Q. Why did the government bailout AIG?
A. American International Group, Inc., or AIG, is a large insurance corporation with ties to banks and financial institutions world-wide. AIG got in trouble selling insurance on credit failures known as “credit default swaps.” This exotic financial product was intended to protect investors from losses on defaults in the mortgage-backed security industry and elsewhere. In 2008, as the home and commercial mortgage market collapsed, the Federal Reserve said that if AIG defaulted on its contracts, then its customers, or counterparties, would be exposed to large losses, thereby further destabilizing the fragile financial markets. In September 2008, the Federal Reserve acted on its own to lend hundreds of billions in taxpayer dollars to AIG to enable AIG to meet its obligations and make payments to its counterparties.
Q. What are the AIG’s counterparties, and what do they have to do with the bailout?
A. AIG’s counterparties are the banks and financial institutions whose mortgage-related securities were guaranteed by AIG. Goldman Sachs said it had nothing at stake with its $12.9 billion share of the AIG bailout because it had transferred its risk to other banks and investors. Regardless, I kept the pressure on for a public accounting of what happened to the money that went to Goldman Sachs.
As part of my ongoing quest to ensure thorough government oversight, I demanded that Goldman Sachs release a list of companies that received money through Goldman Sachs as a result of the government’s bailout of AIG. After a Finance Committee hearing last month, where a subpoena was discussed, Goldman Sachs provided the information. The new documents show that Goldman used bailout cash to pay “counterparties” including 32 hedge funds and financial institutions around the world. The money from the New York Fed also allowed Goldman Sachs to avoid having to make claims on insurance it had purchased to protect itself from an AIG failure.
So, the public bailed out AIG, and the money flowed through AIG to a few large banks, including Goldman Sachs. Now we know that the money kept flowing through Goldman to financial institutions and operations all over the world. It’s as if the New York Fed used AIG as a front man for the bailout of the other firms.
Q. What does President Obama’s nominee for Deputy Attorney General, James Cole, have to do with AIG?
A. James Cole, President Obama’s nominee for Deputy Attorney General at the Department of Justice, was an independent consultant appointed by the Justice Department and the Securities and Exchange Commission to monitor activities at AIG following major fraud settlements in 2004 and 2006. He served in this role as an independent consultant at AIG in the years leading up to the financial crisis and the taxpayer bailout of AIG. During this time, Mr. Cole issued several best practices documents regarding compliance with Securities and Exchange Commission rules and regulations. Documents appear to show that Mr. Cole recommended establishing a derivatives committee to review derivatives contracts entered into by AIG, but the recommendation expressly exempted derivative transactions entered into by the AIG Financial Products Corporation, the subsidiary responsible for the 2008 meltdown at AIG that led to the bailout. Instead, the recommendation said derivatives entered into by AIG Financial Products would be “independently” reviewed by AIG Financial Products itself. Mr. Cole let the fox guard the henhouse, and now he’s been nominated for a very important position in the very department that trusted him to oversee AIG.
Q. I’ve heard that AIG continued to pay its executives huge bonuses. Is that true?
A. Many AIG executives received large bonuses after the bailout. Bonuses totaling $165 million were paid in 2009, and another $198 million was paid in 2010. Since AIG had received billions of dollars in the bailout, there are serious questions about the appropriateness of these payments. AIG claimed that the bonus contracts were binding because they were entered into before the September 2008 bailout. But, there’s evidence that some of the bonus contracts were signed in September and October 2008, after the bailout. Responding to public outrage, President Obama said in March 2009 that he would “pursue every single legal avenue to block these bonuses and make the American taxpayers whole.” Treasury Secretary Geithner was supposedly working with Attorney General Holder on the matter.
In December 2009, I wrote to the Treasury secretary asking why the 2009 AIG bonuses were not paid back, as promised, and expressing dismay that AIG was planning more bonuses for 2010, and the Treasury was not doing anything to stop this second round. In January 2010, I wrote to the TARP special master for compensation, asking more questions about a multi-million dollar severance package for an AIG executive. In February 2010, at a Finance Committee hearing, I asked the Treasury secretary why AIG bonuses went out for two years in a row and why the Treasury didn’t stop them. I wrote to the Treasury secretary to follow up. But in the end, neither the 2009 nor the 2010 bonuses were blocked, nor was an explanation ever given.
Q. Will the government ever recoup the money it spent on this bailout?
A. The nonpartisan Congressional Budget Office estimates that the American taxpayer will lose $35 billion of the taxpayer-funded TARP money given to AIG. It probably will be years before the taxpayer knows the final tally.