1 Boring Old Man

Top U.S., European Banks Got $50 Billion in AIG Aid
Wall Street Journal
By SERENA NG and CARRICK MOLLENKAMP

The beneficiaries of the government’s bailout of American International Group Inc. include at least two dozen U.S. and foreign financial institutions that have been paid roughly $50 billion since the Federal Reserve first extended aid to the insurance giant. Among those institutions are Goldman Sachs Group Inc. and Germany’s Deutsche Bank AG, each of which received roughly $6 billion in payments between mid-September and December 2008, according to a confidential document and people familiar with the matter.

Some banks that were paid by AIG after it was bailed out by the government Goldman Sachs Deutsche Bank Merrill Lynch Société Générale Calyon Barclays Rabobank Danske HSBC Royal Bank of Scotland Banco Santander Morgan Stanley Wachovia Bank of America Lloyds Banking Group Source: WSJ research

Other banks that received large payouts from AIG late last year include Merrill Lynch, now part of Bank of America Corp., and French bank Société Générale SA. More than a dozen firms with smaller exposures to AIG also received payouts, including Morgan Stanley, Royal Bank of Scotland Group PLC and HSBC Holdings PLC, according to the confidential document…

Lawmakers Want Names

The AIG bailout has become a political hot potato as the risk of losses to U.S. taxpayers rises. This past week, legislators demanded that the Federal Reserve disclose names of financial firms that have received money from AIG, which Fed officials have described as too systemically important in the financial system to be allowed to fail.

In a Senate Banking Committee hearing in Washington on Thursday, Fed Vice Chairman Donald Kohn declined to identify AIG’s trading partners. He said doing so would make people wary of doing business with AIG. But Mr. Kohn told lawmakers he would take their requests to his colleagues. The Fed, through a new committee led by Mr. Kohn to discuss transparency concerns, is now weighing whether to disclose more details about the AIG transactions…

Banks and other financial companies were trading partners of AIG’s financial-products unit, which operated more like a Wall Street trading firm than a conservative insurer. This AIG unit sold credit-default swaps, which acted like insurance on complex securities backed by mortgages. When the securities plunged in value last year, AIG was forced to post billions of dollars in collateral to counterparties to back up its promises to insure them against losses.

More Problems

Now, other problems are popping up for AIG. The insurer generated a sizable business helping European banks lower the amount of regulatory capital required to cushion against losses on pools of assets such as mortgages and corporate debt. It did this by writing swaps that effectively insured those assets. Values of some of those assets are declining, too, forcing AIG to also post collateral against those positions. And if the portfolios incur losses, AIG will have to compensate the banks. AIG had seen this business as a relatively safe bet for the company and its investors. The structures were designed to allow European banks to shuck aside high capital costs. A change in capital rules has meant that the AIG protection no longer meets regulatory requirements. The concern has been that if AIG defaulted, banks that made use of the insurer’s business to reduce their regulatory capital, most of which were headquartered in Europe, would have been forced to bring $300 billion of assets back onto their balance sheets, according to a Merrill report.

I find this statement remarkable, "Fed Vice Chairman Donald Kohn declined to identify AIG’s trading partners. He said doing so would make people wary of doing business with AIG." Anyone in the galaxy not already wary of doing business with AIG ought to be committed on the spot. My suspicion is that AIG is trying to isolate AIG-FP from the remainder of it’s other businesses and keep itself going [recall this]. It feels a bit like Madoff trying to claim that his wife’s Manhattan Apartment and $62,000,000.00 Bank Account has nothing to do with his Ponzi Central Investment Firm.