The Real AIG Scandal
by: Eliot Spitzer in Slate Magazine
EVERYBODY IS rushing to condemn AIG's bonuses, but this simple scandal
is obscuring the real disgrace at the insurance giant: Why are AIG's
counterparties getting paid back in full, to the tune of tens of
billions of taxpayer dollars?
For the answer to this question, we need to go back to the very
first decision to bail out AIG, made, we are told, by then-Treasury
Secretary Henry Paulson, then-New York Fed official Timothy Geithner,
Goldman Sachs CEO Lloyd Blankfein, and Fed Chairman Ben Bernanke last
fall. Post-Lehman's collapse, they feared a systemic failure could be
triggered by AIG's inability to pay the counterparties to all the
sophisticated instruments AIG had sold. And who were AIG's trading
partners? No shock here: Goldman, Bank of America, Merrill Lynch, UBS,
JPMorgan Chase, Morgan Stanley, Deutsche Bank, Barclays, and on it
goes. So now we know for sure what we already surmised: The AIG
bailout has been a way to hide an enormous second round of cash to the
same group that had received TARP money already.
Hedge Funds May Be Getting a Bailout via AIG's Payments
It all appears, once again, to be the same insiders protecting
themselves against sharing the pain and risk of their own bad
adventure. The payments to AIG's counterparties are justified with an
appeal to the sanctity of contract. If AIG's contracts turned out to
be shaky, the theory goes, then the whole edifice of the financial
system would collapse.
But wait a moment, aren't we in the midst of reopening contracts
all over the place to share the burden of this crisis? From raising
taxes - income taxes to sales taxes - to properly reopening labor
contracts, we are all being asked to pitch in and carry our share of
the burden. Workers around the country are being asked to take pay
cuts and accept shorter work weeks so that colleagues won't be laid
off. Why can't Wall Street royalty shoulder some of the burden? Why
did Goldman have to get back 100 cents on the dollar? Didn't we
already give Goldman a $25 billion capital infusion, and aren't they
sitting on more than $100 billion in cash? Haven't we been told
recently that they are beginning to come back to fiscal stability? If
that is so, couldn't they have accepted a discount, and couldn't they
have agreed to certain conditions before the AIG dollars - that is,
our dollars - flowed?
The appearance that this was all an inside job is overwhelming.
AIG was nothing more than a conduit for huge capital flows to the same
old suspects, with no reason or explanation.
So here are several questions that should be answered, in public,
under oath, to clear the air:
# 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?
Failure to answer these questions will feed the populist rage that
is metastasizing very quickly. And it will raise basic questions about
the competence of those who are supposedly guiding this economic
Eliot Spitzer is the former governor of the state of New York.