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Hurricane AIG

Scott Jagow Mar 18, 2009

As I’ve pointed out the last couple days, I worry that the whirling dervish of AIG’s bonuses might be diverting our attention from issues more critical to the economic recovery. So I’d like to veer your attention for a moment to an article written by Eliot Spitzer.

Yeah, I know. Who cares what this guy has to say? Still, it’s a bad idea to dismiss an opinion based solely on the character of the person who’s giving it.

In a Slate column, Spitzer says the real question we should be asking about AIG is this: “Why are AIG’s counterparties (like Goldman Sachs and other banks) getting paid back in full, to the tune of tens of billions of taxpayer dollars?”

Why did Goldman have to get back 100 cents on the dollar? Didn’t we already give Goldman a $25 billion capital infusion, and aren’t they sitting on more than $100 billion in cash? Haven’t we been told recently that they are beginning to come back to fiscal stability? If that is so, couldn’t they have accepted a discount, and couldn’t they have agreed to certain conditions before the AIG dollars–that is, our dollars–flowed?

The appearance that this was all an inside job is overwhelming. AIG was nothing more than a conduit for huge capital flows to the same old suspects, with no reason or explanation.

I think Spitzer’s spot on. We have been given no reason or explanation other than, it’s necessary. Here’s what AIG CEO Edward Liddy says in a Washington Post column today:

Although we have wound down more than $1 trillion in the portfolio of the AIG Financial Products unit that is at the root of the company’s troubles, there remains substantial risk in that portfolio. The financial downside for taxpayers is potentially very large, and that’s why we’re winding down this business.

Taxpayers should know that the government’s assistance to AIG has had a beneficial effect. The assistance has provided stability to the company and to the entire financial system.

But exactly how has it helped and where? I want transparency. Answer the questions, Mr. Liddy (and Mr. Geithner). Why did Goldman have to get 100% of its money back? Shouldn’t the bank share the risk and the failure, considering the taxpayer bailout?

What did the banks know about AIG’s condition when they took out insurance on credit default swaps? Was there any due diligence? Is there any now, by the government, about these transactions?

Seems to me this is like the aftermath of Hurricane Katrina. Thousands of people were denied claims because the insurance companies said they had the wrong kind of coverage. They had insurance, it just didn’t do anything for them. In that case, like in this one, the government stepped in financially, but those people weren’t made whole by any stretch.

These banks shouldn’t be either. We need to think of this as a comprehensive solution. I like Time’s article this week on why AIG could be allowed to fail:

Regardless of the details of the various swap contracts, they all represent potential transfers of wealth between financial institutions. If we consolidated the entire financial sector, all these debts would effectively vanish.

Tonight on Marketplace, what else we’re missing because of all the attention on AIG’s bonuses.

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