The ongoing debacle that is the AIG bailout has entered a new phase. Outrage to follow.

The latest admission from the (defunct yet living) company is that well over $100 billion in taxpayer monies has gone to counter-parties at 100 cents on the dollar — no haircut, no penalty, no cost to those who made bad bets or chose their counter parties poorly. They were made completely whole by Uncle Sam and the American taxpayer.

This is a complex situation that is one part legitimate, one part outrage.

Some of this money was properly returned: $43.7 billion paid against lent securities is a perfectly valid transaction. $12.1 billion tied to guaranteed investment contracts paid to US states (California and Virginia in particular) is less clearcut — were these transactions with AIG the Insurer or AIG the hedge fund?

The counter-parties that bought credit-default swaps ($22.4 billion in collateral, $27.1 billion in payments) are more likely the structured finance trades, and unworthy of being made whole by taxpayers.

Among those who have partook in Uncle Sam’s munificence were Goldman Sachs, Merrill Lynch, Morgan Stanley, Wachovia and Bank of America. You might be surprised to learn the rest of the charity recipients were overseas banks: Germany’s Deutsche Bank and French bank Société Générale, as well as Calyon/Crédit Agricole (France), Danske (Denmark), HSBC (UK), Royal Bank of Scotland, Banco Santander (Spain), Lloyds Banking Group (UK), Barclay (UK) and Rabobank (Netherlands).

Not only are US taxpayers subsidizing the bad decisions made by executives in the US, we are also bailing out the poor judgment of the rest of the world.

>

Previously:
Backdoor Bailouts for Goldman Sachs? (March 5, 2009)

http://www.ritholtz.com/blog/2009/03/backdoor-bailouts-for-goldman-sachs/

Solvent Insurer / Insolvent Insurer (March 4, 2009)

http://www.ritholtz.com/blog/2009/03/solvent-insurer-insolvent-insurer/

iBanks Grabbed $50 Billion in AIG Bailout Cash (March 7th, 2009)

http://www.ritholtz.com/blog/2009/03/ibanks-grabbed-50-billion-in-aig-bailout-cash/

>

See also:
All Bailouts Are Counterparty Bailouts
Economics of Contempt, MARCH 14, 2009

http://economicsofcontempt.blogspot.com/2009/03/all-bailouts-are-counterparty-bailouts.html

AIG Says $105 Billion Flowed to Goldman, SocGen, U.S. States
Hugh Son and Robert Schmidt
Bloomberg, March 16 2009

http://www.bloomberg.com/apps/news?pid=20601087&sid=awiPvRbKoabA&

A.I.G. Lists the Banks to Which It Paid Rescue Funds
MARY WILLIAMS WALSH
NYT, March 15, 2009

http://www.nytimes.com/2009/03/16/business/16rescue.html

A.I.G. Paying $165 Million in Bonuses After Federal Bailout
EDMUND L. ANDREWS and PETER BAKER
NYT, March 15, 2009

http://www.nytimes.com/2009/03/16/business/16aig.html

AIG to Pay $450 Million in Bonuses
LIAM PLEVEN
WSJ, MARCH 15, 2009

http://online.wsj.com/article/SB123707854113331281.html

Category: Bailouts, Derivatives

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

56 Responses to “AIG: $105 Billion to Counterparties”

  1. call me ahab says:

    unconscionable

  2. HCF says:

    This why AIG, Bear, Citi, etc. should have gone under without bailouts….

    The fact is that everything done with the bailout money has been legal: paying up on CDS contracts, paying out bonuses… With a bankruptcy process, however, these can be renegotiated in court after those with secure debts are paid first. Counterparties would be begging for merely pennies on the dollar and the bonuses would be easy to calculate: $0.00. The problem is, to do what they have done, AIG is behaving extremely immorally, but completely legally…

    HCF

  3. dead hobo says:

    I find it hard to believe that the best legal advice available looked into the AIG bonus and didn’t see elements of fraud. I suspect the attorneys who researched the agreement gave it the Business Law 101 high level view from 50,000 feet. Nosireee, all the elements of a valid contract are here. Nothing to see. Keep moving.

    Since the contract came from a prior management that was on the hook for massive and miserable failure, I wonder if fraud motivated by revenge was an element of the intent behind the agreement. Specifically, was there a plan use this bonus to stick it to the next management team and to laugh at Uncle Stupid for paying for it. Did the planners or their principals profit from it?

    The lawyers AIG asked to review it most likely didn’t have the stomach or possibly the authorization to investigate any options that were based on fraud or simple theft by top management. Maybe Andrew Cuomo can find the time to look into it.

  4. try2bamused says:

    But, but, but this is what Bernanke says must be done.

    We have to stabilize the financial system before we can have a recovery (one man’s give-away is another man’s stabilization). We have to get banks lending again (ignoring that the demand side of this equation doesn’t exist anymore). For Bernanke, it’s the precious banks uber alles. So keep coughing up those taxpayer dollars…and get back to work!

  5. danm says:

    The counter-parties that bought credit-default swaps ($22.4 billion in collateral, $27.1 billion in payments) are more likely the structured finance trades, and unworthy of being made whole by taxpayers.
    —————-
    I don’t think it’s that clear cut.

    If they bought a CDS protecting against the default of an underlying asset that governement is now propping up, then they deserve to be made whole.

    The problem now is that we have no way of knowing who is getting the money… the rightful winners or those who should have lost.

  6. ottovbvs says:

    HCF Says:
    March 16th, 2009 at 8:02 am
    ……..Unfortunately the collateral damage would have been a complete collapse of the banking system not just here but across Europe….And as Bernanke made very clear last night they are not going to let any of the major banks fail(BR please note)……You clearly think that would have been a good idea but I think I’ll go with Ben on this one……I have to wonder why all the surprise about counterparties…..who does everyone think it was….The Salvation Army

  7. E says:

    Here’s the solution for the AIG bonus payouts that keep coming up every month – publish the names and addresses of the recipients.

  8. ottovbvs says:

    try2bamused Says:

    March 16th, 2009 at 8:30 am
    But, but, but this is what Bernanke says must be done.
    We have to stabilize the financial system before we can have a recovery (one man’s give-away is another man’s stabilization). We have to get banks lending again (ignoring that the demand side of this equation doesn’t exist anymore).

    ……..That the demand side of the equation doesn’t exist anymore would I think come as a surprise to most domestic and commercial borrowers in the US…….And of course Bernanke is right about the broad strategic issues

  9. E says:

    And I too wonder why there is such outrage about AIG paying out CDS contracts to whomever was wise enough to see the whole credit debacle in advance. How would everyone here like it if their short plays and inverse ETFs just vanished one day, because their counterparty failed?

    The government is actually making the shorts whole. Whodathunkit?

  10. ottovbvs says:

    E Says:

    March 16th, 2009 at 8:40 am
    Here’s the solution for the AIG bonus payouts that keep coming up every month – publish the names and addresses of the recipients.

    …….There are probably privacy laws against this but I agree the bonuses are a totally different matter from counter party payments……That said if these folks have contracts don’t kid yourself that rescinding them would be easy…..Remember how easy it was going to be to get the money back from Dick Grasso.

  11. danm says:

    The other issue of course with netting out CDS positions stems from the fact that many financial institutions, the only players with the data, created many of these things knowing fully well the underlying assets were toxic.

    Who deserves the loss on these derivatives? The investors or the banks?

    I’m sure such a debate could drag on for years. We’re not out of the woods yet!

  12. BillK says:

    China is already worried about the US defaulting on debts.

    If financial institutions go bankrupt, then debts can be renegotiated.
    But the danger then is that the US will be seen as a defaulter nation and suddenly the funding for the huge US deficit disappears.

    If the Fed decides that this is not a good outcome then it must support the financial institutions and give them as much money as they need to pay the debts.

    The problem with this temporary fix is that the debts could well be many times the total US GNP and continually paying off colossal debts by printing money leads to …….

  13. KidDynamite says:

    the AIG bonus situation is SICK… it’s CONCIEVEABLE that you can make the “we have to pay people so they don’t leave” in divisions of banks that net lost money, but where some divisions made money… but to use this argument on the pyromaniacs in AIG’s financial products division is the height of absurdity.

    as a comment on another blog said, “If we don’t pay them, will they go run a DIFFERENT firm into the ground?”

    my raged up thoughts here:

    http://fridayinvegas.blogspot.com/2009/03/aig-bonuses-can-anyone-defend-this.html

  14. ottovbvs says:

    BR:
    “The counter-parties that bought credit-default swaps ($22.4 billion in collateral, $27.1 billion in payments) are more likely the structured finance trades, and unworthy of being made whole by taxpayers.”

    ………….These were legal obligations whether you want to recognize it or not Barry……Unfortunately we can’t pick and choose which legal obligations to honor……Well, fortunately actually.

  15. danm says:

    The government is actually making the shorts whole. Whodathunkit?
    ————
    It’s not necessarily about shorting.

    It was probably easier to trade a CDS than to trade the asset itself. A lot of these contracts were probably traded just to manage the books on a day to day basis.

    Government interference is probably distorting all kinds of portfolios.

  16. danm says:

    the AIG bonus situation is SICK
    ———-
    Many getting those retention bonuses are probably NEEDED to untangle all the derivatives spaghetti because they are the only ones who know what’s there… they created it!!!!

  17. danm says:

    And the mark-to-market debate is a huge issue… it could force the winners to post losses and the losers to show gains as valuations in the derivatives markets are probably all out of whack due top this governement interference.

  18. dead hobo says:

    http://static1.firedoglake.com/1/files//2009/03/ny12532-_432294-v7-white_paper_-_aigfp_retention_plan.pdf

    The link above is said to be an analysis from AIG concerning their justification in paying ‘retention bonuses’.

    Labor Law requires it (excerpt)

    AIG has been advised by outside counsel that a breach of the retention plan would subject it to claims for not only the contractually owed payments, but also penalties and fees under the Connecticut Wage Act. The Wage Act provides for the recovery of double damages and attorneys’ fees when wages are improperly withheld and the employer’s refusal to pay wages lacks a good faith basis. (Conn. Gen. Stat. §31-72.) In addition, individual managers who decide to withhold wages that are due are individually liable for violation of the Wage Act.
    ———————————————————-
    There’s nothing here that prevents an interested third party from stopping payments while their legality is investigated.

    Here’s another of major interest (excerpt)

    AIGFP’s derivatives portfolio stands at about $1.6 trillion and remains a significant risk. Failure to pay the required retention payments therefore could have very significant business ramifications.

    For example, AIGFP is a party to derivative and structured transactions, guaranteed by AIG, that allow counterparties to terminate in the event of a “cross default” by AIGFP or AIG. A cross default in many of these transactions is defined as a failure by AIGFP to make one or more payments in an amount that exceeds a threshold of $25 million.

    In the event a counterparty elects to terminate a transaction early, such transaction will be terminated at its replacement value, less any previously posted collateral. Due to current market conditions, it is not possible to reliably estimate the replacement cost of these transactions. However, the size of the portfolio with these types of provisions is in the several hundreds of billions of dollars and a cross-default in this portfolio could trigger other cross-defaults over the entire portfolio of AIGFP.
    ————————————————————————
    In other words, pay the bonus or we’ll kill the company.

    Or how about this reason (excerpt)

    Departures also have regulatory ramifications. As an example, the resignation of the senior managers of AIGFP’s Banque AIG subsidiary would allow the Commission Bancaire, the French banking regulator, to appoint its own designee to step in and manage Banque AIG. Such an appointment would constitute an event of default under Banque AIG’s derivative and structured transactions, including the regulatory capital CDS book ($234 billion notional amount as of December 31, 2008), and potentially cost tens of billions of dollars in unwind costs.
    ————————————————————-
    I don’t believe this would happen, nor should anyone with a brain.

    There is nothing there that prevents a third party from stopping payments while the legality is reviewed and parts relating to claimed horribles can be renegotiated. Connecticut wage law may not be an out for thos who are greedy in this case. After All AIGFS will probably not exist after wind down.

    Who cares if their reputation is damaged a little more. Some might say that would be an impossibility.

  19. Bruce N Tennessee says:

    From each according to his ability to pay (taxpayer)

    To each according to his need (AIG)…

    …Nothing new here…early in the ballgame..now move along and don’t cause trouble..

  20. danm says:

    I think you have to be practical… the derivatives need to be dealt with.

    I would not be surprised that those who created the mess do not want to stay on a sinking ship, yet they are needed to untangle the spaghetti of derivatives they have created.

    How do you keep them there?

  21. Lugnut says:

    Go USA! We’re #1!

    Best thing that can happen to us long term is that the Chinese and the Japanese stop showing up at Treaury auctions so that we stop funding this madness and are forced into a balanced budget that spends only what it receives in tax revenue.

    Actually that just probably means a return to a 95% effective tax rate. nevermind…

  22. dead hobo says:

    Lugnut,

    The US is too big to fail. To China, we are not much different from AIG in a lot of ways. Suckers.

  23. wally says:

    One of the trick used is to call the gambles “insurance” and imply that it therefore has some sort of legal standing.
    The answer is simple: where is the regulation? The reserves? What makes this “insurance” other than the fact that the bets were placed by a company that also sells insurance?

  24. ottovbvs says:

    dead hobo Says:

    March 16th, 2009 at 8:59 am

    ………All you’re doing is pointing up the legal complexity of this…….The bonuses are a totally different matter from counterparty payments although you’d never know it from some of the comments……The govt should have moved vigorously to oppose the bonuse but I find it hard to believe that knowing the firestorm likely to arise that it wasn’t lawyered to death……I suspect getting these rescinded wouldn’ t have been easy if these guys have contracts

  25. Crabbybill says:

    Whenever you see US companies with significant gov’t funding or contracts with an overseas presence, it’s a good bet that it’s a conduit for US gov’t payment for services rendered in covert support by foreign companies. Construction, oil/phone companies and banks/insurance always seem to have a few ‘special’ employees in the overseas offices. Friendly European bank failures not only have economic impact but may jeopardize ongoing US activities.

  26. ottovbvs says:

    danm Says:

    March 16th, 2009 at 9:04 am
    I think you have to be practical… the derivatives need to be dealt with.

    ……PRACTICALITY is not exactly inscribed on the walls of TBP.

  27. Moss says:

    More corporate entitlement transfer payments. Wealth transfer of unparalleled scope.
    If I hear another wingnut mention that taxing the top 2% at a higher rate is a wealth transfer and represents social engineering I will puke. What the F@#k is this nonsense!

  28. E says:

    $1.6 trillion in derivatives at AIG, that could all require full payment in the event of default/collapse.

    Support them for $165 billion on the one hand, let them fail for $1.6 trillion on the other.

    Boy, this is such a tough call!

  29. dead hobo says:

    ottovbvs,

    I don’t think you are correct. The ‘white paper’ linked to above makes it appear that the AIGFS was hostage to the ‘retention payments’. If AIG failed to pay, managers would leave. If managers left then counter parties could cry ‘default’ if they wanted to. Plus, Connecticut law would get them double payments plus attorney’s fees for their trouble. It’s a domino daisy chain and extortion.

  30. danm says:

    I suspect getting these rescinded wouldn’ t have been easy if these guys have contracts
    ————
    I’m thinking of this:

    Government official to CDS creator:”Fix the problem”
    CDS creator thinking of his golden parachute:”I quit”
    Government offical panicking and knowing he needs his help:”How much to keep you here?”

  31. dead hobo says:

    Or, in other words, the bonus scam was a lot like the scene in Blazing Saddles where Clevon Little held a gun to his own head and said “He’s crazy, He’ll Shoot”. And, just like the actors in Blazing Saddles, Uncle Stupid fell for it.

  32. try2bamused says:

    ottovbvs said “……..That the demand side of the equation doesn’t exist anymore would I think come as a surprise to most domestic and commercial borrowers in the US”

    Here on planet Earth, individuals and businesses are choking on too much debt. The notion that we are in a debt bubble is well understood.

    “…….And of course Bernanke is right about the broad strategic issues”

    Yes, here’s one from him: “The impact on the broader economy and financial markets of the problems in the subprime markets seems likely to be contained” (3/08).

    Seems likely! The man’s a genius!

  33. ottovbvs says:

    “…….There are probably privacy laws against this but I agree the bonuses are a totally different matter from counter party payments……That said if these folks have contracts don’t kid yourself that rescinding them would be easy…..Remember how easy it was going to be to get the money back from Dick Grasso.”

    Reply:

    It would have been real easy to rescind contracts, if AIG had been put in receivership (as a quasi-bank) or, simply, bankruptcy. That’s the beauty of allowing bankrupt firms to go bankrupt. Everything is on the table, and there is a structure for prioritizing creditors. The bonuses might still have been paid–if they were considered past wages due, they would have enjoyed a high priority. But if there wasn’t any money to pay them, there’s no recourse.

    The US government’s extra-judicial rescue of AIG opened an impossibly complicated tangle of worms, for which there is little if any legal precedent.

    But it is disingenuous in the extreme for politicians that now own 80% of AIG to claim outrage at the bonuses. First, the contracts providing the bonuses should have been rescinded as a condition of getting the bailout money. If they had refused, then inform them they can try and get their money from a bankruptcy judge. Second, if you are the United States of America and you own controlling interest in an enterprise, you can simply refuse to pay, saying exigencies have required “modification” of the contracts. Let them sue you. The worst can happen is you have to pay. Besides, contract modification is all the rage in Washington these days, particularly if you are talking about mortgage contracts.

  34. danm says:

    Even if they had rescinded to get the bailout money, you would have had the derivatives creators asking for retention bonuses… How often do you see the builders restructure their own creation in corporate America? One strike, you’re out. The entire structure was there to eliminate these derivatives creators­. And of course, they protected themselves against this structure with golden parachutes.

    In the final analysis, they are needed like never before and they’ll get what they ask for as long as they keep the AIG monster alive.

  35. carlwied says:

    BR: I’m not clear why “$43.7 billion paid against lent securities is a perfectly valid transaction.” If I understand the process correctly, the counterparty in a securities lending transactions posted collateral (cash) in exchange for securities. If AIG doesn’t have the cash to pay back the collateral when the securities are returned then why doesn’t the counterparty simply keep the securities?

  36. hangtime79 says:

    “E Says:

    March 16th, 2009 at 8:43 am
    And I too wonder why there is such outrage about AIG paying out CDS contracts to whomever was wise enough to see the whole credit debacle in advance. How would everyone here like it if their short plays and inverse ETFs just vanished one day, because their counterparty failed?

    The government is actually making the shorts whole. Whodathunkit?”

    The difference E is much so, in that what you are quoting is regulated and CDS contracts are unregulated. To put in an analogy, its the difference between going to the Bellagio to play poker versus playing in a high stakes game at a private residence.

    At the Bellagio safeguards are in place to ensure fair play and that people get paid. Of course, one big trade-off is you have to put money upfront. This is akin to shorts or going on to the CBOE and making trades. If a trade goes against you and you can’t meet your margin call – you get liquidated.

    At the private residence you only are as good as the word of players around the table. Of course, if you don’t take money upfront and you let someone bet infinitely don’t suprised at the end of the night if do not get all the money that person has wagered. In this case AIG’s “hedge fund” bet infinitely and everyone let them do it because of their “good name” which came from their insurance underwriting business.

    Two different models, one that is regulated, where cash is king has to be placed upfront, and counterparty surveliance is strict. One that is unregulated, where no cash was put in peril, and counterparty sureveliance is weak. If the stakes are low enough then maybe you do not need the regulated model but in this case when there are 10s of billions in limbo then you absolutely must do so if you intend to get paid.

  37. danm says:

    why doesn’t the counterparty simply keep the securities?

    What if the securities are mispriced intentionally?

  38. mknowles says:

    Anyone listening to the debates on the house and senate floors at the time the Big Bank Bailout and Henry Paulsen’s 3-page give me your $700,000,000,000 taxpayer-money-with-no-strings-attached proposal would not be surprised that U.S. taxpayer money went to European banks because someone wanted to add an amendment to the bill to block that and our elected representatives voted it down.

    For every issue or problem in my life that could be helped by better legislation there are a team of lobbyists between me and my elected representatives. I read somewhere yesterday that there are 4 climate change lobbyists for every representative in DC. And during the Big Bank Bailout, there were hundreds of banking lobbyists making sure the banks interests were protected.

    I’ve got my pitchfork ready when the masses begin to move to DC to turn this lobbyist problem around. Apparently, that’s the only pressure the elected reps will understand and respond to. Phone calls and letters don’t seem to work.

  39. Transor Z says:

    When you start wading into bankruptcy territory, it is critical to subdivide “contractual obligations” into obligations to secured and unsecured creditors.

    I don’t do high finance in my bankruptcy work so honestly I don’t know whether CDS counter-parties are secured creditors. If there are any Chapter 11 attorneys reading this with IB/banking experience I would be interested to hear your takes on this. I believe that part of a CDS transaction is a requirement to actually deliver the underlying security paper to the counter-party in the event of a “credit event.”

    The reason this is important is that not all creditors are created equal in bankruptcy. It’s all about establishing priority and creditor classes.

    No offense, but I think some of the views above claiming to have insights into the lawfulness of these transactions to CDS counter-parties may be a bit premature/uninformed. An insolvent debtor/business making preference payments to one class of creditor at the expense of another class can be a big problem. Particularly where the business making the payments appears to be insolvent at the time the payments are going out.

  40. danm says:

    IMO, the fact that the US is keeping AIG alive is proof that the problem is bigger than anyone can imagine.

    The US is a net importer of money and does not have the choice but to be friendly with foreigners and their banks.

    Unless of course, the US decides to to default on its debt. But in that case, I don’t see how it can pull it off considering its a net importer of energy. It’s hard to go to war or to defend yourslef when everyone hates you and you don’t have enough resources.

    So when I see comment saying to screw the foreigners, I can’t help but feel sorry for the deluded Americans and I’m scared to death of my future. Because if America goes down, it will make sure that everyone goes down with it.

    And this reminds me of the story of a tilor during the great depression. He was disgusted with the overpaid bankers and happy to see them go down… until his business went bankrupt.

    Be careful what you wish for. And it’s a Chinese proverb.

  41. Bruce N Tennessee says:

    I know the headline was about the Empire State data…but did anyone note how much long-term money left us in January…?

    Maybe the Chinese meant what they said…

    http://briefing.com/Investor/Public/Calendars/EconomicCalendar.htm

  42. danm says:

    If there are any Chapter 11 attorneys reading this with IB/banking experience I would be interested to hear your takes on this

    They are probably overworked and have not time to read this blog! lol

  43. danm says:

    tilor = tailor

  44. jlj says:

    It’s nice, once again, to see the power and ability of the free market to sort things out “naturally” without the government regulators getting in the way. Why are all the “free-market” Republicans acting so angry? Let’s get “UBS Phil(we got ours!)” back into the media spotlight to explain again what is really going on.

  45. HCF says:

    @ottovbvs:

    > Unfortunately the collateral damage would have been a complete collapse of the banking system not just here but across Europe….
    >You clearly think that would have been a good idea but I think I’ll go with Ben on this one……

    I admit that the Fed really were in a pickle with this one, but the origins of this goes back to the bailout out of LTCM and then last year of Bear Stearns. AIG is just a logical extension of this, so it wasn’t exactly a surprise. The problem with making counterparties whole is that then various companies/traders/etc. no longer care who they are trading with. In a private contract, you better freaking know who you are trading with and IF they can pay up. On exchanges, there are well practiced margin rules for futures, options, and other standard contracts, so there is little need to worry unless the whole exchange collapses. With AIG, giving them money with no strings was the WRONG thing. In one hand, and out the other to GS, Societe Generale, employees, etc. with virtually no chance of the taxpayer having a say. Pre-packaged bankruptcy would have been much better… At least then, we the people as 80% owners of AIG would be able to renegotiate A LOT of things. Right now, we’re taking it in the rear, and we didn’t even get dinner and flowers!

    HCF

  46. danm says:

    Pre-packaged bankruptcy would have been much better… At least then, we the people as 80% owners
    ———–
    Maybe a pre-packaged bankruptcy is in the cards but they can’t do it until they actually know what they are dealing with.

    That’s when the retention bonuses come in… they need the derivative rainmakers to help them untangle the spaghetti first.

    We don’t know 99% of what is going on behind closed doors. All we know is that there is a lot of conniving.

  47. HCF says:

    @danm:

    I agree that the pre-package bankruptcy might still be in the cards. I sure as heck wouldn’t put anything past the powers that be, but unfortunately, I think it’s unlikely. I believe what’s being done is performing major surgery on a patient with duct tape and a baby pin, a la MacGyver (but with MacGruber type results?). The best example is the U.S. trying to get the rest of the G20 to stimulate their economies with 2+% GDP on the idea that if everyone else is jumping off the bridge, then it’s perfectly ok. The real reason, imho, is to be able to stave off our own creditors (i.e. China as the 900 lb gorilla) for long enough for the power of duct tape, voodoo economics, and copious amounts of prayer to work!

    HCF

  48. danm says:

    HCF:

    I believe the only way out is for the US to deflate its debt via inflation and everything will go in that direction.

    Everything else is noise.

  49. Myr says:

    The “bailout everyone no matter the cost” crowd has won…for now. Now we get to see the consequences of these actions and hear endless cries of “the alternative was unthinkable…we had no choice.”

    Those who didn’t see this calamity coming are the ones who want to bailout everyone. When this policy fails they’ll turn around and say that we failed because we didn’t have the “political will” to fully carry out their policy prescriptions. The age of no accountability lives on.

  50. farmera1 says:

    I seem to recall that there is legislation that says CDS (and derivatives in general) are at the front of the line for any money. They don’t go through bankruptcy process because they get the money. They are first in line.

    That makes bankruptcy a moot point, if I am remembering correctly.

    Anyone out there can clarify this for me.

  51. farmera1 says:

    When Bernanke said deflation was no problem because the FED could drop money from helicopters, he was serious. HE may be using electronic transfers, but he effectively is dropping money on everything. The FED balance sheet is some where near $2 trillion (mostly all the junk no body will buy) up from $800 billion or so. Big difference was the $800 billion was mostly treasury bills.

    Lots of the toxic junk is now owned by the……. FED.

    Numbers may not be exactly right but you get the idea.

  52. usphoenix says:

    Inflation is the only potential solution. The only problem if the disenfranchised middle class is not included in the printing press delivery, things could get ugly fast.

  53. E says:

    $2 trillion is nothing in the face of $50 trillion in wealth destruction that has occurred the past 18 months.

  54. jenslapinski says:

    Barry,

    I am a huge fan of this blog, this is one of the least insightful posts you have ever made.

    What do you think all the ‘bailout money’ is for?

    Of course it is for buying out the people who lend AIG money. Essentially, the US state is swapping out all the investors in/lenders to AIG. And of course, the US being the largest debtor nations in the world, the vast majority of the 3rd parties will be based abroad.

    Sorry, but what did you expect?

  55. jus7tme says:

    Someone please explain the “securities lending” aspect of the transactions described:

    Did AIG lend out $43.7B worth of stock so that Goldman et al could short the stock, and now Goldman et al have done the buyback in the open market and want to exchange the stock for cash again (at full price)?

  56. John Slater says:

    John Slater | jslater@mergers.com | IP: 75.65.2.157

    Most likely you will remember the following:

    Mario Puzo’s The Godfather begins with the following epigram:

    “Behind every great fortune is a great crime”

    -Balzac

    In doing a little research I found that other translations of the quote including:

    “The secret of a great success for which you are at a loss to account is a crime that has never been discovered, because it was properly executed.”

    “The secret of a great fortune made without apparent cause is soon forgotten, if the crime is committed in a respectful way”

    A relevant quote which has received currency recently is Mark Twain’s prescient observation:

    “It could probably be shown by facts and figures that there is no distinctly native American criminal class except Congress.”

    Under the rubric of “systemic risk” a political decision has been made to loot the federal treasury to protect the unsecured creditors of major U. S. financial institutions. Call it what you will: oligarchy, crony capitalism, national socialism; it has not ended well in other times and places and it will not end well here.