During the Second World War, US GIs had a phrase that they liked to use to describe a shitty situation: SNAFU (Situation Normal All Fucked Up)
It seems like a pretty apt description of the banking system that deregulation has given us. I'd like to try to break down for you guys just how fucked up the situation is right now, and put things into perspective. I know that there is already a diary up, but there's a great deal more to be said.
SNAFU
Getting straight what the NY Times reported is important to understand this whole situation.
Financial companies that received multibillion-dollar payments owed by A.I.G. include Goldman Sachs ($12.9 billion), Merrill Lynch ($6.8 billion), Bank of America ($5.2 billion), Citigroup ($2.3 billion) and Wachovia ($1.5 billion).
Big foreign banks also received large sums from the rescue, including Société Générale of France and Deutsche Bank of Germany, which each received nearly $12 billion; Barclays of Britain ($8.5 billion); and UBS of Switzerland ($5 billion).
A.I.G. also named the 20 largest states, starting with California, that stood to lose billions last fall because A.I.G. was holding money they had raised with bond sales.
To be clear, like most derivatives operations, the one at AIG was a tiny fraction of the total operation in terms of employees, less than 4/10ths of 1%, but a huge part of the companies income in good years. Compensation to this small group generally was in excess of $1 million per employee.
In addition to the story, the NY Times provides a a copy of the press release listing counterparties paid until the end of 2008. That's right, this is the amount paid out in the quarter between September and December 2008. It doesn't include any payments made this year. It's easiest to break it out with the graphs from this document. As I read it, AIG is saying that all the payments listed were made using funds provided by the US government.
In reference to the payments made to banks there are three different categories of funds that were disbursed. I've placed them all together below, and listed the country in which the bank is headquartered.
Bank Amount Paid (Bil USD) Country
Goldman Sachs 12.9 United Sates
Soceite Generale 11.9 France
Deutsche Bank 11.8 Germany
Barclays 8.2 United Kingdom
Merill Lynch 6.8 United States
Bank of America 5.2 United States
UBS 5.0 Switzerland
HSBC 3.5 United Kingdom
Dresdner Kleinwort 2.2 Germany
Calyon 2.1 France
DZ Bank 1.7 Germany
Wachovia 1.5 United States
ING 1.5 Netherlands
Morgan Stanley 1.2 United States
Bank of Montreal 1.1 Canada
RaboBank 0.8 Netherlands
Royal Bank of Scotland 0.7 United Kingdom
AIG International Inc. 0.6 United States
KFW 0.5 Germany
JP Morgan 0.4 United States
Dresdner Bank AG 0.4 Germany
Credit Suisse 0.4 Switzerland
Banco Santander 0.3 Spain
Danske 0.2 Denmark
Paloma Securities 0.2 United States
Citadel 0.2 United States
Landesbank BW 0.1 Germany
Total Specified 81.4
Unspecified 4.1
Total 85.0
An interesting way to look at this is to ask how much of this $85 billion actually stayed in the US.
Country USD(BIL)
United States 29.0 (34%)
Germany 16.7 (20%)
France 14 (16%)
United Kingdom 12.4 (15%)
Switzerland 5.4 (6%)
Netherlands 2.3 (3%)
Canada 1.1 (1%)
Spain 0.3 (>1%)
Denmark 0.2 (>1%)
Unspecified 4.1 (5%)
Now, compare this with the payments made by AIG to US states under Guaranteed Investment Agreements (GIAs).
A billion dollars is no small amount, but there's something disconcerting about the fact that the payments made to all states is less that the amount paid out to banks in the UK, France, and Germany, each.
Further, there's a math issue here, because AIG has been loaned $85 billion, all of which is accounted for by payments made to banks that are counterparties to CDS contracts.
The way that a CDS contract works is that the insurer, in this case AIG, guarantees the value of an asset, and the counterparty pays what is essentially an insurance premium on to the other bank. So this means that AIG now owns whatever it was that all these banks had insured. Which effectively means that the US government now owns whatever these assets are.
It may well be that these foreign banks held US mortgages that went south, however Ireland, the UK, and Spain all have had their own real estate busts in recent years, and it's likely that some portion of these assets are located in Europe. Which means that US taxpayers have likely bailed out European banks holding at least some assets in Europe. Which raises an important question.
Why aren't European governments being asked to front cash if this is the case?
We live in a globalized economy, and this debacle shows one of the huge downsides to this, but it's ridiculous that the US government is bailing out banks in Europe without reciprocation.
We need a global plan to deal with these CDS contracts.
First, they need to be regulated like any other type of insurance. And their use for anything other than interest and currency swaps should be banned.
Second, there really needs to be an international solution in which the national governments of affected banks all accept financial responsibility for their national banks.
Basically, we have to either rebuild national financial borders, or we have to rebuild the financial system so that nation's have control, and responsibility, for their corporations.