AIG Bailout Response

Where have all the AIG bailout payments gone?

According to a report in the Financial Post, Goldman Sachs Group Inc and a parade of European banks received the lion's share of $93-billion in payments from, guess who? American International Group, more commonly known as AIG. (thats why they call it the AIG bailout)

The $93-billion accounts for more than half of the U.S. taxpayer money spent to rescue the massive corporation. AIG's pipelining of taxpayer bailout money to an unpopular Goldman Sachs and to banks overseas is the latest in a string of widely criticized decisions AIG has made.

Practically at the same time, another revealed AIG plan met with outrage from President Obama. The plan involved using $165-million of taxpayer AIG bailout money to pay massive bonuses to the very division of AIG that destroyed the company in the first place.

The sheer size of AIG bailout payments demonstrates how concerned regulatory agencies are about the impact a possible collapse of the company would have on US and international financial systems. U.S. Federal Reserve Chairman Ben Bernanke said in an interview with CBS news magazine "60 Minutes" that the failure of AIG would have brought down the financial system.How much bailout money has AIG received thus far? A whopping $173-billion. The AIG bailout is at the heart of the global financial crisis that President Obama is planning to address with trillions of dollars in spending.

But, as the news settles in on the American public about AIG's funneling of billions in bailout funds to Goldman Sachs (which received $12.9-billion) and foreign banks (SocGen received $11.9-billion, Deutsche got $11.8-billion and Barclays was paid $8.5-billion), the outrage is building. Suspicion is also building as to whether the bailout was economically necessary in the first place.

Still others contend that the AIG bailout is the lesser of two evils. The greater evil would have been to stand aside and allow global economic collapse. In commenting on the fact that foreign banks were recipients of US taxpayer bailout money, Peter Morici, professor at the Smith School of Business, University of Maryland said, "The nationality of the bank should not matter. We have an inter-related financial system. You do something to mess with that and all bets are off."

Who is speaking out for the American taxpayer?

The original target of the TARP (Troubled Assets Relief Program) was the credit crunch. The Treasury will be announcing more details about proposed public-private partnerships with the purpose of buyi"ng up toxic assets. The announcements are expected to give a timeframe as well. Clearing bad assets off the books of major banks should restart the flow of credit.

Treasury officials have said the fund, or funds, created by these partnerships would provide as much as $1 trillion in financing for buying up toxic assets – particularly bad mortgages that are fueling the raging foreclosure crisis. The Federal Reserve and Federal Deposit Insurance Corp are onboard as participants in the effort.

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

The process is new

Pressure is mounting for Obama's administration to show that the rescue plan for AIG and major banks is accomplishing its two major goals:

• freeing up the credit system, and

• reining in the excesses of Wall Street.

The AIG disclosures are only complete through December 31. Up-to-date reports are pending. AIG only came clean about who they paid and how much they paid when faced with a looming congressional hearing scheduled for March 18, 2009. AIG chief executive Edward Liddy is slotted to testify regarding the controversial bonuses as well as the payouts to Goldman Sachs and foreign banks who are referred to as "counterparties" and "beneficiaries".

Chief White House Economic adviser Summers called the AIG bonuses "outrageous" but consented that contracts had to be honored. "We're not a country where contacts just get abrogated willy nilly," Summers said on CBS's "Face the Nation" program. Summers stated that Treasury Secretary Timothy Geithner had "negotiated very forcefully" with AIG and done all that was "legally permissible" to limit the payout of bonuses.

AIG's Liddy disclosed in a letter to Geithner that the corporate giant was contractually obligated to make 2008 employee retention payments (bonuses) but agreed to revamp methods for paying future bonuses once the Obama administration voiced disapproval.

"There are a lot of terrible things that have happened in the last 18 months, but what's happened at AIG is the most outrageous," Summers said. And he stated the obvious when he added, "The lesson…is this: We don't really have a satisfactory regulatory regime in place."

Help for the little guy

Officials report that Obama intends to help small businesses by providing $730-million of the $787-billion economic stimulus program to cut lending fees, boost loan guarantees and expand other lending programs.

Christina Romer, chair of the White House Council of Economic Advisers, was also a guest on NBC's "Meet the Press." She stated that small businesses are the "engine of growth," and added, "We absolutely want to do things to help them."

According to Austan Goolsbee, a member of the Council of Economic Advisers, the Obama administration expects private investors to bolster government funds and assist in cleansing the banking system of bad assets." I believe there is a reasonable expectation that people will participate," he said.

The idea of offering financing support from the government for private investors willing to buy the toxic assets was first presented by Geithner in February. Still, the proposal lacks detail and financial markets have not been encouraged.

Investigating AIG contracts

Representative Barney Frank, the Democratic chairman of the House of Representatives Financial Services Committee, is eager to see if the bonuses can be legally recovered.

"We can't just violate legal obligations," Frank told Fox. "I understand that. But I do want to find out at what point these illegal obligations were incurred." Senator Mitch McConnell, Republican minority leader, is also pushing to investigate the timing and the nature of the contracts.

The news of misappropriated AIG bailout money could incite political outrage, but many experts agree the alternative could have been worse.

Outraged members of Congress are vowing to tax the $165-Million in AIG bonuses at 100%, maintaining that the bonuses will be taken back one way or the other. But nothing has been officially decided.