Forget the good bank/bad bank, I have an even bigger beef with this INSANE absurdity: Why are the taxpayers making good on hedge fund trades gone bad?

I cannot figure that one out.

When AIG first faltered, there were two companies jammed under one roof. One was a highly regulated, state supervised, life insurance company. In fact, the biggest such firm in the world.

The other firm was an unregulated structured finance firm, specializing in credit default swaps and other derivatives.

The first firm was Triple AAA rated. They had a long history of steady growth, profitability, excellent management. They made money (as the commercial goes) the old fashioned way: They earned it.

This half of the company held the most important insurance in many families’ financial lives: Their life insurance.  When an AIG policy holder passed away, the company paid off the policy, providing monies that get used to pay off mortgages, kids’ colleges, and surviving spouse’s life time living expenses. Given the importance of this payment, one can see why it is crucial to make sure there are sufficient reserves to make good on the promise of the life insurance policies. The actuarial tables used are conservative, the accounting transparent. The policy payoffs rock solid, utterly reliable.

AIG, this insurance company, was well run. It made a steady income, provided a valuable service to its clients.

It was also very solvent.

The other part of the firm was none of the above. It was neither regulated nor transparent. It existed only in the shadow banking world, a nether region of speculation, and of big derivative bets. This part of the company engaged in the most speculative of trading with hedge funds, banks, rank speculators, gamblers from around the world. Huge derivative bets were placed, with billions of dollars riding on the outcome. It served a far more limited societal function than the Life insurance portion, other than a legal pursuit of profit.

This part of AIG was nothing more than a giant structured finance hedge fund. Despite the fact this hedge fund had no rating, no supervision or oversight, it managed to trade off of the Triple AAA rating of the regulated half of the firm. Somehow, it was treated as if it was Triple AAA, regulated and guaranteed by the government.

This was nothing more than a giant scam, perpetrated by the people who were running the AIG hedge fund.

It was exempt from any form of regulation or supervision, thanks to the Commodities Futures Modernization Act. This ruinous piece of legislation was sponsored by former Senator Phil Gramm (R), supported by Alan Greenspan (R), former Treasury Secretary (and Citibank board member) Robert Rubin (D), and current presidential advisor Larry Summers (D). It was signed into law by President Clinton (D).  It was the single most disastrous piece of bipartisan legislation ever signed into law.

As you might have guessed by now, this portion of AIG is the INSOLVENT half.

Here is the question that every single taxpayer should be asking themselves: WHY AM I PAYING $1000 TO BAIL OUT THIS GIANT HEDGE FUND?

Of all the many horrific decisions that Hank Paulson made, this may be his very worst. That is a very special description, given his track record of incompetence and cluelessness.


What should have been done?

Simple: When we nationalized AIG, we should have immediately spun out the good, solvent life insurance company. It is a highly viable standalone entity.

The hedge fund should have been wound down in an orderly fashion. Match up the offsetting trades, the rest go to zero. End of story.

You as a credit default swap gamblor have no reasonable expectation that anyone other than the incompetent firm you placed your bet with is going to make good. You had as your xounter party another hedge fund. Tahatwas the risk YOU — not the yaxpayer — assumed. That is was under the roof of a legitimate insurance company is irrelevant.

Right now, we are into this clusterfuck for $166 billion — every last penny of which is a needless waste.

Taxpayers should not be bailing out hedge fund trades. This insanity must cease immediately .

Category: Bailouts, Corporate Management, Credit, Hedge Funds

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.

83 Responses to “Solvent Insurer / Insolvent Insurer”

  1. Greg0658 says:

    One reason .. lost in the rage (I’m there)
    We as citizens of our country (USA) allowed our laws to be circumvented that harmed the world financial system

  2. snapshot says:

    You are dead on right. They touched on the fringes of this at the hearings yesterday but didn’t get to the nut that needs to be cracked. Why throw good money after bad. The circumstances – truths – are out there for those that will be responsible and end this game of high stakes poker. Won’t someone in Washington come forward and call gambling – gambling. Save us from ourselves – please.

    “This garbage must insanity immediately” is probably “This insanity or this garbage – but at any rate – it needs to stop immediately. [BR: fixed]

  3. buckykatt says:

    Yes, I agree it needs to stop, but where will the fallout end up?

  4. VennData says:

    The large banks, pension funds, and yes… hedge funds etc… that are counter parties to AIG would have lost a lot of money if “we” didn’t step in. The secondary, tertiary effects would have been Lehman all over again. It’s impossible to set up a counterfactual, but letting the AIG CDS operation fail may have had catastrophic consequences.

    The problem is when you let entities merge (Note to Bush’s FTC…) to be too big, the financial trading system is threatened by their demise. The ecology needs many small players, centralized exchanges, leverage limits, etc… If we don’t learn to halt consolidation and concentration we will repeat these mistakes.

  5. “Banking was conceived in iniquity and was born in sin. The Bankers own the Earth. Take it away from them, but leave them the power to create deposits, and with the flick of the pen they will create enough deposits to buy it back again. However, take it away from them, and all the great fortunes like mine will disappear, and they ought to disappear, for this would be a happier and better world to live in. But if you wish to remain the slaves of Bankers and pay the cost of your own slavery, let them continue to create deposits.”
    - Sir Josiah Stamp, President of the Bank of England in the 1920′s, the second richest man in Britain

    Take it away from them, but leave them the power to create deposits, and with the flick of the pen they will create enough deposits to buy it back again.

    AIG, is a mere Branch, hardly the Root.

  6. will profit says:

    reading the naked truth put forward with with such gusto brought tears to my eyes.
    Thank you.

  7. grumpyoldvet says:

    buckybatt & VernData

    you make good points. letting these institutions just fail may have repercussions that may possibly damage the global financial system even more. i wonder if the “let them fail” crowd has considered the end possibilities.

  8. wally says:

    Careful, Barry – your heart, your heart.

  9. sigmaseek says:

    Maybe the “let them fail” crowd has figured out that living under the slavery of the banks is not necessarily a happy way to live. Perhaps they see that less powerful big banks mean better risk management and less moral hazard. Perhaps systemic financial collapse may be necessary because the system was built on a poor foundation.

  10. ol’ gov,

    that old saw has been used on the tree of Liberty, to ill-effect, for many moon..

    Antifederalist No. 2 “WE HAVE BEEN TOLD OF PHANTOMS”

    “..We have been told of phantoms and ideal dangers to lead us into measures which will, in my opinion, be the ruin of our country. If the existence of those dangers cannot be proved, if there be no apprehension of wars, if there be no rumors of wars, it will place the subject in a different light, and plainly evince to the world that there cannot be any reason for adopting measures which we apprehend to be ruinous and destructive….”

  11. Keith D. says:

    You could look at the hedge-fund part of AIG as the Anti-Berkshire Hathaway company. Basically, they ride the back of a highly rated insurer and use their money for investments, just like BH. Unfortunately, the invest in everything opposite to what BH would say was a safe investment with a good margin of safety. It’s funny to see such a large disparity between the two, yet both are similar in their method of financing.

    Barry, you hit the nail on the head with the second part of your post. We should have spun off the hedge-fund part of AIG a long time ago and let it die a slow, painful death. That part of the company can’t honestly be too big to fail, it already has! The insurance portion I can understand the need to keep that solvent and going, that is too big to fail. Yet, like you said, we’re bailing out the hedge-fund part of the company. If we got rid of the hedge fund, what would AIG look like? Probably profitable, afterall they’re still getting premium payments, aren’t they?

  12. Myr says:


    Yes, the “let them fail crowd” have considered the end possibilities. It amounts to intense quick pain rather than death by a thousand cuts. It essentially involves (a) temporarily guaranteeing 100% of all bank deposits, and (b) temporarily guaranteeing all money market funds. Other than that, there’s a role for the government to selectively take control of large institutions that fail…i.e. receivership. It makes the creditors of these failed institutions pay rather than innocent taxpayers and it gets it over quickly.

    The better question is “have the ‘bailout every institution crowd’ considered the total cost of their approach?”

  13. tradeperformance says:


    “This garbage must insanity immediately.”

    This is an instant classic !!! It immediately captures the exasperation of the situation. It reminds me of myself when I get so flustered that I can’t even speak properly.

    If you printed T-Shirts with this slogan I would buy one !!

    Thanks for you excellent blog.


  14. krice2001 says:

    Barry, excellent post, as always. I fear that we’ve sunk so much into these bailouts that the current crop of players can’t help but throw more good money after bad. I too, feel we are bankrupting ourselves in trying to save ourselves. It seems counter-productive in the greater scheme and morally wrong.

    I agree with grumpyoldvet and others that worry about the result of not continuing to bail out these institutions and that has to be a prime driver of the current administration’s actions. But on the other hand, allowing a shorter and probably initially more painful process now will likely get us out the situation more swiftly and with a better long term outcome and less debt. I feel somehow at some point Obama may have to come to the “people” and more honestly say that we can’t save every major financial institution and that there may be some rough periods to go through but that in the end the nation will emerge stonger for allowing some institutions to fail.

  15. greg says:

    Barry, this all apparently happened after Hank Greenberg left. That’s what he said on CNBC yesterday, so I’m sure it’s true. I mean he’s a really old man, he wouldn’t lie…..would he?

  16. kaisten says:

    This is the next Nobel prize for non-fiction when it comes out in book form. In detail about AIG – The bad side, how it started and how it cuased the present catastrophe. A must read to understand how we got here.

  17. super_trooper says:

    BR, why are you NOW telling me that AIG should have been split in two back in September? How about screaming that out load in September? I’m tired of this childish bitching. We all know that there are so many things wrong and just complaining won’t do much, My suggestion is to come up with things we can do. You have a significant number of readers and with the power of the blogs influence is created. Use your power for change, not just to complain. How about suggesting how we can influence the outcome of AIG. Create a standard fact based letter, with suggestions that we all can send to out senators etc. And don’t forget to take to the street, imagine the view of traders, economist etc taking to the street in NYC or DC and actually protest. You don’t have to be a Union worker, leftist or French to take to the street. It’s time to stand up, stop bitching and do something about it. Let us put a stop to this garbage!

  18. grumpyoldvet says:


    I’m not for bailing out every institution but I’m not quite sure that letting them just fail will not just rattle the system a bit more than quick & painful. It just might be longer and more painful than many imagine. I just think everybody is looking for easy answers and there just aren’t any.

  19. skier33 says:

    BR, great post, but i think you are missing the key point. Who (and which entities) is the government bailing out and why? there is a counterparty to the zero sum trades. 100bn of losses for AIG, means 100bn of gains for someone else. Who is that? rumours of Goldman having exposure of 30bn has surfaced previously, and it woudl of course make sense for Goldman alumni to bail GS out but who else and on whose orders

  20. jpo says:

    The problem is that the stakes are so incredibly high. Rocking the boat again immediately after Lehmann could have had even more catastrophic consequences than the one we are witnessing now. Are you really willing to bet the livelihood of literally billions of people that letting AIG fail would only cause a short intense pain? Not maybe world war 3? $166 billion just might be the cheap solution…

  21. John Galt says:

    AIG was simply the conduit to shovel the our cash to GS and others to unwind their bets at par. At mother-effin PAR!!! Where can I bet way large with absolutely no risk of loss? Where’s my Gallardo, my East Hampton playground? When the tide lifts all boats the unwashed masses are fat and happy, but the tide done gone out. We now see with complete clarity how the whole game is rigged – from Wall St to Pennsy Ave. We’re witnessing a plain site pickpocket of Uncle Sam (yup, you and me) to the tune of trillions and apparently there is nothing we can do about it. I’m no militia wingnut (wife & 3 kids in the Jersey burbs) but maybe that crew was on to something. I think the military was right to commit more troops to peace keeping within our own borders. If “they” keep this up it’s a dead cinch lock that you’re going to have massive social unrest on a scale not seen for decades. And so it goes…

  22. larster says:

    After Lehman everyone is afraid of the consequences and since there is no way of knowing the counterparties, we now have to get involved. I see Barry’s point, but I also fear a system where we do not regulate, let things blow up, and then say sorry sucker. Seems to me that would be as damaging as what we are doing w/AIG. The other solution is to hire honest people for these financial jobs, but that might tale too long to be an effective solution.

  23. Bruce in Tn says:

    Glad to see your book got picked up..

    I have a working title for the next one….Insolvent Nation.

    Not much news about the ADP numbers this morning but the expected was 565k and the true number was 132k greater than that…the point?…that even after the abysmal numbers since September that the downturn is still showing greater strength than the prognosticators expect….

    Maybe we see an uptick for a few days…

  24. VoiceFromTheWilderness says:

    Well thank god someone finally said it. But it’s not just AIG, quite frankly if you look carefully most of the bailout money is going to PE empires gone bust: Citibank, Cereberus, BofA, AIG… It’s pretty clear that the people that control the government, whoever they are, presnit, or someone else, believe that this is a country where empire building is social good that needs to be supported at all costs. Why they believe this is anyone’s guess.

    It has been an outrage, though not one that apparently anyone but your humble scribe has noticed, that the ‘hedge fund’ industry which by law us poor folks are not allowed to play in because ‘it’s too risky’, is now being bailed out by… us poor folks. Too risky too play in, but not to risky for us to be on the hook for. And our children, and their children, and their children….

  25. Mike in Nola says:

    Barry, you are just one of those whiners Gramm talks about. We should all be happy to contribute to the well being of those who are overpaid and screw up royally. It is their right.

    We all know why AIG is being bailed out: because Goldman is one of he big counterparties and Goldman has the most stroke in D.C., cept maybe Bill Gross.

  26. phb says:

    The exasperation should not be so much with “how we got here” but more about “what the HELL are we doing about it.” BR you are spot on with this post, but if history tells us nothing, it tells us that sane, rational, thinking is rarely applied and expecting this moment in history to be any different is, well, a bit looney. Our countries poor response is no different, intellectually, than the debunking of MPT. Now what? I’m not sure, but certainly a wide range of response (or probability to the 6th std dev) is underway.

    Cash, hard assets are king.

  27. jpo says:

    @Mike in Nola:
    So the chain would be AIG, Goldmann, …,The World? I understand and support your anger, but the stakes are too high!

  28. Mike in Nola says:

    jpo: I wouldn’t mind if they give some protection to those who buy our bonds, e.g. China and Japan, if they are indeed counterparties. We owe them some consideration, if only because of enligntened self interest.

    But why protect those who used AIG to flout bank regulations by listing AIG swaps as counterbalances to their risky investments? We owe Goldman, et al, nothing.

  29. goatdog says:

    Retroactively seize bonuses of the counter parties management, replace them with CDS contracts when written price, then watch this speed up the price discovery process

  30. rktbrkr says:

    Why the incredible reluctance by BB to identify the counterparties benefitting from the AIG hedge fund payoff? The AIG shareholders haven’t benefitted from the $166B their stock is virtually worthless, it’s the hush-hush conterparties who have benefitted. I say GS is right at the top of the list.

  31. Ben says:

    Very good post. We need to figure out a way to get this message to the idiots in charge.

  32. rktbrkr says:

    If AIG gets rescued because of systemic risk then on that basis an unregulated hedge fund that goes tits up should get a bottomless rescue because they would be a systemic risk. However, I am assuming a consistency that has been copletely lacking all the way through. My guess is that Tiny Tim tells the next hedge fund that calls him with an emergency to f-off and we’ll begin the next round of panic.

  33. jpo says:

    @Mike in Nola:
    I understand you and I share your anger. BUT: What if the fall of AIG+Goldmann were the next black swan that finally pushes everything over the brink? Unlikely? How do you know?

    No, something like this must never be allowed again, but saying “We owe Goldman, et al, nothing.” and then let them fail to see what happens is just not an option. Once again: The stakes are way too high. This really might be a question of survival! An no, nobody knows but we can’t give it a try.

  34. rktbrkr says:

    What are the odds we can make it through this economic situation without a large hedge fund failing dramatically?

  35. batmando says:

    skier33 sez:
    “Who (and which entities) is the government bailing out and why? there is a counterparty to the zero sum trades. 100bn of losses for AIG, means 100bn of gains for someone else. Who is that?”

    This is the part I don’t get, larster sez:
    “After Lehman everyone is afraid of the consequences and since there is no way of knowing the counterparties,…”

    Why in the hell is there “no way of knowing the counterparties?

    If we, the people, own 80% of AIG, then the people’s representatives and government should damn well be able, not only able but required (by us), to reveal AIG’s counterparties: just who the hell has received the billions that AIG has paid out? We then might be able to have informed opinions on the risks of letting AIG fail, or not.

  36. “Perhaps systemic financial collapse may be necessary because the system was built on a poor foundation.”

    Exactly. Why try to rescue a “financial system” (which was anything but) that brought us to this point?

    If you want a good way to piss yourself off today, take a gander at the WSJ front page article about the money paid to Merrill’s employees in 2008 as the bank was losing nearly $30 billion:

    Its top 10 earners made $209 million dollars in 2008. That’s money that’s no longer available to fill the big holes in Merrill’s balance sheet that is now punching holes in BofA’s. Thus, it is money we taxpaying minions will have to come up with.

    It’s time for a revolution.

  37. Myr says:


    “I just think everybody is looking for easy answers and there just aren’t any.”

    I think this is exactly what’s driving current policies- a desire to pretend that it’s all going to be okay if we just let time pass. This is what Krugman has referred to as “rearranging the deck chairs while hoping that the iceberg melts.” Those people, like myself, who have been in favor of taking our pain in large doses up front have been the only one’s making the point that we can’t simply paper over past mistakes- someone has to pay for those mistakes. Delaying taking the pain(i.e. delaying mark to market and delaying liquidating bad debt) is a big mistake and only compounds the problem. The *only* people looking for “easy answers” are the one’s who support the current bailout. I’m in favor of the difficult path…I call it “facing reality and dealing with it.”

    Unfortunately, this administration(just like the last) wants the easy way out. They don’t want to tell the powerful bankers that the gig is up. Those who screwed up need to be pushed out of their positions and those assets need to be sold to the prudent and strong.

  38. bri says:

    skier called it:

    Goldman Sachs, Goldman Sachs, Goldman Sachs.

    follow the menace.

    nice work, barry.

  39. Mike in Nola says:

    Several senators in the Bernanke hearing yesterday said they were proposing legislation to require disclosure or all counterparties. Let’s hope it passes speedily and causes enough of a scandal to make the position of the pro-Goldman cabal politically untenable. The sooner they get rid of Geithner and his ilk, the quicker they can start doing something constructive.

  40. Myr says:


    And what about the risk that the US government defaults after taking on all this debt as we try to save everyone? What of the risk that we are so burdened with debt that we stagnate for two decades? Your argument cuts both ways, but you don’t acknowledge that.

  41. jpo says:

    @Myr: You may well be right from a U.S. domestically point of view. But this is not longer just a crisis of the financial system or the economy. This is at least partially a geostrategic problem: “facing reality and dealing with it” could push countries with nukes (Pakistan?) over the brink. You really, really don’t want to go there.

  42. jpo says:

    @Myr: I acknowledge your point. I can’t disprove it. But the situation right now is so that you MUST NOT rock the boat.

  43. batmando says:

    Mike in Nola, thanks for that info, didn’t hear or read follow-ups on Bernanke hearing yesterday.
    The sooner a disclosure bill gets passed the better – I envision the effects of such counterparty transparency as similar to those seen when the sunlight falls upon Dracula….., if only.

  44. batmando says:

    jpo -
    letting fear of the unknown consequence(s) drive the non-solution(s)…..?
    As MEH posted above
    “..We have been told of phantoms and ideal dangers to lead us into measures which will, in my opinion, be the ruin of our country.”
    We pays our money, but we don’t gets to take our pick?

  45. Al Bergette says:

    I am not in finance but as a casual observer who sees the financial meltdown of hedge funds, AIG etc. as being a result of tens of thousands of side bets being made by speculators on the profitable completion of financial relationships between two or three parties that are individually direct stake holders in the transaction who are no more then two degrees of seperation from the — primary — physical underlying asset.

    It seems these side betters who are several degrees removed from say a bank, mortgage holder and insurer relatively directly related to eachother in a transaction, benefited in some way by making the side bet, offsets against losses elsewhere or whatever without being a principal of the primary transaction.

    I don’t know if I’ve expressed my thinking here clear enough but why is the loss not being put to side betters of these goofy side bet transactions eventhough they may have won in isolated cases by virtue of the “exactitudes” of law or whatever.

    Why aren’t the bailout dollars only given to the intergral players in the primary transaction?

    And, if a transaction is so complicated no clear line of the stakeholders directly related to each other by 2 or three degrees of seperation can be determined, then, void the whole damn relationship as too vauge with all parties taking the hit.

  46. jpo says:

    @batmando: Talk is cheap if your talk has no consequences. But if your actions or inactions can bring down the world, than I would rather err on the side of caution.

  47. Tripower says:

    “$166 billion just might be the cheap solution”

    And what makes you think the latest bailout that upped the (sub)total to $166 billion is the final number? We’ve seen AIG come back for more and more money. When is it going to be too much? When it’s $300 billion, 5, 8, or a trillion? Roubini says the system needs another $2-3 trillion to cover the losses. Just how much taxpayer money needs to bleed off before you get irate jpo?

  48. GeorgeNYC says:

    I completely agree with your analysis. However, I am not so sure that the “companies” were as separate as you might think. AIG was one of the most opaque entities around. While the “regulated” end certainly was scrutinized by the state regulators, I am not so sure that the “unregulated” side did not assist in some manner the “regulated” side. That is, the entire hedge fund operation somehow permitted AIG to compete on different terms from the rest of its competitors. That is perhaps the most pernicious aspect to all of this. The market distortions created by the “shadow” banking system are not going to be understood for a long time, if ever.

  49. sdbailey says:

    My understanding is that AIG was backstopping many of the banks in Europe, who were using CDOs insured by AIG CDS as part of their reserves. If AIG went down, the European banks were going down as well, so European Finance Ministers were all over Paulson to bail out AIG.

    Of course, their banks are going down now anyway…

  50. larry says:

    Screw Goldman Sachs. However, European banks are also major counterparties.

  51. Zenster says:

    @batmando & Mike-in-NOLA you are on to something BIG. Disclosure is the key, I agree. Where is the pit bull that can take a hold of this intentional(?) obfuscation & hold on until we know who the trillions being spent, guaranteed and backedup are benefitting? Trillions of our children’s assets are being doled out to unknown parties & TPTB stonewall us. Why is there no transparency???

  52. jpo says:

    @Tripower: I’m irate right now. Very much so, but I’m much more scared about what might happen if another Lehmann like event happens.

  53. scorpio says:

    only Warner of Virginia made this point to Geithner at yday’s hearings. for the life of me i dont understand why Obama’s buying the Summers?Bernanke view of the world that counterparties are sacred and have to be paid 100c on the dollar. Goldman’s swaps and EVERY FIRM THAT ENABLED 50X LEVERAGE thruout this charade should TAKE THEIR LOSSES. the haircuts begin with the enablers. stocks are off 50%, homes are down 30%, let’s see the guys who financed these risky strategies take their lumps. GS and all others would be bankrupt right now but for the US taxpayer

  54. jpo,

    Fear, Uncertainty, and Doubt are the greatest levers of control being used against us.

    as zenster reiterates: “Disclosure is the key.” then asks: “Why is there no transparency?”

    so should you.

    it is Far more productive than remaining deep in the cave, responding to cast Shadows..

    –Plato realizes that the general run of humankind can think, and speak, etc., without (so far as they acknowledge) any awareness of his realm of Forms.

    –Such prisoners would mistake appearance for reality. They would think the things they see on the wall (the shadows) were real; they would know nothing of the real causes of the shadows.

  55. jpo says:

    @Mark E Hoffer: Lehmann is prove that this is not just shadows.

  56. batmando says:

    jpo -

    Understand and appreciate the fear part too. I just don’t respond well to fear tactics (cf. TARP I legislation) and don’t wish to be driven to financial ruin (individually, collectively, or globally) by fear-mongering of uncertain, unknown, what-if scenarios.
    As best I can make out, you’re saying that the frantic attempts to preserve the status quo ante have better known (or more likely) consequences, say by pouring billions into the cesspool without bottom that is AIG, it will be less likely Pakistan might let fly on India with a nuke or some other regional conflict might get out-of-hand in financially de-stabilized world.

    Just saying… I’d rather see deliberate action to unveil what’s going on behind the curtains of AIG, Citi et. al., sunshine being the best disinfectant and all that. It would be much easier to judge what is in the best interests of any given party (banks, nations, whomever) if everyone sees who has what at stake. Letting the hits fall on those most culpable, in the long run, seems more likely to keep order in the world. The U.S. might have some moral culpability to the rest of the world who are CDS counter-parties for having allowed the AIG horror to arise, but are our pockets deep enough to make everyone whole? I think not.

  57. jpo,

    you’re very good at repeating what you cannot prove.

  58. batmando says:

    jpo -
    Let’s just say there’s a really good chance that the shadow-casting machine is in the process of breaking down and the man behind the curtain is frantically bellowing into the speaking trumpet “pay no attention to the man behind the curtain.”
    What is the appropriate response?
    To worry that somewhere there could be flying monkeys in the sky or to question the man behind the curtain very closely, ask him to turn out his pockets, or maybe even arrest him?

  59. constantnormal says:

    As I understand things, despite Uncle Sam owning 80% of AIG, exactly who the counterparties are to the CDS that AIG has written is (at least publicly) unknown.

    I don’t believe for a second that Bernanke and Geithner/Paulson don’t have a sliced & diced database of the AIG CDS counterparty exposure. The fact that they refuse to be specific about who is on the other end of the hook from the US taxpayer is telling.

    Suppose (leaving the realm of the known and entering the realm of rumor) that a major counterparty is the Chinese government? That would explain our taking an ownership position in AIG, just as we nationalized Freddie & Fannie and gave their debt formal government backing when the Chinese became concerned about their money.

    That would also explain our continued (nay, infinite) willingness to pour additional funds into AIG. We care a lot more about supporting Chimerica (Niall Ferguson’s term, deliciously fitting, for the interdependence between China and America) than we do about Euroland or the US taxpayer.

  60. donna says:

    Why? Because we still would like all those families to still get their life insurance payments.

    You can think of it as two companies, but if part of it goes down it all goes down. The government needs to step in and take over to make sure those life insurance payments go out, make sure pension funds and other things based on these bad but triple A rated hedges don’t fail, etc. We can all be as angry as we please about it, but there are financial realities here that have to be taken care of.

    There are trillions in the shadow banking system crashing down around us, we all know that. But there are real people being affected whose entire lives depend on us making sure it crashes down in some orderly fashion somehow. As it all unwinds it feels horrible that anyone has profited from this mess, and of course we’re all angry about it. That doesn’t mean we let families and companies suffer who were innocently caught up in this mess.

  61. Myr says:


    I hear you. I just think we’re actually setting ourselves up for far more pain by not rocking the boat now. I hope I’m wrong. I hope everything turns out ok and we muddle through somehow. However, I’m not trading based upon that hope.

  62. batmando says:

    @ Donna
    Agree that there are innocents standing under the falling structures.
    I question…
    Can the falls be attentuated (not likely prevented)?
    Where to allocate our resources?
    Are they sufficient to make whole all the AIG CDS counter-parties (China?)?
    Or to default on the CDS and make good claims from holders of AIG’s real insurance policies on lives and properties?
    Maybe it is the case as constantnormal asserts “that Bernanke and Geithner/Paulson… have a sliced & diced database of the AIG CDS counterparty exposure” and from that know the U.$. is toast and all they can do are rearguard actions to slow the fall, a disaster in slo-mo?
    The lack of disclosure speaks volumes.

  63. Hal says:

    quick thought:

    if the aig investment arm took all the cash from the operating companies–why would the operating compnaies be in good shape now without requisite reserves other than a useless receivable from the investment arm of aig.

    I do not know the detail but where did the investment arm get its capital–it would have to come from the liquidity and investments of the operating companies, no?

  64. cn,

    with this: “That would also explain our continued (nay, infinite) willingness to pour additional funds into AIG. We care a lot more about supporting Chimerica (Niall Ferguson’s term, deliciously fitting, for the interdependence between China and America) than we do about Euroland or the US taxpayer.”

    see: American International Group

    (…) AIG is a public company. Its largest single shareholder with 13.62 percent of AIG stock is Starr International Company (SICO), a private company headquartered in the tax haven of Bermuda. Greenberg owns 21.86 percent of SICO. Forbes says Greenberg has a net-worth of $3.6 billion, making him the world’s 132nd richest man. Greenberg was elected AIG president in 1962, CEO in 1967 and chairman in 1989.

    (…) Greenberg has enviable political clout, never so much in evidence as when, with the help of Henry Kissinger — chair of AIG’s international advisory committee and a paid consultant via Kissinger Associates – AIG became in 1995, the first company licensed to sell insurance in China. AIG was the only foreign firm that owned 100 percent of its license there.

    The American International Group at its origins was linked to the OSS (Office of Strategic Services) the forerunner of the CIA. It grew from the Asia Life/C. V. Starr companies founded by Cornelius Starr who started his insurance empire in Shanghai in 1919, the first westerner to market insurance in China.

    donna, please let tales of annonymous woe keep us from understanding what we’re being asked? to pay for..

    people, myself included, have, I’m sure, no problem helping those that have been unfairly harmed, but, to use them as shields, is to further compound the iniquity..

  65. constantnormal says:

    @Mark — wow! that’s some nice logs to throw on the rumor-mongering flame. You know what they say, “where there’s smoke, there’s …” smoke, at least. Maybe even fire.

    Thanks for the history lesson.

  66. cn,

    when we’re left w/o Fact, Fancy Reigns.

    it’s a sad State of affairs, though, happily, we already know that the sunlight, provided by transparency, cures that too..

    w/ Obama’s new Budget, maybe the Cave will qualify for a tax-credit if it gets some ‘energy-efficient’ Windows…

  67. Lugnut says:

    “This garbage must insanity immediately.”

    Heh, I would have left it as is. Has a nice ring to it. Kind of like “Excelsior, you Fathead!” (apologies to the Jean Shepherd fans still around in the tri-state area).

    As to the post at hand, basically we suck as a nation. We lack the curiosity, interest, desire, intellect, and outrage to properly deal with it (as a whole). Those here who recognized the enormity of the situation are only left with a “WTF??” Write a letter or call up your Congressman or Senator? How’d that work out for you during the initial TARP vote when calls against were over 100-1 in their offices. Instead we got more pork added to it and a Bronx salute to the people who cared.

    I think , however, (just thinkingout loud) that a website (hosted offshore), that simply noted the names of these assclowns that have brought us to this state, along with a decent description of their misdeeds against the country. That , along with a listing of their home addresses might go a ways towards addressing our biggest failing as a country, namely the lack of will to prosecute under the law those who are responsible. That we do not only implies that the government and the embezzlers are in bed with each other, and that it is up to the common citizens of this country to seek other venues for redress. Vigilantism and Revolt are ugly words.

    Just sayin, folks…

    When your Federal Governement no longer acts in your interest, but merely as a special interest proxy for the pigmen who screwed up and want us to pick up the peices, the only options are the ones that no one will normally suggest to you.

    Tree, rope, politician. Some assembly required.

  68. Porsche87 says:

    Too many easy answers being bandied about here. You stop bailing out AIG, Goldman posts a huge loss, a few hundred mutual funds drop even further and all the baby boomers are screaming for politicos heads for not preventing it. Combine that with the fact that any one of the Wall St firms probably directly or indirectly contributed more than everyone on this blog combined, and there’s no wonder as to the path take, rage or not.

    To fix this, you take the route suggested earlier. Get the names of the counterparties out there. Their stocks will drop, the mutual funds will bail on them (way ahead of everyone else). You can then seal off AIG with very little risk. Maybe we can use the Freedom of Information Act?

  69. Lugnut says:

    Or perhaps I can distill this down to a simple question…..

    During the course of this ongoing crisis since it’s roots, how often have you heard any relevant politician (such as the President, VP, Fed Chairman, Treasury Secretary, Pelosi, Reid, other Senators, SEC official, Senate Committe on Banking, House Financial Services Committee, etc…) call for either the end of CDS, or at the least call for introduction of legislation calling for regulation of them? and can any decision to provide this additional money to AIG not be tied to legislation mandating the overhaul of the CDS industry?

    No one inpower is looking out for you anymore. The malfeance is no longer concealed, its right in the open for all to see. What are you going to do about it?

  70. batmando says:

    I like Porsche87′s take
    “Get the names of the counterparties out there. Their stocks will drop, the mutual funds will bail on them (way ahead of everyone else).”
    Let the process play out with the liabilities falling upon those who took the risks, even those of us who are in IRAs.
    I’d rather take hits in my IRAs and 401(k), hits that at least I can attempt to dodge by carefully picking my investments, than have me, my daughter and my grandkids pay in taxes (including the hidden tax of inflation) in perpetuity for on-going, open-ended, undirected, blunderbuss bail-outs that have little or no chance at succeeding at what they are purported to be doing.

  71. DL says:

    I would expect this sort of nonsense from the Bush administration; Bush just let Paulson do whatever he wanted (and what he wanted was to help his friends on Wall Street).

    But I was hoping for something more from Obama. He campaigned FOR the “little guy” and against the greedy Wall Street CEO’s.

  72. DL says:

    “What should have been done? Simple: When we nationalized AIG, we should have immediately spun out the good, solvent life insurance company. It is a highly viable standalone entity”

    As a legal matter, I just don’t know if this could have been done outside of bankruptcy.

    (And if bankruptcy would have been required, then so be it).

  73. farmera1 says:

    I’ve struggled with the question why pump $166 billion into AIG (and trillions into the banks), why not nationalize (restructure) both. The only logical conclusion I can reach is FEAR. The tactic/plan (or lack of plan) that we’ve been following (I call it the SHOVEL and HOPE plan; as in shovel billions into banks and AIG and HOPE something good happens) makes no other sense. I suppose one could also argue chronyism, corruption etc but that seems too far out for me. I’ve settled on FEAR for a few reasons.

    1) There are (were) some $500 trillion in derivatives floating around the world according to Gross a few years back. The US GDP is some $14 trillion for perspective.

    From PIMCO in January of 2008:

    2) Paulson used the idea of buying toxic assets to justify TARP I ($750 billion slush fund). Not one toxic asset was bought with no real explanation except Paulson changed his mind, my thought was that he started looking under the hood and realized $750 billion was chump change in the world of toxic assets on the bank books. This is pure speculation on my part.

    3) Enter the new administration and the direction doesn’t change, SHOVEL AND HOPE is the plan. Taking the whole shadow banking system down via bankruptcy would involve, retirement funds, money market funds banks etc.

    About a third of the way down the page is the following post:


    “The deepest, darkest concern of bond professionals is whether bond holders of banks will ever be asked to share the bailout pain. Ever since Lehman the Fed’s reluctance to impair bank bonds has been palpable. Finance issues represent more than 60% of 1-5 year maturity bonds. They are ubiquitous in pension funds, insurance company portfolios and, until last fall, money market funds(most money market funds have moved up the capital structure to CDs at this point). So there are “systemic” reasons to protect them. Large foreign holdings of bank debt may complicate matters further as the U.S. is dependent on foreign financing.

    A plausible explanation for the government’s fear is the unknown magnitude and distribution of CDSs. When Lehman failed, it brought AIG, one of the biggest insurers in the world, to immediate insolvency — saved temporarily to date by two huge government bailouts. What would happen if Citigroup and Bank of America were allowed to fail? Perhaps the consequences are too great for the government even to talk about in public, for fear of creating a new wave of panic.”

    My only conclusion is that the government is operating from fear, of what would happen if the banks and AIG were nationalized (restructured) and the assets written down to their true worth, they must see that option as worse than the SHOVEL AND HOPE plan we are now following. The guys running things are a lot smarter than I am and certainly have better information. But I do like to understand why things are done, and at this point fear is the only reason I can see.

    But these derivatives are unbelievably complicated, often taking thousands of pages to describe and understand according to Buffett. The scope, scale and complexity of unwinding hundreds of thousands of derivatives, would give anyone pause.

  74. batmando says:

    Dr. KN
    Meant to post that link earlier myself with an excerpt from ol’ Karl.
    Sounds like a good Rx for transparency,subshine and the kind of information markets need to sort the wheat from the chaff.
    Karl sez (among other things):
    “President Obama: You can stop this with the stroke of a pen. Issue an executive order today that says:
    * “Naked”, that is, CDS that are not insuring an actual bond, which are not traded on a public exchange with nightly margin supervision, are uncollectable as contrary to the public interest.
    * ALL CDS, covering a bond or not, are uncollectable six months hence unless they are traded on a public exchange with nightly margin supervision.
    This will force all CDS onto a public exchange and stop OTC dealing in these instruments. It will stop dead the writing of these instruments without the capital behind them to pay. It will stop the speculative attacks right now, resolve most of the AIG issue immediately, and within six months put a stop to all abuse of the CDS marketplace.”

  75. ravenchris says:

    There’s a taxpayer born every minute…

  76. gloppie says:

    for the effin life of me I can not understand why the US Citizenry is accepting to be robbed blind to compensate losses from UNREGULATED deals.

    If I play Monopoly(Tm) board game with my neighbour, using real money, this is only a two-party contractual agreement. No matter what the outcome of the game and the stakes of it, it is inconceivable that any other third non-playing party would support my neighbour or my losses !!!!

    Wake the EF up America !!

  77. dunnage says:

    Your making sense. It is simply that this needs to be done with all the investment banks; they are what may be referred to as disinterested in the application. Obama has decided on a Wall Street Treasury and the money centers are trying to get by with our money and time. Dragging this all out helps in turn to kill the Commercial Banks who then receive the handling you recommend, albeit there deposits end up with the Investment Banks grasping for reserves. Sad for everybody in the damn world.

    And it gets worse: Not enough cash in the Universe for the world’s money centers to get their act together. So down we go and go till a real “leader” surfaces. Could be soon, years, or never. No indications to date. Therefore the Red Herring Blame Game. The vested personages of current so-called investement banks reached Peak Wealth essentially selling mortgage mutations to one another. All based on real estate, a standard cyclical. Using your credit card. Embarrassing. Tulip bulbs would make a better story in retirement. Remember that picture of the Chairman of Woolworths beitn carried in his chair from his office? These guys don’t want to go home to their wives.

  78. doug86 says:

    I emailed your post verbatim to the White House.

  79. Jay Haley says:

    AIG Is Said to Pay $18.7 Billion to Goldman, SocGen for Swaps
    By Hugh Son

    Dec. 10 (Bloomberg) — American International Group Inc., the insurer rescued by the U.S. government, made $18.7 billion in payments tied to credit-default swaps to banks including Goldman Sachs Group Inc. and Societe Generale SA, according to a person briefed on the situation.

    The insurer sent the money to the banks in the three weeks after AIG’s Sept. 16 bailout, said the person, who declined to be named because the information is confidential. The banks bought the swaps from AIG as protection on mortgage securities that plunged in value.

    “The AIG bailout wasn’t meant to help the American taxpayer,” said Janet Tavakoli, president of Chicago-based Tavakoli Structured Finance. “What this has ended up doing is helping the investment banks who had AIG as counterparty.”

    The payments may protect the biggest U.S. and European banks from investment losses tied to the collapse of the subprime mortgage market. AIG’s expanded $152.5 billion government rescue included funds to buy the underlying assets of swaps so the contracts could be retired. The insurer has won agreements to terminate $53.5 billion of the swaps.

    The largest recipients were Societe Generale, which got $4.83 billion, Goldman Sachs with $2.97 billion, Deutsche Bank AG with $2.92 billion, Calyon Securities with $1.89 billion and Merrill Lynch & Co. with $1.32 billion, the person said.

    Nicholas Ashooh, an AIG spokesman, Michael Duvally of Goldman Sachs, Ted Meyer of Deutsche Bank and Danielle Robinson of Merrill Lynch declined to comment. Jolyon Barthorpe of Societe Generale and Bertrand Hugonet of Calyon didn’t return calls.

    AIG’s payout was reported earlier today in the Wall Street Journal

  80. Old Geezer Pilot says:

    Back in September, when Lehman went down, there were $42 trillion in Credit Default Swaps, basically bets with no collateral. There are now $27 trillion, so these guys are settling these bets amongst themselves. If we were to have let AIG fail, God only knows how many CDSs would have become due and payable – or how many of the bettors would have had to sell their stocks, bonds, properties (in a falling market) to come up with the loot.

    The consequences would have been a global banking collapse – not pretty.

    While I don’t like bailing out AIG any more than the next guy, I like global collapse even less.

    So let them work out their CDSs. In another 6 to 12 months, we’ll be done with this.

    Then, let’s track ‘em down and lock ‘em up.

  81. Kiers says:

    Barry…Love your mojo…you are ABSOLUTELY right!

    The corruption knows NO limits! It is the biggest GIVEAWAY of wealth ever…given away.

    Look at the IRONY: We are propping up (in a SOCIALISM sense) BETS AIG undersigned on its CDS portfolio (the CEO comes on cnbc and uses the term “policyholders” doing his best joe plumber impersonation) which CDS are probably held by I-Banks, and HedgeFUnds who are NOW INTERESTED In PUSHING other companies into BANKRUPTCY: companies like Ford, Lyondell, SixFlags.

    What is this? SOcial handout to the pinstripes…bankruptcy for the proletariat? With Obama/Geithners blessings! Doh!