A funny thing--the American taxpayer is up in arms about millions going to AIG individuals, but doesn't care about billions--BILLIONS!!--going to those who bought AIG CDSs (Credit Default Swaps), perhaps knowing that AIG could never pay.
Barry Ritholtz of "The Big Picture" financial blog has a great interview about it here.
You should listen to the whole interview but the gist of it is, "You're worried about millions--how about 100s of Billions going to bad players!!"
The greatest crimes are achieved by making people believe they solved the crime.
Today, The New York Times summarizes the story, with a tepid lead--
Members of Congress and the New York State attorney general demanded detailed information Thursday on how tens of billions of taxpayer dollars flowed through the American International Group during its crisis last fall and ended up in the coffers of several dozen big banks, shielding them from losses.
But they never get at the root of the story, perhaps better posed by Eliot Spitzer's March 17 column in Slate, most essentially, his questions::
--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?
Questions.
Here are some blunt facts behind the questions (what Spitzer implies, but cannot say directly):
- The secretary of the Treasury at the time, Hank Paulson, was the former CEO of Goldman Sachs. During his tenure at Goldman, they levered up and bought a lot of bad CDOs (Commercial Debt Obligations).
- Hank Paulson, former Goldman CEO, basically saved Goldman from the bad decisions during his tenure by saving AIG.
- We don't really know whether Goldman actually bought AIG's CDS's as insurance or just as a "good market bet." That is, we don't know whether these CDS's (and the saving of AIG) was actually because Goldman was at risk, or just because Goldman had a position to make a profit.
Follow up Question: Is this a conflict of interest?
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Alternate Reality: The Madoff Investors
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Contrast this situation with the all-too-real alternate reality of the Madoff investors:
Madoff
Madoff Investors bought into a Ponzi scheme that they too willingly believed to be real. Their investments proved to be mere paper. As such, they collectively lost billions. Perhaps they will gain a small bit of what they orginally invested, but not the gains.
AIG Counter-Parties
AIG CDS investors bought into a scheme that they might have believed to be real. Perhaps also, they didn't actually beleive that it was real. This is a consideration that needs to be considered: Perhaps they just thought that AIG would go bankrupt, and they would obtain their assets during bankruptcy.
Contrasting the Result
Obviously, there is a large disparity between the way the investors in Madoff have been treated and those of AIG
But, let's say for instance, that an institution, or an individual, knew that AIG didn't have the capital to pay off their credit default swaps. CDS's are traded, and if an institution wanted to, they could just invest by just buying the CDS's of AIG in the hope of becoming a creditor during AIG's bankruptcy: The result would be that they could be a creditor of AIG during a bankruptcy proceeding.
AND THEN . . . . .
BINGO! BINGO!! BINGO!!!
TREASURY, HEADED BY HANK PAULSON, FORMER GOLDMAN CEO, CHOOSES TO PAY ALL AIG CDS CONTRACTS 100 CENTS ON THE DOLLAR!!!
REPEAT: TREASURY, HEADED BY HANK PAULSON, FORMER GOLDMAN CEO, CHOOSES TO PAY ALL AIG CDS CONTRACTS 100 CENTS ON THE DOLLAR!!!
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Can you see there might be something wrong here???
I mean, yes, I take Fed Chairman Ben Bernanke at his word when he says that AIG posed system risk (AIG's insurance division actually bought CDSs, and Ben implied that a default could have promulgated a run on insurance contracts.)
But BILLIONS, BILLIONS, go to Goldman from a company (AIG) that should have just gone bankrupt?
DO YOU SEE THE SCANDAL HERE!!:? DO YOU SEE BILLIONS, BILLIONS, BILLIONS, AS OPPOSED TO MILLIONS?!
THE TRUE SUCKER IN THE AIG SCANDAL (AND I MEAN I SUCKER WHO IS GOING TO PAY FOR THE REST OF THEIR LIFE THROUGH TAXES). IS THE ONE WHO BELIEVES THAT AIG IS ABOUT MILLIONS PAID TO AIG EMPLOYEES!!!
IS THAT YOU DAILY KOS MEMBER!!!
PENNY-WISE, POUND FOOLISH!!
MADOFF INVESTORS ARE CURING YOU!!!