Friday, February 12, 2010

AIG Bailout Inquiry

In recent weeks, the House Committee on Oversight and Government reform has expanded its investigation into the bailout of AIG to require testimony from former Treasury Secretary Henry Paulson and former Federal Reserve Chairman Stephen Friedman. The inquiry will interrogate the decision to fully compensate the counterparties of AIG when they were bailed out by the government. This inquiry responds to Republican Congressman Darrell Issa’s call for Paulson to testify after uncovering e-mails in which New York Fed lawyers told AIG to keep some details of the bailout secret. According to the AP:

"The committee is pressing for details about deals that sent billions from AIG's bailout to big banks including Goldman Sachs Group Inc. Lawmakers want to know why the New York Fed pressed AIG to be more secretive about the 'backdoor bailouts' and other aspects of AIG's management."

The following questions are expected to be addressed during the inquiry:

How was the Treasury’s decision to fully compensate the counterparties of AIG in its 182 billion dollar bailout reached?

Why was the decision made by then New York Fed Chair and now Treasury Secretary Timothy Geithner and Paulson to refuse to name those counterparties that were paid off in full?

The Committee on Oversight and Government will also be asking the GAO to examine the payments and inquire into the source of the direction to pay the counterparties in full and what steps were taken thereafter to block disclosure of those payments.


  1. Hank Greenberg asks all the important questions in this article in the Wall Street Journal:

    In short, it added up to a perfect trap for AIG. As panic spread through the financial sector, impossible amounts of cash were required of the firm under insurance contracts that had years to run and (as Mr. Greenberg argues and events seem to be showing) would likely end up performing adequately in the long run.

    But this is just half the puzzle, he says. When the government took over AIG, why did it insist that Goldman and other firms receive 100 cents on the dollar on their AIG exposure, while the terms of AIG's own bailout were so onerous as to force the firm into slow-motion liquidation? When the government's bailouts of Citigroup, Bank of America, GM and Chrysler were clearly designed to restore the firms to health, why was AIG's apparently designed to create a wasting asset that would wither and die in taxpayer hands?

    Most of all, he cannot fathom why Treasury and the Federal Reserve let billions of dollars in taxpayer cash fly out the backdoor to Goldman and other firms. Washington could simply have ordained that AIG's debts were the government's debts and so no collateral was due give Uncle Sam's bulletproof credit rating.

    Can AIG Be Saved, WSJ

    That final question strikes right at the heart of the AIG takeover. The pre-funding and pre-payment clauses of the CDS contracts held by AIG were triggered by AIG's credit downgrades. When the government took over AIG it had only to assert that AIG's contracts were now backed by the Aaa rating of the U.S. government and that those contracts would be paid only upon default, period. If that had been done the taxpayer would have had to pay almost nothing to support AIG.

  2. Anonymous:

    Agreed that the bailout of AIG, its terms, and the backdoor payments to Goldman must be investigated. The rest of the article you reference reads as self-serving trope by Greenberg and the Wall Street Journal.

  3. I believe this situation was a "catch 22." Although we would all like to know every detail of the bailout, it may present adverse effects. Understandably, our frustration and desire to know of all the bailout details originates from our feeling of being owed an explanation- after all it was tax money that went to provide this bailout. But, these "backdoor bailout details" may be misconstrued in the media resulting in even more issues. I believe that the decision to keep these details confidential was not completely founded in ill will, but better yet in prevention of worsening an already bad situation.

  4. Personally, I believe it is important for us to know the details of the AIG bailout because tax payer's hard earned money contributed to this government crutch. It is equally unfair to allow these counterparties who received full payouts to hide behind a curtain and absorb all of the benefits without any of the risks. Sure, there are many people who would prefer the fortune without the fame (media frenzy), but when you take from the public you must answer to the public. I think it will be interesting to see how Paulson responds; however, we are dealing wih people who are used to dancing around issues so it would not surprise me if these questions go unanswered.

  5. I personally agree with Ms. Rhodes. I believe that there is a right to know. Not saying that taxpayers need to know every little detail of where taxpayer money is spent but the federal government spent $182 billion in order to bail out AIG. That is a substantial amount of funds to aid correcting the egregious mistakes made by this company. It seems odd to me that the government has directed that the troubled insurance giant use those funds to pay back its counter-parties but allow the company to withhold the public details about its massive and controversial payments to these counter-parties.

  6. Transparency is a theme of the Obama administration. As Ms. Rhodes opined, "when you take from the public, you must answer to the public." The real test here is whether, after this investigation, will the public really get the transparency it seeks? I have a personal issue with reactionary investigations when our government selects a "fall guy(s)" and zealously goes after that person(s) giving the public impression that "oversight" is actually occurring. I'd like to see a proactive oversight where, if we must bailout these financial institutions because of its mismanagement, the funds are distributed with serious management of taxpayers' money. If mismanagement of these institutions would warrant a bailout, oversight should have started from the beginning. The "Backdoor Bailouts" are not a surprise when you consider the pipeline of a board member moonlighting as Federal Reserve Bank Chairman.