U.S. Banks Stiffed By AIG Kept Secret
As I reported earlier, at today's House Financial Services hearing, Spencer Bachus (R-AL), the committee's ranking member, made an interesting allegation. He suggested that, though AIG had spent billions of dollars in bailout money to make its major counterparties whole, some smaller institutions (including U.S. banks) had been asked to accept 20 or 30 cents on the dollar for secured loans they'd made to AIG subsidiaries.
This obviously raises several questions. For instance: Which institutions got stiffed? Why were they asked to take a hit when bigger institutions never were? What was the nature of the loans they made? Unfortunately, these turn out to be difficult questions to answer.
What we do know is this: Before today's hearing, Bachus sent letters both to Barney Frank and to Timothy Geithner about this very issue. I've gotten a hold of the former letter, but haven't yet been able to get my hands on the latter.
You can read the whole letter to Frank here, but the key paragraph reads:
I have been informed that, in contrast with its treatment of foreign banks, AIG is now attempting to force many of its creditors that are U.S. banks to accept severe reductions in the debt owed to them. I am told in some cases that these U.S. banks are being asked to accept reductions of over 70% of the debt owed to them.
Which is basically what Bachus said at the hearing. It's also fairly unspecific. The other letter allegedly contains more detail. But, perhaps because of that, nobody's being all that forthcoming with it. At least not yet.
We'll try to get a hold of it, but until then we'll keep our eye on what Bachus and the committee minority have to say publicly about the matter.
Josh
Elana
Matt
Eric
It is quite possible that AIG does not have the option to renegotiate terms with the foreign entities (or that they were able to simply refuse.)
I would be quite interested in seeing the details of the various agreements; in part to see how much the little guys are getting stiffed in favour of the bigger players with more leverage, which is usually the case with anything financial.
(Also, first time I have seen a Mr. Beutler--welcome.)
March 26, 2009 7:46 PM | Reply | Permalink
Well, color me shocked to learn that AIG paid Goldman Sachs the full notional amount before it plans to pay a smaller regional bank 30 cents on the dollar.
However, this raises suspicions that there are levels of national security elements and diplomatic complications at play here.
March 26, 2009 8:21 PM | Reply | Permalink
I would expect AIG is dealing with different classes of creditors and therefore is negotiating with each class differently based on the legal rights each class has. And perhaps the amount of systemic risk that each class represents.
AIG is essentially going-out-of-business in lieu of formally declaring bankruptcy. So, just as in bankruptcy, based on seniority, certain classes of creditors get more per $1 of debt than others. As I understand the situation with the CDS, they're senior to just about everybody. So AIG has had to pay them off or at least keep putting up collateral as the valuations head south. By contrast, an unsecured lender of AIG would have to get in line with other unsecured lenders to split up whatever is left over.
Now it may be that a higher percentage of counterparties on AIG swaps were foreign banks than the percentage of foreign banks who were unsecured creditors of AIG -- not surprising if they were using the swaps as a way to get around regulatory capital requirements. But that's just an accident of marketing and who had an appetite for various stuff AIG was peddling.
We really can't have a system that discriminates against those who have superior legal claims against AIG simply because they're foreign-based. That would indeed blow up the entire global financial system.
March 26, 2009 10:21 PM | Reply | Permalink
A further comment - having just listened to Bachus' complaint and Geithner's "I'll get back to you" response. Bachus says they're secured creditors who are getting stiffed. Well that just means there's not enough in the way of value left in the assets which secure the loans, so they're left in line with all the other unsecured junior creditors.
I can't believe AIG has been using collateral it put up for secured loans to pay off the CDS. It simply wouldn't survive in court, and the secured lenders would be able to claw back payouts to Goldman, SocGen et al if they had received inappropriate preferences.
It may be politically galling to have spent such a huge amount of taxpayers money and still have a bunch of US banks wind up on the short end of the stick as AIG creditors. But the only "solution" would be for the government to pump even more cash into AIG to make the junior creditors better off. And I doubt Sen Bauchus would be eager for Treasury to recommend AIG get even more TARP funds.
March 26, 2009 11:28 PM | Reply | Permalink
Good discussion. Another question worth asking is what units within AIG secured or guaranteed these various debts. Perhaps the CDS agreements were structured to allow the large creditors recourse against the parent corporation, but the agreements with the smaller banks were limited to a subsidiary of AIG.
I think there are plenty of possibilities that could make this valid, but I agree wholly with Representative Bachus that the public deserves an explanation.
March 27, 2009 9:33 AM | Reply | Permalink