Randy Miller

Congress' Handling of AIG Bonuses Is Shameful

We have to sort out the propaganda, coming from Wall Street, some in the government. etc

Henry Paulsen used fear to stampede Congress into the original TARP plan, and Barney Frank helped him. Even today, Bernanke keeps saying things would have been much worse if there had been no bailout.

Liddy reads death threats to plant fear that Congressman will be culpable if names were released.

Liddy and others planting the fear that only the guys who made the mess could straighten it out. And that we are cutting our own throats by criticizing the current crowd at AIG.

So, what if, instead of TARP, Congress had passed a law giving FDIC authority of AIG and other large companies, as Geithner proposed today. FDIC could have stepped in on a Friday night in October, split off the genuine insurance side of AIG, the strong viable parts, and said they would be open for business on Monday morning with temporary government ownership until those units could be sold. They could have frozen the Financial Products division, and re-written the contracts to say that the government would use the proceeds from the sale of healthy units to pay the counterparties WHEN THEY ACTUALLY HAD A DERIVATIVE FAIL TO PERFORM.

That is the one pertinent fact that seems to be ignored. I think it was the head of OTS who said last week in Congressional testimony that not one of the the super senior traunches that AIG FP insured has gone into default. Their value may be lower, but they are still performing. IF AIG FP had just re written the CDS contracts to say that we will pay up if the insured derivative actually fails to perform, they would not have needed to send one dime to Goldman Sachs, the French banks, the German banks, etc. In some cases AIG has used taxpayer money to buy some of the CDO's , etc, which will be fine as long as they keep paying. The value of the counterparty CDO had gone down, and because of the way AIG FP wrote those contracts, AIG had to pay up to cover the lowered value. The banks in particular were using the value of the insured CDO's as capital for regulatory purposes, so when the CDO value went down, their capital base shrunk, and they were going to have problems with their regulators. If the governments had just said, even though these CDO's have lost value, they have still not defaulted, so list them in your capital statements at par, in this one special case. You would be telling the actual holders of those CDO's that they would be made whole in the event of a default, which is what insurance is supposed to do.

Of course the speculators holding naked CDS would be hosed. We need to know how much AIG money went to those speculators. A month ago I was concerned we would never know. One value of the populist outrage is that it drew public attention to AIG per se, so the good reporters could say yes, the bonuses are bad, but look what has been going on in the back room. Instead of distracting us from those back room dealings as has been charged, the outrage brought more attention to them.

The way the contracts were originally written would be like writing fire insurance for a house in the woods, and during a forest fire AIG would have to pay money just for the fire approaching the house, even though the fire never gets there or damages the house. This was not a contract written in the best interests of anyone but a small group of people.

But... Cassano still got his fees, and put them in the bank.