gets messier, and we the tax payers keep footing the bill.

2009 Apr 02 01:31 AM

[Steven Hansen]

this is exactly why there needed to be a type of bankruptcy with court, not political supervision of AIG.

2009 Apr 02 01:52 AM

[Jasper M]

Thank you for this update (and several others), Tyler. I will continue to follow your reports on this.
However, I cannot help but note an apparent inconsistency between this story, and the last one, re AIG giving hugely profitable sweetheart deals to the suddenly profitable C, BAC, etc., the bill footed (arguably on both sides) by the taxpayers. In this story, the very same company is trying to screw over some of these same big US bank counterparties by attempting to force them to accept Big haircuts in payments (though realitically, probably less severe than what they'd get if AIG went through bankruptcy liquidation - AIG has obligations way, Way bigger than its assets). While I understand that the arcane mysteries of high finance are such that both coddling and screwing might be going on simultaneously, it makes me wonder "what's the point?"
Can a wiser head explain this to me?

2009 Apr 02 02:54 AM

[User 305589]

Well, before there aren't all the details on the table, I wouldf simply regard this as yet another Barney Frank smoke and mirrors maneuver rather than an attempt to shed some light on the real happenings. Frank and Dodd are among the most incompetent politicians and share a great deal odf responsibilirty for this mess. So the letter smells very much like 'blame it on ethe foreigners' - just to redirect attention of the public away from the real issues. Could it be, that those deals with foreign banks and foreign counterparties were perhaps a bit different than those with most u.s. counterparties - implying a different treatment from legal points of view? Could it be that perhaps foreign central banks and foreign governments already did some deals with the u.s to avert a global financial meltdown and that treatment of AIG's foreign counterparties was part of these deals?
there are many possibilities and the truth may never be told.
Imho nobody needs the cds market except gamblers, speculators and crooks. let the cds markets die (ban new contracts from being written) and you eliminate a lot of systemic risks.

2009 Apr 02 03:46 AM

[Reclined]

The wording is interesting

"I understand the importance of honoring foreign obligations BECAUSE OF THE NEED FOR US TO CONTINUE TO RECEIVE A FLOW OF FOREIGN INVESTMENT."

So is he telling us that it's not important to honor contracts for their own sake? It is the basis of functioning capitalism. It would be much better to let the courts deal with it in an orderly and impartial manner.

2009 Apr 02 07:23 AM

[bindlepete]

Barney and Company continue to dance to obscure the real history of all of this AIG scam.

Hank took the money with the current Goldman Sachs frontman in violation of any ethics imaginable.

Barney knew of this from the get go but did nothing until the truth was forced out. Now he is trying to cover his waste like a cat but it all still smells. Geithner stood idly by being a good boy along with Bernanke. Who, me??

A violation of their respective oaths to serve the people of the US. Personal service before public service. Some one should pass them a service pistol with one in the chamber. British tradition.

2009 Apr 02 10:59 AM

[Soldalma]

Here is a much, much bigger AIG scandal:

us1.institutionalriska...

2009 Apr 02 11:36 AM

[Allan Frain]

Excellent reference. Thank you.

When viewing the questionable acts of the powerful it is generally imprudent to attribute them to stupidity which is hardly a path to power. The underlying attributes are more generally greed and criminality.


On Apr 02 11:36 AM Soldalma wrote:

> Here is a much, much bigger AIG scandal:
>
> us1.institutionalriska...

2009 Apr 02 03:20 PM

[wobatus]

Isn't this a contradiction of the prior article, that the US banks were getting sweetheart deals?

Anyway, is this guy a pseudonym or just an amalgam? Does Sidney Falco ghost write the column?

2009 Apr 03 04:24 PM

[SeekingTruth]

These underground tactics are part of the reason these theft and misconduct issues take so long to unfold .
As in the Madoff case, the strategy is:
"We'll hold the public off at the pass long enough for you to make it out through the back door. If you can't do that, then you 've been given ample time to pay off and silence all that are necessary to protect yourselves, and we have done more than our part to assist you. If you fail to do that, then you have no one to blame but yourselves."
For years , I have heard about the disproportionate power and influence of Goldman Sachs in all things financial and political, but did not know how to assess them, or whether to believe them.
NOT ANY MORE!!

2009 Apr 03 10:32 PM