A.I.G. Gives Candy To Its Many Bank Friends

With each additional grant of cash or support the government gives to dying insurance giant A.I.G., my coworkers stand amazed and outraged. "Why is the government not bailing us out?" goes the question, and to which the usual answer is that, "You have no obligations that would wreck everyone around you if they go unpaid"

"Well I have three sons. Those are my counterparties and nobody helps me with them," says one particularly spirited coworker.

All too true, if somewhat irrelevant. Last week the Wall Street Journal named some of the counterparties who essentially received cash from the government via the A.I.G. bailout. Congress is in high verbal outrage mode, as though the cash pumped into A.I.G. was to serve some vague "A.I.G. only" purpose, and as if there were no credit default contracts to unwind with concerned others. Just why then did they think the Treasury was so hell bent on propping up A.I.G. if there was no string of related firms whose contract ties needed to be unwound?  What are these politicians thinking?

So is A.I.G. the taxpayer gift that keeps on taking? Sure looks that way. And while no one can say with certainty whether more money will be needed, the sheer volume of derivatives engineered by a small London unit of A.I.G. suggests that taxpayers haven’t seen the bottom of this money pit.

Some $440 billion in credit default swaps sat on the company’s books before it collapsed. Its biggest customers, European banks and United States investment banks, bought the swaps to insure against defaults on a variety of debt holdings, including pools of mortgages and corporate loans.

Because of the way A.I.G. wrote its swaps, and because the company had a double-A credit rating at the time, it did not have to put up collateral to assure its customers that it would be able to pay on the insurance if necessary. Collateral would be required only if A.I.G.’s credit rating were cut or if the debt underlying the swaps declined.

Both of these “unthinkable” events occurred in 2008. Suddenly, A.I.G. had to cough up collateral it didn’t have.

So, you see, the rescue of A.I.G. also involved a bailout of its many customers, none of whom the insurer or the government is willing to identify.

(Gretchen Morgenson, N.Y.Times)

Most of what is going on in these transactions between the government and private industry will go largely unfathomed and misunderstood by the average person, not due to lack of intelligence, but lack of interest in anything remotely complex. But one expects that politicians would dial the outrage down a bit given the precarious nature of it all, and try to add insight to the national economic injury.

The A.I.G. counterparty story is rather a non-story, and brightly obvious to anyone paying attention, but it will be played as new, with enough posturing all around (via media and political types) to insure no greater productivity in actually solving our problems.