AIG: Forget Bonuses; What About Bank Payoffs?

Though executive bonuses paid by AIG are sparking plenty of public outrage, some are even more disturbed by where much of the rest of the $170 billion promised AIG in federal bailout funds is winding up: U.S. and foreign banks.

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MICHELE NORRIS, host:

We have been hearing a lot about rage about the huge bonuses that AIG gave to executives, but there are some who say that outrage is misdirected. They say more outrageous are the billions of dollars in taxpayer money that AIG is using to pay its counterparties, that is, banks and other institutions.

NPR's Adam Davidson is part of our Planet Money team. He's been studying AIG and he joins me now. Adam, please remind us how this works. Why is AIG paying these so-called counterparties all this money?

ADAM DAVIDSON: So the counterparties are basically some of the biggest banks, and hedge funds and financial institutions around the world. And basically, for several years, AIG provided a service. If you believe that the U.S. housing market was going to go down in value and you wanted to make money if that happened, you bought something called a credit default swap, a form of bond insurance from AIG.

And it was a way to take a bet on the housing market, to say, I think the housing market is going to do badly. If it does, AIG will pay me money. And so the housing market has done very badly, so AIG, which was on the other side of that bet - they were betting that the housing market would not do terribly badly, AIG now owes all those people an awful lot of money.

NORRIS: Adam, the people who are outraged say that the money that the government is paying to AIG is actually some sort of secret bailout for these counterparties, these other huge banks. You've been covering this a long time, is that the way you see this? Why would AIG give money that it received from the U.S. government to these counterparties and make these payouts at 100 cents on the dollar?

DAVIDSON: Well, first of all, I don't think the word bailout is the right word, which is not to say this is some wonderful thing that we should all go around celebrating. But the decision that was made last September when the U.S. government rescued AIG, the decision was made that if AIG collapsed, it owed so many billions of dollars to so many financial institutions, many of those would collapse and it could bring down the entire global economy.

What surprises me most, I have to say, about this week and last week, is that so many people in Congress and other leaders didn't realize this in September. This was the obvious and clear decision that was made. We are going to give taxpayer money to AIG so that they can meet their contractual obligations to pay these counter-parties.

Now, there probably would have been other ways for the government to do this. They could have put AIG into some kind of receivership, or something that would've allowed them to give the counter-parties money but not all the money. Not 100 cents on the dollar. I think that the government's argument is, it was a weekend. The feeling was if they didn't do this rescuing in two days the whole economy was going to break. And this would've required Congress to write new laws, it would've required a dramatic change in regulation. And I think everyone involved just said, forget it. We're going to do it the fast way.

NORRIS: Now, a lot of people are interested in who was on the receiving end, or what companies were on the receiving end of these AIG payments. What do we know about that list?

DAVIDSON: Well, we've gotten a partial list. We know that it does include many banks, like Goldman Sachs, Merrill Lynch - there's several overseas ones, you know, Deutsche Bank in Germany, Barclays in the UK, France's PNB Pariba and lots of others. The Wall Street journal today is reporting that it's likely, and I think this is probably very true, that either already or sometime in the future hedge funds just speculative investors will get money from AIG.

NORRIS: Now whether this outrage is justified or not, one of the curious things about the list of recipients of this AIG money is that some of these financial institutions also received money from the government.

DAVIDSON: Yes, I mean that's a separate thing, this is - basically the government decided to keep AIG as a private sector company that just happened to have one very large shareholder: the US government. This is totally separate from the bailout money, but yes I mean it is true that it is the same banks, in some cases.

NORRIS: Is that troublesome or should that be troublesome?

DAVIDSON: I mean I think the way in which it's troublesome is it's just one more reminder that much of the global economy, much of the US economy was in the hands of a very small number of banks. When you think of the four top banks controlling more than half of the assets in the US banking system it should be no surprise that they're in the middle of this, they're the ones getting the bailout. It's just a reminder that a handful of banks really control the lions share of US financial transactions and that, as we've seen, is troubling.

NORRIS: Adam thank you very much.

DAVIDSON: Thank you.

NORRIS: That's NPR's Adam Davidson and you can hear a lot more about the AIG bailout and other financial news at NPR's Planet Money blog and it's Planet Money podcast, that's at npr.org/money.

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