Posted on 10/17/2014 8:10:42 AM PDT by Lorianne
To understand the backstory, let’s take a quick look at AIG’s role in the housing bubble. Broadly speaking, AIG sells insurance, and one of its divisions (AIG Financial Products) sold a very specific type of insurance called a credit default swap. If you were a big bank and you owned a mortgage backed security (stuffed into a collateralized debt obligation, or CDO), you could buy a credit default swap against the possibility that the security would default. Then, because you owned this insurance, whatever that security might contain, be it good loans or the most toxic dreck imaginable, it was as good as gold. Default? No problem, AIG had you covered. The problem was that AIG covered everyone in the market (well not everyone, but a lot of the big players especially Goldman) so while the company had a really big balance sheet, it ended up being liable for sums that were larger than the amount of capital the parent company could access. There were other serious problems at AIG, such as its securities lending operation, but those aren’t as relevant to the story. And yes, technically speaking, a credit default swap wasn’t legally considered a type of insurance, it was considered a ‘derivative’. But that was just a legal fiction so that insurance regulators, who would have forced AIG to hold enough money to back its bets, couldn’t touch the company. A credit default swap is insurance.
So anyway, AIG blew up because it guaranteed an entire collapsing market of mortgage-backed securities. The Federal Reserve came in and pumped money into the company, for fear of the whole system collapsing.
We have already learned a few interesting facts about AIG (courtesy of Yves Smith). First of all, we learned that AIG didn’t necessarily need to be bailed out by the United States government. There were two and a half offers on the table to recapitalize the insurance company. One came from China, which offered to buy parts of the company. Paulson prevented this from happening. We don’t know why, though it could be due to national security concerns (rumors of AIG being heavily involved with the CIA have always floated around). The second offer came from rich Middle Eastern investors, represented by Senator Hillary Clinton (through her friend Mickey Kantor). This didn’t happen either, and again, we don’t know why. Could be national security. But the third offer suggests otherwise. The New York financial regulator offered to let AIG dip into $20 billion of capital it had in an insurance subsidiary, but Geithner said the company didn’t need it. You heard that right — Geithner turned down an internal recapitalization of AIG. $20 billion wasn’t enough to plug the hole, but it wouldn’t have hurt.
There’s more funky stuff that went on. The board of AIG was never even shown the term sheet for the bailout by the government, and the board only approved it because their lawyer — superlawyer Rodge Cohen —made a dramatic reversal of his legal position. Cohen at first told the board that a bankruptcy was a reasonable option, but a few days later he said that if the board chose bankruptcy rather than the government offer, sight unseen, the board members could be personally liable. At the same time, Cohen was also representing AIG counterparties, and was informally advising the government. Whoa there.
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AIG should have been put down at the time. Still should be.
The bailouts were further proof (as if we needed it) the U.S. is an oligarchy that preaches capitalism but really does not practice it.
The bailout scenario makes about as much sense as Karl Rove covering up the Iraqi WMD’s.
In hindsight, something about the Bush Administration reeked to high heaven.
I read a fews back (2009?) that AIG was bailed out for the simple reason that ALL Congress members (past and present) had their PENSIONS with AIG (among stock options).
That’s what I heard about AIG . . .
burn it down
End the Federal Reserve and prosecute the federal agents involved in the bailout.
Hank Greenberg was pushed out of AIG by the board, a company he built into the financial powerhouse that it was, because he objected to insuring the CDOs. The new management went into the business whole hog.
Hank isn’t going away quietly.
Hank Greenberg Challenges AIG Bailout
Financial Crisis Moves by New York Fed, Government to Shore Up Insurer at Center of Trial
http://online.wsj.com/articles/hank-greenberg-challenges-aig-bailout-1411941174
The cozy relationship between AIG and Goldman Sachs is the real place to look.
Yep.
” The cozy relationship between AIG and Goldman Sachs is the real place to look.”
And you don’t have to look very hard, either.
Of course revisionism is in full swing these days and per the meme it's Greenberg who gets the blame for pushing those bad bad CDO instruments down AIG's throat.
Let’s go back in the memory machine since the press is to incompetent to make the effort:
1) Lehman Brothers was allowed to burn, FED said we shall not bail out anyone period. Lehman Brothers sold for pennies on the dollars to the Wall St. insiders.
2) Goldman Sachs met with FED behind closed doors the following day, “Dude, we got 20 Billion that is going to go up in smoke because AIG can’t cover the bets on the mortgage insurance”.
3) FED forces sight unseen bailout of AIG, which makes Goldman Sachs whole.
4) AIG guys are in court because this was a hijack of there company by the government per Goldman Sachs.
It is not good enough to be a crony capitalist oligarch, you have to have the right connections to be picked the winner by the FED. Lehman Brothers and AIG did not. Goldman Sachs did. That is how this has played out.
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