The Real AIG Scandal

http://www.thebigmoney.com/articles/-best-policy/2009/03/17/real-aig-scandal?page=0,0

by dpapathanasiou • 17 years ago

40 43 17 years ago

lssndrdn• 17 years ago

I have been wondering some of the same questions. It seems like Goldman Sachs is one of the best-positioned large bank in this whole thing. Now they get to eat the cake and have it too? Am I missing something?

Tangurena• 17 years ago

Treasury Secretary Paulson was CEO of Goldman Sachs. He went to save his own buddies.

http://en.wikipedia.org/wiki/Henry_Paulson

HSO• 17 years ago

The timeline goes much longer, and the involvement much deeper. As for the timeline, former treasury secretaries Summers and Rubin were both at high-level positions at Goldman, Rubin actually was co-CEO. Then Friedman (his "co") who is Republican worked as chief advisor for Bush. Then Paulson, who as you said also was Goldman CEO. Now we got the Rubin people in there again, Geithner was his protege at treasury (as Rubin himself says in his autobiography) and Summers (now chief advisor to Obama) was Rubin's protege at Goldman. Note that Goldman paid out about 10 or 11 billion in 2008 for compensation, in the same year it received about the same sum officially (i.e. not counting the AIG shadow payments). Someone on a panel once said that if this same thing happened not in the US but some "developing" country, we would now hear big lectures about "crony capitalism". I used to admire Rubin and Goldman but this does not look good. This looks like Russian oligarchs, just in a richer country.

zurla• 17 years ago

yes. i've been disappointed that the controversy about the bonuses on the order of $200M have gotten more press and attention than the AIG bailout which is orders of magnitude more taxpayer dollars.

padmanabhan01• 17 years ago

One private company (AIG) insured 10 other private companies, and that one private company is now not in a position to honor the insurance policies. and now the Govt. on behalf of the public is giving money to that private company to save other companies.

isn't this wrong in many levels? this is against capitalism, this is rewarding bad behavior, it is immoral - in the sense that Govt is taking money from Peter to pay Paul, this approach is not going to work on top of all this, I just feel this is just wrong.

mikedouglas• 17 years ago

If you think the extent of AIGs insurance business was 10 companies, you're hugely mistaken. AIG is the backer of a huge number of corporate, state and municipal bonds. The usual terms of those bonds state that if the insurer fails, the bond becomes due right away. In a single day, we'd see a huge percentage of the solvent/proper economy just evaporate.

AIG would take an enormous part of both the private and public economy with it, if it ever failed.

gscott• 17 years ago

Through AIG banks could lend more since their investments were insured, so they didn't have to hold so much in reserve. Banks around the world used AIG so the AIG bailout is propping up banks everywhere, not just the US.

AIG is on the hook for such a large sum of money, I can't imagine they can be bailed out forever.

I am curious if AIG is writing more of the same contracts that took them down this path in the first place. I wouldn't be suprised if they are because the people behind this bailout believe deep down that CDO's and other similiar contracts are still good for the economy.

smanek• 17 years ago

The contracts themselves are good in principle, they were just executed stupidly (and the stupidness was rewarded with a bailout).

But there is no reason that I shouldn't be allowed to sell you a guarantee that "X" won't happen (for any value of "X"). But, you are responsible for making sure that I'm liquid enough to pay in case "X" does happen - because if I'm not I'll just go bankrupt and you can try to claim your share of my assets just like everyone else.

These sort of contracts help hedge risk - as long as they are done responsibly. When they are done irresponsibly, the involved parties should be made to suffer, not bailed out with tax payer funds.

joe_the_user5• 17 years ago

You mean that the contracts seem logical to you - when you just look at the relation between two companies.

But you aren't really looking at the total effect of these contracts. Derivative contracts "spread risk" but, as we've seen, they don't avoid risk. So what they do is turn the individual risk of corporate bankruptcy into the risk of systemic collapse.

That is called an "externality of production". Individual companies sometimes don't mind taking gambles that have a downside for people not otherwise involved with them. Much of governmental regulation is specifically for preventing these externalitie from impacting people - this is why banks are regulated, why companies must proper precautions handling toxic materials, why automobile drivers must have insurance, etc.

So, ultimately, these kinds of contracts are bad. They need to be regulated in the same way that banks are regulated and for the same reasons.

rjurney• 17 years ago

Insurance is ok. Insurance is regulated.

Credit default swaps are derivatives. They were deregulated in the http://en.wikipedia.org/wiki/Commodity_Futures_Modernization... so as to be completely unregulated.

You can't insure 35 times your cash reserves, but you can issue just such a derivative.

Insurance was ok. Insurance gone mad in the form of derivatives literally tanked our economy.

hardik• 17 years ago

IMHO, our understanding of ability to hedge risk is still in infancy. The idea of complete diversification of risk is only good on paper and a lot of mess is a result of companies naively (or greedily) thinking that they can achieve it. I recently attended a presentation by some very respected actuaries where they showed empirical evidence that while risk can be diversified in general (across assets as well as asset classes) in the tail end of economic scenarios all asset classes have strong positive correlation. In other words in general you can ensure consistent returns by diversification, when things go bad, you are screwed and nothing much you could have done would prevent that; writing derivative contracts which would save you from such scenario are contingent on counter-party not defaulting, which it did (until the US Gov. paid the counter party taxpayer money to prevent defaults).

At the end of the day, yes, it feels right to not only AIG but those counterparties should also feel the pain.. at least they should not be given 100 cents on a dollar!

jibiki• 17 years ago

It's a little off-topic, but does anyone else here feel like Spitzer kind of got a raw deal from the media?

aristus• 17 years ago

We'll probably never know, but the timing sure smelled fishy. Right before all the initial bailout drama, Spitzer gets taken down for paying for hookers with a credit card. Dirty little secrets like that are generally kept in reserve just in case you need someone out of the way.

numair• 17 years ago

How about NO...

He ruined Hank Greenberg, one of the greatest businessmen in this country, and put AIG in the very position it is in today -- all for what, a shot at becoming the next Giuliani? It's utterly retarded. He is the classic "bad cop" who is off doing shady crap in his free time, punishing perfectly good law-abiding citizens as part of his power trip. I mean, really, Hank Greenberg was the squeaky-cleanest guy you could find; yeah, there were the backroom deals and whatnot, but that's called "the old boys' club," and nothing that was severely impacting the fate of the global economy. Leaving AIG in the hands of Marty Sullivan and his gang of idiots, however... Well, we see what has happened; AIG is now so impotent that it is used as a mere pawn by the banks and the Fed. Spitzer practically shouldn't be allowed to write about this without acknowledging that he created the problem.

The problem with politics is ... When Miley Cyrus says she will "ruin" Radiohead, we all laugh; when the Miley Cyruses of the political world say they are going to "ruin" someone, the power given to them by the people allows them to make inroads into doing just that.

jhancock• 17 years ago

Can you please elaborate on two things:

1 - "Hank Greenberg was the squeaky-cleanest guy you could find"

2 - "He ruined Hank Greenberg, one of the greatest businessmen in this country, and put AIG in the very position it is in today"

CWuestefeld• 17 years ago

Not a bit. Spitzer's whole reputation was built on grandstanding, rather than real substance. It's only fitting for him to be hoist on his own petard.

The Real AIG Scandal

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