Bachus: AIG Stiffed Small U.S. Institutions, While Paying Off Foreign Banks in Full
Rep. Spencer Bachus (R-AL) just raised a new objection to the AIG counterparty payments--specifically that while AIG used government money to pay off their CDS obligations dollar-for-dollar to major (sometimes foreign) financial institutions, it repaid smaller U.S. institutions that made secured loans to AIG subsidiaries at a rate of only about 20 to 30 cents on the dollar.
Video forthcoming, but Geithner had no immediate answer to the query, which, to amateur ears anyhow, sounds like an interesting one. We'll follow up.
Late Update:
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Josh
Elana
Matt
Eric
Buh, buh, but according to AIG's "mad as hell" execs, they've been treated poorly by the public, and scapegoated.....I'm confused!
March 26, 2009 11:49 AM | Reply | Permalink
OK, here is something a lot of people do not know ...
Dick Dale's name at birth was Richard Mansour.
March 26, 2009 12:49 PM | Reply | Permalink
I like the new spelling ... but let's go all the way and call him Bacchus.
A toast : to Senator Bacchus !
March 26, 2009 12:48 PM | Reply | Permalink
Unfortunately, AIG's actions here are probably understandable. In an international economy whose primary currency is the US dollar, I would imagine that the current crisis would put a lot of foreign-relations style pressure on the government to pay off foreign investors first. Not only that, but we are not helped if our the economies of our various trading partners falls off a cliff because of AIG's default.
While it may not have the best political optics, I have to say that they are probably right to have done it this way. At least, I can't say that they were absolutely wrong to have established these priorities.
March 26, 2009 1:09 PM | Reply | Permalink
Some background:
Maiden Lane III was a special corporation set up by the Fed with TARP cash to deal with AIG's CDS problems. ML III bought the toxic assets from counterparties like Goldman Sachs and Societe that had purchased CDS coverage on them. That was for pennies on the dollar (range of 40-55 cents). However, AIG had been paying CDS obligations on them, and with the TARP money injected directly into AIG, they were able to make the counterparties whole. The counterparties got par value for their assets between ML III and AIG.
Maiden Lane II was set up to deal with AIG's own stash of toxic assets. It helped the Fed shut down a lending facility that it had opened to deal with this before TARP existed. The subsidiaries were selling the toxic assets to ML II for about 50 cents on the dollar and using the cash to pay off the Fed lending window so that facility could be closed.
AIG had gotten all these toxic assets by taking out loans on perfectly good assets (as I understand it) and using the cash to leverage their way into the CDO market. That's the transactions that are being compared to the ML III restorations. AIG had borrowed about $20 billion from the first Fed facility to deal with these loans on good assets -- before the TARP funds and the Maiden Lane shells ever showed up.
It may be just how it happened, but it would still be amazing to think that counterparties who made loans on "perfectly good assets" took extensive haircuts while counterparties who speculated wildly in the CDO market got a deal to get par for their toxic assets.
March 26, 2009 1:20 PM | Reply | Permalink
Yes, because the intent of the AIG bailout was really to bailout large foreign banks that should have been able to assess their own coutner-party risks.
March 26, 2009 1:42 PM | Reply | Permalink