AIG Acts as Conduit. Taxpayers Get Nothing.

by Odysseas Papadimitriou on July 17, 2009

AIG BankruptMy point, in the past, has been that if America had allowed AIG to go into prepackaged bankruptcy, as we are doing with Chrysler and GM, we would have been in a better position to deal with the money AIG owes through Credit Default Swaps (CDS) because we could have negotiated payback for those positioned to collect on AIG’s obligations.  AIG owed money, we bailed them out to save the economy, and the result is that AIG paid off a lot of its obligations, and we, as taxpayers, now own billions of dollars of nearly worthless AIG stock. 

For the ones that are still not convinced, let us look at Goldman Sachs and its position concerning AIG.  AIG  paid out $13 billion bailout money to cover its CDS obligations to Goldman Sachs.  Actually, taxpayers paid Goldman Sachs, AIG just acted as a conduit.  The $13 billion was incredibly good for Goldman Sachs whose stock has since risen, but not nearly as good for AIG whose stock is perpetually on the verge of tanking.  However, the major problem here is that taxpayers paid AIG to pay off Goldman Sachs.  The result is that taxpayers own AIG stock (on the verge of collapse), and own no stock in Goldman Sachs (which is on the road to recovery).  Moreover, because CDSs are still unregulated, Goldman Sachs stands to make about $30 billion if AIG does, eventually, go bankrupt because of the CDSs they’ve taken out on that eventuality.  It is possible that other companies have similar CDSs bought against AIG, but since, remarkably, there still is no system of market regulation set up for CDSs, we can’t know for sure.

So, two things.  First, if we wanted to give money to Goldman Sachs, why didn’t we just do that?  We could have let AIG go into prepackaged bankruptcy, told Goldman Sachs that we would cover some of AIG’s obligations to them, in return for Goldman Sachs preferred shares.  As a result, we wouldn’t have been left us holding billions of dollars worth of worthless AIG stock, and instead we would have owned part of Goldman Sachs and actually made money from their economic recovery.

Second, now that AIG is a sinking ship bobbing its last in the global financial ocean, what are we going to do, financially, about the CDSs that have obviously been purchased against the eventuality of AIG’s collapse.  Because of a lack of market regulation, we have no idea how widespread of a risk these CDSs pose to our economy.  Having let this go too far, it is now in the tax payer’s best interest for AIG stock to go up in value, while it is in Wall Street’s best interest that AIG collapses.  Who should Washington support in all this?  Should they be worried about the money that will be lost in CDSs if AIG does manage to succeed?  Will that endanger still recovering companies?  Should they push AIG towards collapse so as to artificially force the CDSs to pay off (at the loss of all the money that has, thus far, been paid into AIG)?  One thing’s for sure, the situation is an absolute mess.

Now, let us imagine, that the United States had let AIG go into prepackaged  bankruptcy way back when.  Nobody would have had time to take CDSs out on the eventuality of their bankruptcy and so we wouldn’t have pitted the interests of private enterprise versus private citizens.  The money owed by AIG would have become immediately apparent, and could have been covered in a way that would have saved the economy without making American taxpayers majority shareholders in an economic sinkhole.  We would, arguably, be where we are today, except for the possibility that our funds might have gone towards stock in companies that had a glimmer of hope in recovery.

In closing, I’d like reiterate the point I made way back in March:  that AIG needs to go into prepackaged bankrupctyso that the government can effectively deal with the company’s toxic assets.  I think I’ve already elucidated my reason for this, but I’d like to leave you by citing one more.  On June 29th, AIG signalled that they may have underestimated the losses in their derivative portfolio.  This should have come as no surprise to anyone who has been following this issue, but in any case, it should if nothing else, motivate the government into action.  AIG still owes who knows how much or to whom.  As long as it remains insolvent, it will continue to act as a conduit funnelling taxpayer funds to pay off these obligations.  Taxpayer bailouts will go towards making those companies healthy while the stock we own in AIG will creep closer and closer to zero.  If we go into prepackaged bankruptcy now, we can end this cycle.  Otherwise, we might as well expect to pay off the next round of AIG’s CDS obligations.

Discussion

John
It is time for Goldman to do the right thing and at a minimum offer the taxpayer a fair price for the warrants the government holds. And show some gratitude for being saved from the abyss. There is a related post at http://iamsoannoyed.com/?page_id=588
July 17 at 17:34 pm
Jim O
Absolutely right. To your post I would add: that's why they anoonced the $165M in "bonuses" on the same day they announced Goldman Sachs, et al., got tens of Billions of the taxpayer's bailout money. They knew which of those two pieces of news would attract the lightning. But to this day, most people can't seem to figure out which was the real swindle.
July 17 at 16:14 pm

Relevant Articles

No Similar Posts

Most Popular Topics

Most Popular Articles

Subscribe

Receive the latest advice and deals:

Wallet Hub Facebook Twitter Google Plus

Submit A Post

Want to be a guest blogger? Submit a Post