AIG massive payments to banks stoke bailout rage

WASHINGTON/NEW YORK (Reuters) – A large portion of  the taxpayer money spent to rescue insurer AIG was passed on to  Goldman Sachs and several European banks, who were among the  major beneficiaries of more than $90 billion in payments in the  first three-and-a-half months of the government bailout, AIG  disclosed  yesterday.

The revelation was another public relations nightmare,  coming on the same weekend that the Obama administration  expressed outrage over American International Group Inc’s plan  to pay massive bonuses to the people in the very division that  destroyed the company by issuing billions of dollars in  derivatives insuring risky assets.

AIG, an embattled insurance giant that has received federal  bailouts totaling $173 billion and is now paying $165 million  in employee bonuses, is at the heart of a global financial  crisis that President Barack Obama is trying to address with  plans for trillions of dollars in spending.

As part of those efforts, Obama will announce steps today to make it easier for small business owners to borrow  money, officials said.
But the revelations that billions of U.S. taxpayer dollars  were funneled through AIG to Goldman Sachs — one of Wall  Street’s most politically connected firms — and to European  banks including Deutsche Bank, France’s Societe Generale and  the UK’s Barclays was likely to stoke further outrage at the  entire U.S. bank bailout.

While the payments were not illegal, the fact that billions  of dollars given to prop up giant insurer AIG were then  transferred to European banks and Wall Street investment houses  could raise new doubts about whether the rescue was really  economically necessary.
Goldman Sachs, formerly led by Henry Paulson who was  treasury secretary at the time of the original AIG bailout,  could not immediately be reached for comment. Deutsche Bank and  Barclays declined to comment.

As it seeks to ease the credit crunch that was the original  target of the Troubled Assets Relief Program (TARP), the  Treasury will also offer more details this week about the  workings of proposed public-private partnerships to take toxic  assets off banks’ books, including a timeframe, a senior  department official said on Saturday.

“No taxpayer in these arrangements is going to lose money  until the investor who put up the money has lost 100 percent,”  said Chief White House economic adviser Lawrence Summers.

Treasury officials have said the fund, or funds, would be a  vehicle to provide as much as $1 trillion in financing for  buying bad assets — particularly mortgages gone bad as a  result of the U.S. housing bust. The Federal Reserve and  Federal Deposit Insurance Corp would participate.

As more Americans lose their jobs and homes, Obama’s new  administration is under heavy pressure to show that the rescue  plan for AIG and major banks is working to free up lending and  rein in the riskier excesses of Wall Street.

The payments to AIG counterparties include the provision of  collateral to back up credit default swaps, a form of financial  insurance that AIG’s London office was writing, the purchase of  the collateralized default obligations, a type of complex debt  security that underlay that insurance, and payments to  counterparties of a securities lending program.
Through three separate types of transactions, Goldman  received an aggregate $12.9 billion. Among European banks,  SocGen was the biggest recipient at $11.9 billion, Deutsche got  $11.8 billion and Barclays was paid $8.5 billion.

The list of counterparties was made public by AIG amid  growing pressure on the insurer to come clean about the true  beneficiaries of the bailout ahead of a congressional hearing   on Wednesday at which AIG chief executive Edward Liddy is  slated to testify.

Summers — speaking before the payments to banks were made  public — called the AIG bonuses “outrageous” but said  contracts must be honored, even though Treasury Secretary  Timothy Geithner had “negotiated very forcefully” with AIG and  done all that was “legally permissible” to limit the payments.

“We’re not a country where contacts just get  abrogated  willy nilly,” Summers, a former treasury secretary, said on  CBS’s “Face the Nation” program. “What the lesson is, is this:  We don’t really have a satisfactory regulatory regime in  place.”

News of the AIG bonuses sparked outrage beyond political  circles and was equally apparent on news Web sites and among  ordinary Americans.

Help For Big And Small
To help small businesses, officials said Obama intends to  provide $730 million from the congressionally approved $787  billion economic stimulus program to cut lending fees, boost  loan guarantees and expand other programs.

“We know that small businesses are the engine of growth,”  Christina Romer, who chairs the White House Council of Economic  Advisers, said on NBC’s “Meet the Press.”
“We absolutely want to do things to help them.”

As part of the financial rescue, the Obama administration  expects private investors to bolster government funds to help  cleanse the banking system of bad assets, said Austan Goolsbee,  a member of the Council of Economic Advisers.

“That is a key component to the plan but that is not the  only key component,” Goolsbee told “Fox News Sunday,” stressing  that the first step had to be a “thorough examination of what  situation the banks are in.”

“It’s better to do this jointly with private capital,” said  Goolsbee. “I believe there is a reasonable expectation that  people will participate.”
The idea of offering financing support from the government  for private investors willing to buy the toxic assets was first  put forward by Geithner in February but the lack of detail has  disappointed financial markets.

Mark Zandi, chief economist at Moody’s Economy. com, said  private investors were ready to join the government in buying  up toxic assets — “if it is organized well enough.”

Around the Web