[Marxism] Spitzer on the real AIG scandal

Marv Gandall marvgandall at videotron.ca
Mon Mar 23 05:38:56 MDT 2009


The Real AIG Scandal
It's not the bonuses. It's that AIG's counterparties are getting paid back
in full.
By Eliot Spitzer
Tuesday, March 17, 2009

Everybody is rushing to condemn AIG's bonuses, but this simple scandal is
obscuring the real disgrace at the insurance giant: Why are AIG's
counterparties getting paid back in full, to the tune of tens of billions of
taxpayer dollars?

For the answer to this question, we need to go back to the very first
decision to bail out AIG, made, we are told, by then-Treasury Secretary
Henry Paulson, then-New York Fed official Timothy Geithner, Goldman Sachs
CEO Lloyd Blankfein, and Fed Chairman Ben Bernanke last fall. Post-Lehman's
collapse, they feared a systemic failure could be triggered by AIG's
inability to pay the counterparties to all the sophisticated instruments AIG
had sold. And who were AIG's trading partners? No shock here: Goldman, Bank
of America, Merrill Lynch, UBS, JPMorgan Chase, Morgan Stanley, Deutsche
Bank, Barclays, and on it goes. So now we know for sure what we already
surmised: The AIG bailout has been a way to hide an enormous second round of
cash to the same group that had received TARP money already.

It all appears, once again, to be the same insiders protecting themselves
against sharing the pain and risk of their own bad adventure. The payments
to AIG's counterparties are justified with an appeal to the sanctity of
contract. If AIG's contracts turned out to be shaky, the theory goes, then
the whole edifice of the financial system would collapse.

But wait a moment, aren't we in the midst of reopening contracts all over
the place to share the burden of this crisis? From raising taxes—income
taxes to sales taxes—to properly reopening labor contracts, we are all being
asked to pitch in and carry our share of the burden. Workers around the
country are being asked to take pay cuts and accept shorter work weeks so
that colleagues won't be laid off. Why can't Wall Street royalty shoulder
some of the burden? 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.

So here are several questions that should be answered, in public, under
oath, to clear the air:

    What was the precise conversation among Bernanke, Geithner, Paulson, and
Blankfein that preceded the initial $80 billion grant?

    Was it already known who the counterparties were and what the exposure
was for each of the counterparties?

    What did Goldman, and all the other counterparties, know about AIG's
financial condition at the time they executed the swaps or other contracts?
Had they done adequate due diligence to see whether they were buying real
protection? And why shouldn't they bear a percentage of the risk of failure
of their own counterparty?

    What is the deeper relationship between Goldman and AIG? Didn't they
almost merge a few years ago but did not because Goldman couldn't get its
arms around the black box that is AIG? If that is true, why should Goldman
get bailed out? After all, they should have known as well as anybody that a
big part of AIG's business model was not to pay on insurance it had issued.

    Why weren't the counterparties immediately and fully disclosed?

Failure to answer these questions will feed the populist rage that is
metastasizing very quickly. And it will raise basic questions about the
competence of those who are supposedly guiding this economic policy.

*    *    *

The Real AIG Scandal, Continued!
The transfer of $12.9 billion from AIG to Goldman looks fishier and fishier.
By Eliot Spitzer
Sunday, March 22, 2009

The AIG scandal is getting ever-more disturbing. Goldman Sachs' public
conference call explaining its trading relationship and exposure with AIG
established once again that Goldman knows how to protect itself. According
to Goldman, even if AIG had failed, Goldman's losses would have been
minimal.

How did Goldman protect itself? Sensing AIG's weakening capital position
through 2006 and 2007, Goldman demanded more collateral from AIG and covered
outstanding risk with instruments from other firms.

But this raises two critical questions. The first is why did $12.9 billion
of taxpayer money go from AIG to Goldman? What risk—systemic or
otherwise—was being covered? If Goldman wasn't going to suffer severe
losses, why are taxpayers paying them off at 100 cents on the dollar? As I
wrote earlier in the week, the real AIG scandal is that the company's
trading partners are getting fully paid rather than taking a haircut.

Goldman's answer is that it was merely taking a commercial position—trying
to avoid any losses at all on its AIG positions. I suppose we can hardly
expect Goldman to reject government assistance in the form of pure cash that
seems to have had no strings attached.

But what were the government officials possibly thinking? The only rationale
for what we should call the "hidden conduit bailout" to AIG's trading
partners is that the cascading effect of AIG's inability to pay would have
been devastating. But Goldman has now said very clearly there would have
been no cascade. Not even a ripple.

Is the same true of AIG's other counterparties, including several foreign
banks? What examination of the impact of an AIG failure did federal
officials undertake before making their decision to spend countless billions
bailing out AIG and its trading partners?

The government decision to bail out AIG was made after the private parties
supposedly at risk had declined to structure a private series of investments
that might have avoided the need for use of public money. Perhaps they knew
the impact of an AIG default would be small, or perhaps they knew that the
federal officials in the room would blink and ante up. In a post-Lehman
moment when panic not reason was dominating the discussion, perhaps they
figured they could walk away with extra billions—and indeed they did.

This issue cries out for immediate government inquiry. Maybe one or two of
the more than two dozen government entities now beating their chests about
bonuses can redirect their energies to this much larger issue confronting
us: Who signed off on this $80 billion bailout—now approaching $200
billion—and why?

The second question, of course, is why was Goldman wise to AIG's declining
position two years ago, but nobody else appears to have known? There is
always the operating premise that Goldman is better than the rest in the
field, but where were the federal agencies that should have been taking a
look at AIG's leverage situation and general financial health?

And were AIG's public statements accurate in revealing a decline? Or did
Goldman, with its multiple trading relationships with AIG, get an early
warning? This series of questions also demands immediate inquiry and
resolution.

What continues to be fundamentally disappointing is that the "too big to
fail" institutions continue to absorb enormous sums of taxpayer support
without either demonstrating the genuine need for such support, or altering
their behavior after receiving it.

After getting $12.9 billion in what now seems to be a mere gift, has Goldman
begun to lend in a way that will restore the credit markets? Were they asked
to do so?

It is time the government realizes it has two simple options: tightly
regulate entities that are too big to fail, or break them up so they aren't.

Eliot Spitzer is the former governor of the state of New York.






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