'Counterparties' scandal unfolds: AIG gave out $120 billion in bailout funds to gangster-like banks

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Like a scheme out of the Sopranos, only on a huge scale, AIG funneled $120 billion of taxpayers' bailout money late last year to Goldman, Merrill, foreign banks, and other "counterparties" in the mortgage-securities scandal.

This morning's Wall Street Journal describes the weekend's revelations in more polite terms:

Troubled insurer American International Group Inc., now 80% owned by U.S. taxpayers, spent the weekend deflecting mounting criticism of how government funds have been funneled to various banks and used to pay employee bonuses at the business unit that almost sank the company.

After calls for more transparency, AIG disclosed Sunday that roughly two-thirds of the $173.3 billion in federal aid it received has been paid out to trading partners such as banks and municipalities in the U.S. and abroad.

It's hardly surprising that Goldman Sachs appears to be the largest U.S. recipient in this scheme involving what are formally called credit default swaps: Former Goldman CEO Hank Paulson was the Bush regime's bailout czar.

By the way, you can probably kiss that money goodbye. Despite the disclosure, at last, of the money received by these counterparties, it's highly doubtful that any of the money will be clawed back.

Simply put, those banks and others had invested money in AIG, the world's largest insuror, to insure their own losses in the mortgage-securities market. Like a restaurant owner refusing to name mobsters who were silent partners, AIG refused to identify the counterparties.

Adding to the frustration: U.S. taxpayers had already "made whole" these counterparties, as the WSJ puts it, when these toxic assets were bought by a bailout bank set up last year by the Federal Reserve after the Wall Street meltdown.

Think of these counterparties as mobsters reaching over the counter of a pizza joint owned by a sucker indebted to them and snatching money right out of the cash register.

Further adding to the frustration is that the $120 billion of bailout money funneled through AIG to the big banks and others represented insurance those banks purchased in case average Americans' mortgages collapsed in the subprime-market schemes.

In essence, these big banks bet against average Americans, who then bailed them out — before bailout plans began for said average Americans.

The Bush regime had refused to press AIG to release the names and amounts of money in this scheme — in other words, Hank Paulson kept secret the fact that his former bank was apparently the biggest U.S. recipient of the publicly funded payoffs. Some of the names leaked out last week. But now the names and numbers have been made public.

James Lieber cut through to the heart of these credit default swaps and other aspects of Wall Street's derivatives schemes whose collapse ignited the global financial crisis in his January 28 Voice piece "What Cooked the World's Economy?":

As staggering as the Madoff meltdown was, it had a refreshing side — the funds were frozen. In the bailout, on the other hand, the government often seems to be completing the scam by quietly passing the proceeds to counterparties.

The advantage of treating these players like racketeers under federal law is that their ill-gotten gains could be forfeited. The government could recoup these odious gambling debts instead of simply paying them off. In finance, the bottom line is the bottom line. The bottom line in this scandal is that fantastically wealthy entities positioned themselves to make unfathomable fortunes by betting that average Americans — Joe Six-Packs and hockey moms — would fail.

Now that the names and numbers are finally public, the details of how Lehman tanked and Goldman was saved last year become clearer in context. As Lieber wrote in late January:

The day before AIG reaped its initial $85 billion bonanza, Paulson met with his [Goldman] successor, Lloyd Blankfein, who reportedly argued that Goldman would lose $20 billion and fail unless AIG was rescued. AIG got the money.

Had Goldman bought from AIG credit derivatives that it needed to redeem? Like most other huge financial traders, Goldman has a secretive hedge fund, Global Alpha, that refuses to reveal its transactions. Regardless, Paulson's meeting with Blankfein was a low point. If Dick Cheney had met with his successor at Halliburton and, the very next day, written a check for billions that guaranteed its survival, the press would have screamed for his head.

The WSJ concisely describes the scheme this way, after which you can judge for yourself whether the money will ever be clawed back:

In all, the disclosure shows that between Sept. 16 and Dec 31 last year, about $120 billion in aid to AIG has been distributed in the form of cash, collateral and other payouts to banks, municipalities and other institutions in the U.S. and abroad.

The sum includes $52 billion of outflow from AIG's Financial Products unit, the unit that made bad insurance bets on mortgage assets. Another $43.7 billion was used to repay banks and brokers that were customers of AIG's securities-lending business. It also includes $24 billion in Fed money that was used to buy mortgage-linked securities that AIG insured so that the contracts tied to them could be torn up.

There are political risks to the disclosures, notably the fact that taxpayer dollars are essentially passing through AIG to make whole private businesses and foreign banks. Yet it was concern over the risk of a cascading series of bank failures, both in the U.S. and abroad, that spurred the government to consent to an emergency rescue plan. Fears of financial stress at U.S. municipalities was another worry.

Oh, yeah, the latest bonus round of the unfolding scandal: The AIG unit that Lieber focused on in his January 28 piece as a key to AIG's meltdown is certainly being made whole. The WSJ notes:

AIG has been shelling out large sums elsewhere. On Sunday, new criticism emerged about $450 million in bonuses paid to employees of AIG's Financial Products unit, which made a series of bets on credit default swap contracts that drove $40.5 billion in losses last year.