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Fallout: The Financial Crisis

Where is AIG spending that money?

Jeremy Hobson Mar 16, 2009
Fallout: The Financial Crisis

Where is AIG spending that money?

Jeremy Hobson Mar 16, 2009


Kai Ryssdal: And alright, they’re not all fat bonuses. Some of the folks at the AIG Financial Products unit — the group that’s largely been responsible for taking that company down — are getting as little as $1,000. Others, though, are getting way, way more than that. And this morning the president took the opportunity to make his position on the behavior of a firm that the government owns 79.9 percent of perfectly clear. And he got in a quick plug of support for his Treasury secretary, too.

PRESIDENT OBAMA: In the last six months AIG has received substantial sums from the U.S. Treasury. And I’ve asked Secretary Geithner to use that leverage and pursue every single legal avenue to block these bonuses and make the American taxpayers hopeful. I want everybody to be clear that Secretary Geithner’s been on the case. He’s working to resolve this matter with the new CEO Edward Liddy, who, by the way, everybody needs to understand came on board after the contracts that led to these bonuses were agreed to last year.

That is not to say Ed Liddy gets off scot free. New York State Attorney General Andrew Cuomo said late this afternoon Liddy has missed the deadline for providing answers to the bonus questions he’s looking for. Subpoenas almost certainly to follow. And we will have more on extra pay for AIG employees in just a couple of minutes.

But that $450 milllion in bonuses is really just a fraction of the other spending that AIG has been doing. In the last three months of last year, AIG paid out about $120 billion to banks and other institutions to make good on its obligations. Consider, for a second, that the total federal bailout for AIG so far is worth $170 billion. And it does kind of raise the question of where all the money’s going and why? Marketplace’s Jeremy Hobson’s been following that story for us from New York today.

Hi, Jeremy.


Ryssdal: We start, I suppose, with the banks because those are the big dollar amounts. AIG is sending or has sent, I suppose we ought to say, taxpayer money to banks that have themselves also received taxpayer money, Goldman Sachs, Bank of America, we all know the cast of characters here. The question, though, has to be why?

HOBSON: Well, it’s mostly AIG’s signature product, these credit-default swaps, these are insurance contracts, mostly against mortgage-related investments. Now as the investments go bad, as they get worse, AIG has to put up more capital, something they also have to do, by the way, when their own rating drops, so it’s sort of like a margin call. Your broker calls you and says your stock is down, I need more money to make sure you’re good for it, and these collateral calls, as they’re called in this case, have added up to $22 billion between September and December of last year.

Ryssdal: OK, but even though AIG is an insurance company, as we’re often reminded, it’s not as like this is happening because this is an insurance company, right? I can’t call my health insurance company and say, listen I don’t really think you’re good for my surgery I have coming up, so show me you’ve actually got the money in the bank, right?

HOBSON: Right, and here is why it’s different. Normally, insurance companies have capital requirements. They’re regulated. But in this case, AIG is not regulated in selling these credit-default swaps. These were a product, a financial product, that were not within the realm of regulation, and therefore companies that wanted to get into agreements with AIG said we want a little bit of an extra guarantee to make sure that you’re going to be good for this, and so they write these collateral-call provisions right into the contracts.

Ryssdal: And we’re not done, sadly, with AIG, when we’re done talking about banks, are we?

HOBSON: No, we’ve got the securities-lending business, it lost $42 billion, which it had to pay out to clients, and billions more, AIG decided, Well, you know what, these mortgages are never going to turn around, so let’s just rip up some of these credit-default swaps and buy the mortgages outright.

Ryssdal: Let’s pick up on that rip-it-up analogy here for a second. Why can’t AIG, which is receiving taxpayer money, and the banks or whoever else is on the other side of this credit-default swap, also receiving taxpayer money, why can’t they agree to just cancel the contract. Rip it up. That way nobody is out any money. And everybody has more time to let the markets stabilize, let the economy come back, and maybe we wouldn’t need the transaction anyway.

HOBSON: Right. That would be great. But right now time is money. And the banks don’t have either, they have to pay their own counterparties. Remember these are credit-default swaps that were hedges against very complicated investments that have been chopped up, packaged up and sold all over the place. So the banks may well have people knocking on their doors looking for money. Think of it this way, Kai: There is only guy on the block who is not broke and out of the job and that’s Uncle Sam. And he’s got a nice, big printing press in his backyard, and that’s why he’s paying for everybody else’s mortgages.

Ryssdal: Yeah, that’s right. One of the hallmarks of AIG throughout this whole episode has been that they keep coming back. I think we’re on their third or fourth revisit on their loan and guarantee from the government. Any clue or any sign that this would be the end of it?

HOBSON: No, probably not. You’ve got a lot of credit-default swaps that have not been a problem so far on things like residential mortgages in Europe, on corporate debt and as the economy as gotten worse and worse over the past few months, these have started to look shaky now too, and they may require collateral calls in the months ahead.

Ryssdal: More to come then on AIG. Marketplace’s Jeremy Hobson in New York. Thank you, Jeremy.

HOBSON: Thank you, Kai.

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