US tax dollars at work - AIG Total paid to foreign institutions = 58 Billion!!!

And WHY isn’t the focus of the press on THIS?????

This is FAR more important than the bonus pay....

And WHY isn’t the focus of the press on THIS????? This is FAR more important than the bonus pay....

Because the self-hating Liberals control the press, I dis watch (on TV) one republican rep. raising the issue... but he was dismissed by the panel.

We’re bailing out Europe?

Tip of the iceberg, I’m sure.

There was a brief story on this last Sunday night, but by the next morning, the story had been pulled.

Of course money was sent to banks by AIG. They were honoring the Credit Default Swaps they wrote.

We can argue about the bailout, but the fact that AIG sent money overseas isn’t a story.

Just like AIG was honoring contracts with employees by paying bonuses, AIG is also honoring the Credit Default Swaps they wrote.

End of story.

WTF is AIG doing propping up all those Foreign banks???

Now, I am realllllly p*ssed!!!

I wonder how much our sweet Turbo-Tax Timmy has set aside for himself as past of this sweetheart deal??

If even a mere 1% commission he's garnered a mere $650 Million for himself.

WTF is AIG doing propping up all those Foreign banks???

AIG is a multi-national company doing business in 130 different countries. Why is it a surprise that the counterparties to their CDS are outside of the US. The major FP office that caused their demise is in London.

This whole “AIG money going to foreign banks” hysteria has got to stop. It is deflecting attention from little things like stimulus packages, grotesque budgets, China having reservations about buying any more of our debt, the Fed monetizing our debt, GDP shrinking while debt as a percentage of GDP climbs, nationalizing health care and incipient runaway inflation.

"Because the self-hating Liberals control the press,...

Liberals aren't "self-hating." They love themselves and government to the extreme. Liberals HATE AMERICA, traditional Christian morality, conservatives, the free enterprise economic system, the right to self defense, private property, free speech and a host of other individual human rights and liberties. They're totalitarian to the core of their being.

I agree. The one possible good that may come from this whole fiasco is that the Dems are now fully exposed to the world for what they truly are.

In their over-exuberance and zeal to grab power they arrogantly put aside all pretense of respect for the Constitution and the American people. Only time will tell whether this will be remembered in 2010, 2012. I for one plan to remember and to encourage others to do the same.

Diversion Folks. While all this was playing out on AIG. The Fed’s Printed $1.3 trillion dollars to buy our debt from foreign governments! Wed Mar 18,2009. That’s why the Stock market went down Thur and gold shot up and the dollar went down against other currency’s!

AIG is buying back credit swap contracts!

Because they have to honor there Credit default swaps!

I have seen several people mention their concern over the fact that bailout money given to aig has been paid by AIG to meet their obligations to international financial institutions. These payments by AIG, which also went to many domestic institutions, were made due to contractual obligations; primarily derivatives contracts known as credit default swaps. Some people have expressed their opinion that they think we would have been better off letting AIG go into default by not honoring their contracts to their foreign partners, which would potentially drive them into bankruptcy. Keep in mind that AIG’s total exposure to derivatives is in the neighborhood of $1.5 trillion. That is not what they owe right this second, but that is what they would owe if everything went bad all at once.

I am going to begin by giving a very stripped down general explanation of how a credit default swap works (this will help you better understand the implications later on, but you can skip this paragraph if you don’t want the gory details). Bank A makes a loan to a customer. The loan receivable is on bank A’s books as an asset. Bank A wants to hedge their exposure to the risk of their customer defaulting on the loan, something that they consider to be 10% probability. So, if the loan was for $100, it is on their books at $100, net of a $10 reserve, for a total asset value of $90 reflecting the 10% probability of default. In order to hedge their exposure to the risk of default, they enter into a contract with another company, AIG in this case, where bank A makes payments to AIG (let’s say $10) in exchange for the right to receive $100 in the event of their customer defaulting. The right for bank A to receive that payment is on their books as an asset, initially at $10. The value of that asset rises as the customer becomes more likely to default. So, let’s say the customer’s probability of default goes from 10% to 20%. The bank’s loan receivable on their books is still at $100, but the reserve increases to $20, so the net loan receivable is now $80. However, due to the customer becoming more likely to default, the value of the credit default swap receivable from aig is now worth $20 on their books. The rise in the value of the credit default swap on their books offsets the decrease in the value of the net loan receivable on their books. Conversely, on AIG’s books, they initially had a liability for $10 related to the credit default swap payable to bank A. As bank A’s customer became more likely to default, the value of that liability on aig’s books also rose to $20. Although an extremely generic example, this is the principal of how it works. NOTE: bank A and AIG are now considered counterparties to the credit default swap.

If bank A’s customer defaults, they don’t care a whole lot, because they will receive payment from aig. These derivatives, generally speaking, brings a lot, and i mean A LOT, of stability to our financial system and in fact protects the value of a lot of assets that aren’t even directly related to the derivative contract. However, these derivatives create substantial systemic risk in the event of massive simultaneous defaults, especially when the total potential exposure of a financial institution far exceeds their assets.

OK. AIG has these contracts with financial institutions here in the US, as well as around the world. (they also have all sorts of other derivatives and investments contracts, but i am trying to keep it simple.) First of all, even if aig did not directly honor their contracts with foreign counterparties, some of the money would still end up there. This is how: AIG would make their contractual payments to domestic banks. Those domestic banks also have contractual obligations to foreign institutions. due to the fungible nature money, when the American bank receives money from AIG, it goes into a big pot of cash at the American bank, out of which funds are drawn by the American bank to pay their contractual obligations to foreign institutions. Really, it’s not something we can prevent.

But, let’s say the government tried to prevent it by forcing AIG to breach all of their contracts with foreign counterparties. However, if the government wants to stop bailout money going to foreign banks, they also have to prohibit ALL domestic financial institutions from honoring their contracts with foreign counterparties and trading partners if those american banks received bailout funding.

this is what would happen next:

AIG and American banks dishonor their obligations to all foreign banks. Foreign banks, in turn dishonor their obligations to our banks. You are now getting into a whole lot more territory than just credit default swaps. You are getting into other derivatives including foreign exchange contracts, interest rate swaps, commodities related derivatives, as well as contracts related to normal investments. Really, at this point, most banks are already facing bankruptcy. in general, derivatives contracts are highly protected under bankruptcy law. In essence, if a company goes into bankruptcy and they have derivatives contracts, their counterparties can cease assets to the extent that the bankrupt company owes them money. You don’t get out of derivatives contracts very easily. Do i need to go any further?

Ok, i will anyway. Let’s say the banks did it anyway.

Asset values on the books of financial institutions (as well as many non-financial institutions) are dependent on the guaranteed flow of these funds based on the terms of the contracts. If it becomes unlikely for the institution to receive their payments from these contracts, they have to write down the value of those assets. So, you would have a massive simultaneous writedown of global assets. The immediate direct effect of this would be significant stock price declines of all banks involved. Indirectly, this would lead to significant declines throughout the entire stock market. Banks hold significant investments in many stocks (including foreign AND domestic companies). As these stock prices decline, they also reduce the value of the investment assets on the banks’ books. BOOM. You now have more writedowns, and additional stock market declines.

Imagine that cycle happening a few times and the increasing effects with each iteration of that cycle.

OK, another slice of the pie. This is not a one sided issue.

Now, remember, in addition to that catastrophic cycle, the markets are ALREADY goofed up pretty good.

Also, and this is the ultimate key, remember at the time of the initial aig bailouts last year, many banks were failing due to bank runs...customers were pulling their cash out of the banks so quickly that the banks could not survive and many were failing. Now, imagine the fear that would have hit the market (globally) if the cycle that i just described above happened along with the events that were already taking place last september. Now you have more fear in the market leading to more bank runs leading to more bank failures.

Not good.

OK. Another slice of the pie. Remember, this is not a one sided issue.

Remember when i said that foreign banks would stop paying their obligations into the us. A lot of foreign banks are counterparties to what are known as interest rate swaps (and various other derivatives) in the United States. (in essence, we give them a lot of credit default swaps and they give us a lot of foreign exchange contracts and a lot of interest rate swaps). Interest rate swaps help businesses reduce their exposure to changes in interest rates on the debt that they owe to banks. If businesses hold interest rate swaps and their counterparty becomes unlikely to pay, they have to write down the value of their interest rate swap. In addition, this scenario, due to debt covenants (requirements that businesses are subject to related to the debt that they owe), many companies would go bankrupt if the counterparties to their interest rate swaps simultaneously decided to dishonor those contracts. (sure, the banks could give the companies temporary reprieve from those debt covenants, but guess what...those banks now have to write down their assets even more.) BOOM. More bankruptcies. More stock market declines. More write offs on the banks’ books because they hold investments (stocks and bonds) in these companies as assets. Now throw in increased layoffs from these companies. This would only make it more probable for significant loan defaults to occur. This would require the financial institutions, including aig and others, to pay out on even more credit default swaps. guess what: those financial institutions are out of cash. System fail.

OK...one more aspect...

GM also received bailout funds. They have a lot of foreign suppliers. Guess what, GM paid those foreign suppliers with bailout funds as well. If GM were prohibited from paying their suppliers, some (or many) of them would likely go bankrupt. Guess what, most car manufacturers depend on these same suppliers. Bye bye vroom vroom industry. Now, think of everything that depends on the auto industry.

This scenario would be like sucking all of the oil out of a worn-out machine. A shaky financial system would come to a grinding halt and fail. In all reality, all of the direct and indirect consequences would take pages and pages and days and days to fully explain. Even in the events that i have described above, i have omitted a lot of detail for the sake of your reading pleasure. I have basically tried to give the simplest explanation possible of what would happen. However, hopefully you get the point.

If you don’t, the outcome would not be good. Regardless, it’s not really an option anyway. Counterparties to derivatives contracts are highly protected. If a company defaults on their derivatives obligations, their counter parties have extraordinary power to cease collateral from the defaulting company.
I could go on for hours about this. Actually, i could go on for days. Basically, i think that no longer honoring any financial contracts with foreign institutions would create a ripple through our system so strong that we would have something called global economic collapse. It’s simply not worth this just to prevent bailout money from indirectly going to a foreign company. fortunately, it’s not even possible in the first place.

Clients of Banco de Santader, of Spain, lost more than 2 billion in the Madoff fraud. Moreover, last fall, Venezuelan leader Chavez nationalized its branch there. Although it was broke, he paid 1.2 billion: a big contribution from the Venezuelan people to aliviate the credit crunch.

Among the main shareholders of Banco de Santander is JP Morgan. Chavez indeed knows who must favour.

And one wonders if they will blame the results of all their horribly INEPT actions on ____________ (insert any name other than their names).

It’s my understanding that had Hank Greenburg not been hounded out of running AIG, there’s a good chance a lot of this wouldn’t have happened.

Supposedly, Greenburg was against writing a lot of CDS’s, simply because Greenburg didn’t believe in “putting all your eggs in one basket.”

For what it’s worth.