We’ve raised this question several times over recent weeks and months. Now the Times is asking too. In an editorial in Tuesday’s paper, the editors ask: just who’s getting the money the federal government keeps forking over to AIG? And they’re casting a suspicious eye on Goldman Sachs …
The A.I.G. bailouts fail the basic test of transparency: Who ends up with the money? Major financial institutions are not innocent victims of A.I.G.’s demise. They are sophisticated investors, and they should have known the risks being taken — and who profited mightily from the relationship before it all came crashing down.
Whomever the recipients are, they should be investigated for their roles in the crash and, to the extent possible, be made to pay for the bailouts.
The serial A.I.G. bailouts are especially problematic for their connection to the Wall Street bank Goldman Sachs. At the time of the first A.I.G. rescue last fall, it was reported by Gretchen Morgenson in The Times that Goldman was A.I.G.’s largest trading partner, with some $20 billion of business tied into the insurer. Goldman has said that its exposure to risk from A.I.G. was offset, or hedged, by other investments.
As the Times‘ Joe Nocera explained in a column over the weekend, AIG’s key role in the economic meltdown was selling credit-default swaps, which amounted to insurance policies on those toxic mortgage securities which have upended the world financial system. As he writes …
These exotic instruments acted as a form of insurance for the [mortgage] securities. In effect, A.I.G. was saying if, by some remote chance (ha!) those mortgage-backed securities suffered losses, the company would be on the hook for the losses. And because A.I.G. had that AAA rating, when it sprinkled its holy water over those mortgage-backed securities, suddenly they had AAA ratings too.
AIG’s trading partners weren’t defrauded or hoodwinked. They knew what they were doing as well as AIG did. But the AIG bailout isn’t really a bailout of AIG, which is the ultimate financial zombie institution at this point. It’s a backdoor bailout of lots of different banks and financial institutions here in the US and worldwide. The argument is that letting AIG default on these obligations would trigger the ultimate domino effect, upending numerous other institutions and making the whole crisis vastly worse. In other words, the systemic risk an AIG failure poses to the entire international financial system justifies the bailout.
Whether that is true or not, I don’t feel capable of answering. But if we’re going to pay hundreds of billions of dollars to unwing the AIG mess, as some are now predicting we may do, we need a clearer understanding of who is really getting bailed out with this money