Where did the AIG Bailout money go (what they don't tell us)?
I recently got an e-mail from my nephew who is a EE PhD Student at Brown. In his e-mail he was asking for an explanation - if I had any - to the AIG bailout money. Where did it go? I think the answer is pretty obvious but not too many people are talking about it and it is not hard to guess why.
We already know of AIG’s role as the insurance counter party to many interbank transactions. We also know that AIG was counter party to many derivative instruments that went bad (reached maturity) and possibly many more to come (when they also reach maturity - and the need for all the additional bailout that is yet to come).
As far as I understand it, some of the money they got went to shore up AIG’s credit rating with the agencies by adding more cash to their balance sheet but most of the money went to settle those very derivative transactions that they ended up owing money. The fed and treasury don’t want to disclose the names as they claim the transaction are too complex, difficult to unravel and there are too many counterparties.
We know some of the counter parties to those derivative transactions like Goldman Sachs, Morgan Stanley and Deutsche Bank. It is not hard to imagine that a big chunk of the counter parties to AIG are banks in the US and all over the world (just like Goldman, Morgan and DB) and they probably are receiving a big chunk of the money. So the bailout of AIG is an indirect bailout of all those banks. Instead of declaring the derivative instruments illegal, or allowing AIG to go bankrupt and helping the banks directly, the Fed and treasury decided to do this indirectly.
There are 2 benefits to this:
- Regulated banks are required to maintain certain leverage ratios - how much of the deposits they can invest relative to their capital paid in cash reserves. If AIG defaulted on their obligations, all these banks would have to come up with more capital to offset the investment losses and prop up their balance sheets or reduce their investment exposure. Either way, the markets would tank further or more likely many these banks would go bankrupt - not just in the US but all over the world.
- The second benefit (more of a conjecture) is that US tax payers don’t want to hear that the money is going to fat cat wall street bankers like GS and MS or BofA, or to foreign banks and foreign financial institutions in the Middle East, China, South America, Europe, you name it; so doing this indirectly spares us all the reality.
This is a much kinder gentler way for the fed and treasury to shield us from the truth - if they don’t prop AIG or if they were to let it fail the banks behind it that it owes money to, the whole financial system will collapse irreparably. I guess no one needs too much imagination as to what might happen if a lot of banks were to fail like dominos.
This is a “…you can’t handle the truth!” thing if you will.
There are also undoubtedly non-bank beneficiaries to this bailout - and we’ll find out who they are eventually when they get named to the Forbes’ wealthiest people list (if the magazine is still in print) and their fortunes shadow Bill Gates and Warren Buffet combined but for the sake of maintaining this chaotic but survivable world we live in I would be indifferent to their success.
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