American International Group, Inc. (AIG) NYSE: AIG, also known as AIU Holdings, Inc., is an American insurance corporation. According to the 2008 Forbes Global 2000 list, AIG was once the 18th-largest public company in the world. It was listed on the Dow Jones Industrial Average from April 8, 2004 to September 22, 2008.
AIG suffered from a liquidity crisis when its credit ratings were downgraded below "AA" levels in September 2008.
The US Federal Reserve Bank on September 16, 2008, created an $85 billion credit facility to enable the company to meet increased collateral obligations consequent to the credit rating downgrade, in exchange for the issuance of a stock warrant to the Federal Reserve Bank for 79.9% of the equity of AIG.
The U.S. government revised the credit facility, and eventually increased the total amount available to as much as $182.5 billion.
AIG subsequently sold a number of its subsidiaries and other assets to pay down loans received, and continues to seek buyers of its assets. In March 2009, AIG faced public outrage and media and political backlash for its retention payments of $165 million. Some AIG employees faced hate mail and death threats, and websites had sprung up attacking AIG.
Systemic risk exposures of AIG
- Source:Statement by Ben S. Bernanke, Chairman, Board of Governors of the Federal Reserve System before the Committee on Financial Services, U.S. House of Representatives, March 24, 2009 (page 2)
- Some of AIG’s insurance subsidiaries, which are among the largest in the United States and the world, would have likely been put into rehabilitation by their regulators, leaving policyholders facing considerable uncertainty about the status of their claims. **State and local government entities that had lent more than $10 billion to AIG would have suffered losses.
- Workers whose 401(k) plans had purchased $40 billion of insurance from AIG against the risk that their stable value funds would decline in value would have seen that insurance disappear.
- Global banks and investment banks would have suffered losses on loans and lines of credit to AIG, and on derivatives with AIG-FP. The banks’ combined exposures exceeded $50 billion.1
- Money market mutual funds and others that held AIG’s roughly $20 billion of commercial paper would also have taken losses.
- In addition, AIG’s insurance subsidiaries had substantial derivatives exposures to AIG-FP that could have weakened them in the event of the parent company’s failure.
- Direct and Indirect Impact of AIGFP failure AIG, February 26, 2009
- The large size of their derivatives books: AIG Financial Products Corp. (AIGFP) has approximately $1.6 trillion in notional derivatives exposures
- Unwinding of the portfolio in an AIG failure would likely cause enormous downward pressure on valuations across a wide range of associated asset classes
- The large number of counterparties involved in a wind-down of the derivatives books. Counterparties include top banks, sovereign wealth funds, money managers and hedge funds.
- Total client base: more than 1,500 major corporations, governments, and institutional investors would be affected
House Oversight Committee inquiries
AIG House oversight
See AIG House oversight.
Rep Towns requests documents on Friedman waiver
- Source: Fed Told to Hand Over Friedman Documents Wall Street Journal, March 19, 2010
Lawmakers demanded documents from the Federal Reserve relating to the purchases of Goldman Sachs Group Inc. stock by Stephen Friedman, the former Goldman executive who stepped down as chairman of the Federal Reserve Bank of New York last year because of a controversy over those purchases.
Mr. Friedman's Goldman stock purchases, which occurred in December 2008 and January 2009, raised "serious questions about the integrity of the Fed's operations," Edolphus Towns, chairman of the House Committee on Oversight and Government Reform, said in a letter to Fed Chairman Ben Bernanke on Thursday.
Mr. Towns's staff has been investigating the incident, which involves potential conflicts of interest and revolves around complicated rules that oversee the boards of 12 regional Fed banks.
A spokeswoman for the Fed said it had received Mr. Towns's request and planned to respond.
- Congress Demands Explanation From Bernanke On Why Goldman And Ex-Fed Board Member Stephen Friedman Illegally Bought Shares Of Goldman In December 2008 ZeroHedge, March 19, 2010
Rep Issa requests AIG documents
- Source: Bernanke Asked for Fed’s AIG Bailout Documents by Lawmaker Bloomberg, February 18, 2010
Feb. 18 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke has been asked by a Republican lawmaker to turn over documents related to the decision to rescue insurer American International Group Inc.
The Federal Reserve should deliver the records by March 2, according to a letter dated yesterday from Representative Darrell Issa of California, ranking member of the House Oversight and Government Reform Committee. Bernanke last month invited the Government Accountability Office to conduct a “full review” of the central bank’s actions tied to the bailout that swelled to $182.3 billion.
“In light of your professed commitments and your apparent desire to cooperate with this committee’s investigation, I am writing to request that you voluntarily produce to this committee all records and communications in the possession of the Federal Reserve” regarding the rescue, Issa wrote.
Issa is seeking to widen the probe into what he’s called a “backdoor bailout” of banks that got funds from AIG after its rescue and efforts by the Federal Reserve Bank of New York to withhold details from the public about the payments. Treasury Secretary Timothy Geithner, who ran the New York Fed when AIG was bailed out in 2008, testified last month that the payments were necessary and that subordinates made disclosure decisions.
The New York Fed, which turned over about 250,000 pages of documents after the oversight committee issued a subpoena, is “not in full compliance” with the demand, Issa wrote in a separate letter to committee Chairman Edolphus Towns. The regulator limited material to the period from September 2008, the month of the bailout, to May 2009, Issa wrote to the New York Democrat.
Senate inquiries about AIG
Senator Grassley receives Goldman hedging identities
- Source: Goldman Sachs Names European Banks It Paid Amid AIG's U.S.-Funded Bailout Bloomberg, jULY 23, 2010
Goldman Sachs Group Inc. said it made payments to banks including Germany’s DZ Bank AG and Banco Santander SA of Spain for mortgage-related losses as it received U.S. taxpayer funds through the American International Group Inc. bailout in 2008.
The list of 32 counterparties to Goldman Sachs on collateralized debt obligations was released today by U.S. Senator Charles Grassley. The largest payments were to European lenders that also included the London branch of Rabobank Nederland NV, Zuercher Kantonalbank and Dexia Bank SA.
“The majority of these beneficiaries appear to be foreign entities,” Grassley wrote in a set of questions directed at Elizabeth Warren, chairman of the Congressional Oversight Panel, and published on his website. “Can you please explain how ensuring that these institutions were paid in full, rather than required to suffer the consequences of the risks that they took, benefited the U.S. taxpayer?”
Goldman Sachs turned over the list to the Congressional Oversight Panel and Financial Crisis Inquiry Commission, which are reviewing the use of taxpayer funds in financial bailouts. Grassley, the ranking Republican on the Senate Finance Committee, had suggested Goldman Sachs could be subpoenaed if the New York-based bank didn’t provide the information.
- Source: Goldman Sachs Said to Give AIG-Hedging List to Investigators Bloomberg, July 23, 2010
Goldman Sachs Group Inc. told U.S. investigators which counterparties it used to hedge the risk that American International Group Inc. would fail, according to three people with knowledge of the matter.
The list was sought by panels reviewing the beneficiaries of New York-based AIG’s $182.3 billion government bailout, said the people, who declined to be identified because the information is private. Goldman Sachs, which received $12.9 billion after the 2008 rescue tied to contracts with the insurer, has said it didn’t need AIG to be rescued because it was hedged against the firm’s failure.
“We want to know the identity of those parties, partly just to know where American taxpayer dollars went, but partly to assess Goldman’s claim,” said Elizabeth Warren, chairman of the Congressional Oversight Panel, in a Senate hearing this week. “We cannot evaluate the credibility of their claim that they had nothing at stake one way or the other in the AIG bailout.”
Warren’s panel and the Financial Crisis Inquiry Commission, both of which are reviewing the use of taxpayer funds in financial bailouts, received the data from New York-based Goldman Sachs, the people said. Goldman Sachs had rebuffed a May request from the Congressional Oversight Panel for the names of counterparties, according to a document provided to lawmakers.
- Goldman, Blackrock In Cross Hairs Again As Senator Grassley Digs Up Old Corpses ZeroHedge, July 24, 2010
Senator Grassley sends 2nd letter to pay czar
- Source: Grassley Again Questions Pay Czar Over AIG Wall Street Journal, January 26, 2010
Sen. Charles Grassley has sent a second letter to U.S. pay czar Kenneth Feinberg asking about reports of severance payments to executives leaving American International Group Inc.
The letter inquires about former General Counsel Anastasia D. Kelly and Suzanne Folsom, who was chief compliance and regulatory officer.
Both left the company at the end of 2009. Ms. Kelly received an exit package of at least $3.9 million and Ms. Folsom received more than $1 million in severance, according to people familiar with the matter. Neither was reached for comment Monday.
Mr. Grassley (R., Iowa) in his letter Monday questioned Mr. Feinberg about a recent investigation by an outside law firm for AIG into whether Ms. Kelly was "properly performing her duties as general counsel." Mr. Grassley asked for details on that investigation.
Mr. Grassley also referred to reports that Ms. Folsom may have received $1 million in severance. He asked for information about the basis of that payout.
AIG said Dec. 30 that Ms. Folsom "left to pursue other opportunities." Unlike Ms. Kelly, Ms. Folsom wasn't a participant in AIG's executive-severance plan, according to people familiar with the matter.
Senator Grassley explores AIG ex-general counsel's severance
- Source: Senator Wants Explanation on AIG Severance Deal Wall Street Journal, January 18, 2010
Sen. Charles Grassley (R., Iowa) has asked the U.S. pay czar to explain why the recently departed general counsel of American International Group Inc. will receive several million dollars in severance.
The giant insurer agreed last month to award ex-general counsel Anastasia Kelly an exit package totaling roughly $3.9 million, the bulk of which is severance, according to people familiar with the matter. Ms. Kelly resigned from AIG effective Dec. 30, the company said.
AIG determined that Ms. Kelly was entitled to severance under terms of the company's executive-severance plan after her annual cash base salary was reduced to $500,000 under determinations made by the pay czar, Kenneth Feinberg.
"The taxpayers are fed up with massive payouts to executives at companies that took taxpayer money," said Mr. Grassley, the ranking Republican on the U.S. Senate finance committee. He called the payout a "windfall."
An AIG spokesman and Ms. Kelly had no comment. A representative of Mr. Feinberg's office didn't immediately respond to a request for comment.
Senate oversight hearing March 5, 2009
- Source: AMERICAN INTERNATIONAL GROUP: EXAMINING WHAT WENT WRONG, GOVERNMENT INTERVENTION, AND IMPLICATIONS FOR FUTURE REGULATION Senate Banking Committee website, Thursday, March 5, 2009
Christopher J. Dodd view statement
- Honorable Donald Kohn view testimony Vice Chairman Board of Governors, Federal Reserve System
- Mr. Scott M. Polakoff view testimony Senior Deputy Director and Chief Operating Officer, Office of Thrift Supervision
- Mr. Eric Dinallo view testimony Superintendent, New York State Insurance Department
See also AIG - SIGTARP.
- Source: Barofsky Says Criminal Charges Possible in Alleged AIG Coverup Bloomberg, April 28, 2010
"...The TARP watchdog has also criticized Treasury Secretary Timothy F. Geithner in reports and in congressional testimony for his handling of the process by which insurance giant American International Group Inc. was saved from insolvency in 2008, when Geithner was head of the Federal Reserve Bank of New York.
The secrecy that enveloped the deal was unwarranted, Barofsky says, adding that his probe of an alleged New York Fed coverup in the AIG case could result in criminal or civil charges.
In Senate Finance Committee testimony on April 20, Barofsky said SIGTARP would investigate seven AIG-linked mortgage-related securities similar to Abacus 2007-AC1, the instrument underwritten by Goldman Sachs Group Inc. that is at the center of a U.S. Securities and Exchange Commission lawsuit filed against the investment bank on April 16.
“I’ve been in contact with the SEC,” he told the committee. “We’re going to coordinate with them, but we’re going to lead the charge. We’re going to review these transactions.”
Barofsky and Geithner’s offices have gone toe-to-toe over AIG, alleged lax oversight of TARP funds and even over the question of whom Barofsky reports to..."
Congressional Oversight Panel on AIG - May 26
- Source: COP Hearing on TARP and Other Assistance to AIG COP
On Wednesday, May 26, the Congressional Oversight Panel will hold a hearing in room 342 of the Dirksen Senate Office Building on the financial assistance provided to American International Group, Inc. (AIG) under the Troubled Asset Relief Program (TARP) and other government financial stability programs.
- [http://www.federalreserve.gov/newsevents/testimony/alvarez20100526a.pdf Testimony by Scott G. Alvarez, General Counsel, Board of Governors of the Federal Reserve System before the Congressional Oversight Panel, May 26, 2010
Justice Department drops probe of Cassano
- Source: Prosecutors Said to Drop Probe of Former AIG Executive Cassano Bloomberg, May 22, 2010
Federal prosecutors won’t bring charges against former American International Group Inc. executive Joseph Cassano related to the insurer’s collapse, according to a person familiar with the investigation.
The Justice Department found after a two-year investigation that there was insufficient evidence to charge Cassano, who was the former chief executive officer of AIG’s Financial Products division, the person said.
The Justice Department and civil investigators from the Securities and Exchange Commission were examining comments made in 2007 by Cassano and other AIG executives. They were probing whether executives misrepresented the value of AIG’s portfolio of “super senior” credit-default swaps, which insured bond losses tied to the U.S. housing market.
“Although a 2-year, intense investigation is tough for anyone, the results are wholly appropriate in light of our client’s factual innocence,” F. Joseph Warin, an attorney for Cassano, said yesterday in an e-mailed statement.
“The large group of federal agents and prosecutors was diligent and professional throughout the investigation, and our client is grateful that they did their jobs by following the facts to the end,” Warin said. “This result was the product of two things: an innocent client and fair prosecutors and agents. The system worked.”
Warin said in November 2008 that Cassano was cooperating with investigators and acted lawfully. Cassano, he said, acted appropriately during the valuation of AIG’s credit-default swaps and gave “full and complete information to investors, his supervisors and auditors.”
Cassano’s unit managed $2 trillion in derivative trades tied to bonds, currencies, commodities and stocks. He told investors in December 2007 that “it is very difficult to see how there can be any losses in these portfolios.”
By Feb. 28, 2008, AIG posted what was then its biggest quarterly loss, writing down $11.1 billion on the swaps. AIG announced Cassano’s resignation as president and chief executive officer of AIG Financial Products a day later.
Hannah August, a Justice Department spokesman, didn’t immediately return voice-mail and e-mail messages seeking comment after regular business hours yesterday.
The federal government’s bailout of AIG is expected to cost the Treasury Department $45.2 billion, based on March 31 data, the department said yesterday in a statement. The New York-based insurer’s $182.3 billion rescue includes as much as $69.8 billion from Treasury, a $60 billion Federal Reserve credit line and as much as $52.5 billion to buy mortgage-linked assets owned or backed by AIG.
AIG - Goldman Sachs - Pricewaterhouse conflicts
- Source: A Prisoner’s Dilemma: AIG and Goldman Sachs Game Each Other And PwC re: The Auditors, February 18, 2010
In fact, Andrew Ross Sorkin told us in his book, Too Big To Fail, Goldman Sachs was still not satisfied in June of 2008 that PwC was pushing AIG hard enough to consider “market participants’ views” on pricing on a timely or suffiicient basis so Goldman could “obtain as much cash as possible from their collateral calls”:
…Sorkin describes a Goldman Sachs June 2008 board meeting where the issue of their collateral dispute with AIG boils over.
“In a videoconference presentation from New York, a PwC executive (PwC is Goldman Sach’s auditor, too) updates the board on its dispute with AIG over how it was valuing or in Wall Street parlance, “marking-to-market,” its portfolio. Goldman executives considered AIG was “marking to make-believe” as Blankfein told the board…the afternoon session proceeded with upbraiding PricewaterhouseCoopers:
“How does it work inside PwC if you as a firm represent two institutions where you’re looking at exactly the same collatteral and there’s a clear dispute in terms of valuation?”
How does it work, indeed. Jon Winkelreid, Goldman’s co-president, may or may not have received an answer that day. Sorkin does not report one. I have never heard one.
I still have not heard a specific explanation for how PwC could preside over a long running dispute between two of its most important global clients, a dispute that was material to at least one of them, obviously, that had the attention of its highest level partners, and not force a resolution based on consistent application of accounting standards sooner.
I mean… We are talking about valuation of the same assets!
I’ve been writing almost as long as I’ve been writing here that PwC should resign as AIG’s auditor. Was it not enough that PwC had been sued by AIG shareholders more than once for its role in accounting errors and restatements? Was it not enough that AIG never got corporate governance right and PwC let them get away with it forever? Is it not enough that now PwC has its own partners testifying against their client on behalf of plaintiffs they settled with in order to extricate themselves from ongoing expensive litigation?
Is it not enough that PwC was clearly torn between two clients (and maybe more who would have been impacted) who held enormous financial sway and lost its independence and objectivity? I think PwC finally succumbed to Goldman Sachs, selling out AIG while still tippy-toeing around the necessity to finally say which one was closest to complying with standards. Actually taking a consistent stand would potentially implicate other clients such as JP Morgan and Bank of America as well as Freddie Mac in a mark-to-model or rather “mark to make it happen” scandal?
- AIG Said to Deliver $46 Million in Bonuses Today Bloomberg, March 15, 2010
- Source: $100 Million Bonus Plan at A.I.G. Draws Fire New York Times, February 2, 2010
The American International Group has agreed to cut employee bonuses by $20 million and will distribute about $100 million on Wednesday, according to people with knowledge of the negotiations.
But the reductions may not be enough to appease the company’s critics, who do not accept the company’s argument that it has to honor contracts established before its government bailout.
“A.I.G. has taxpayers over a barrel,” said Senator Charles E. Grassley, an Iowa Republican, in a statement on Tuesday night. “The Obama administration has been outmaneuvered. And the closed-door negotiations just add to the skepticism that the taxpayers will ever get the upper hand.”
A.I.G. first promised the retention bonuses to keep people working at its financial products unit, which traded in the derivatives that imploded in September 2008, leading to the biggest government bailout in history.
The contracts, which were established in December 2007, were intended to keep people from leaving the company and called for the bonuses to be paid in regular installments to more than 400 employees in the unit. The final payment, which was for about $198 million, was due in mid-March, but was accelerated to Wednesday as part of the agreement to reduce its size.
Fearing a firestorm like the one last spring, A.I.G. had been working with the Treasury’s special master for compensation, Kenneth R. Feinberg, on a compromise that would allow it to keep its promise in part, without offending taxpayers.
The agreement calls for employees who still work for the financial products unit to accept 10 percent cutbacks, while employees who have left the company must take 20 percent cuts. Those employees are still entitled to their bonuses under the contract, which adheres to the scheduled payments even if people have lost their jobs. The financial products unit has shed almost 200 people as it has wound down A.I.G.’s derivatives business.
A.I.G. has told all the affected people that if they do not accept the reduced amounts, they will get no bonus at all, according to a person with knowledge of the agreement.
But some people have not agreed to the cutbacks and are insisting on the entire amounts. People with knowledge of the negotiations said that a vast majority of those still employed at A.I.G. had accepted the cuts, but only about a third of the former employees had done so.
The holdouts seem determined to make A.I.G. pay the full contractual amounts, knowing they can make a reasonably good case under law, because A.I.G.’s own lawyers have previously issued an opinion that the contracts are binding. If they succeed, A.I.G. would have to pay them more money at some point in the future, and might even have to pay penalties for breaking its employment contracts.
So, while it appeared on Tuesday that A.I.G. and the Treasury had cut the bonus payment to just half of the $198 million that was scheduled for March, the total amount remains unclear. The company acknowledged Tuesday night that it had cut the original amount by $20 million, but did not confirm that the final payment would be $100 million.
In a previous exchange regarding the bonuses, Mr. Feinberg wrote to Senator Grassley on Jan. 15 saying that the contracted amounts were “grandfathered payments.” He said they were not covered by the new rules he administers curbing executive bonuses at bailed-out companies.
“My staff and I have insisted that employees should have their overall current compensation reduced to take into account the fact of these grandfathered payments,” Mr. Feinberg said.
The last time A.I.G. paid a round of retention bonuses, worth $168 million, it caused such an uproar that some employees received death threats, according to its chief at the time, Edward Liddy.
To mollify the public, employees agreed to pay back roughly $45 million to the taxpayer-owned company.
The complaints subsided, but last October, the special inspector general for the Troubled Asset Relief Program, Neil M. Barofsky, audited the program and reported that only $19 million of the total due back had been received.
SIGTARP investigating AIG/Fed disclosures
- Source: Probe into NY Fed over AIG disclosure Financial Times, January 26, 2010
"The New York Federal Reserve is being investigated by Neil Barofsky, the special inspector general overseeing the troubled assets relief programme, over its disclosure of documents relating to the bail-out of AIG and its counterparties.
In a statement submitted to the House oversight committee, Mr Barofsky said his team is examining whether the New York Fed improperly withheld information about the AIG bail-out from the Securities and Exchange Commission and his office...
...Mr Barofsky, who is due to appear at the hearing alongside Mr Geithner, says in his testimony that he is pursuing parallel investigations into whether the New York Fed improperly withheld information from the SEC and whether it subsequently withheld documents from his office during an earlier audit of the payments...."
- N.Y. Fed Investigated by Barofsky Over AIG Bailout: Video Bloomberg, Jan. 26, 2010 (running time 2 minutes)
Hu of SEC on Goldman "empty creditor" thesis
- Source: At SEC, a Scholar Who Saw It Coming Wall Street Journal, January 24, 2010
"... In a Wall Street Journal opinion article in April 2009—which Ms. Schapiro says prompted the job offer from the SEC—Mr. Hu suggested Goldman Sachs Group Inc. used a kind of derivative called a credit default swap to turn itself into an empty creditor of AIG. He wrote that this may have encouraged Goldman to push for extra collateral from AIG, even when that threatened AIG's existence.
Lucas van Praag, a spokesman for Goldman Sachs, said for a number of reasons the bank "doesn't think that its transactions with AIG are appropriate examples of Prof. Hu's thesis."
The derivatives trade association, the International Swaps and Derivatives Association, later criticized the research, saying the empty-creditor hypothesis is "appealing on the surface" but "is not consistent with either the way credit default swaps work nor with observed behavior in debt markets."
A.I.G. in debt-for-equity swap with New York Fed
- Source: A.I.G. in Debt-for-Equity Swap With New York Fed New York Times, December 1, 2009
"The insurance giant American International Group said on Tuesday that it had closed two debt-for-equity transactions that reduce its debt with the Federal Reserve Bank of New York by $25 billion.
A.I.G. said that under the agreement the New York Fed would receive preferred shares with a liquidation preference worth $16 billion in American Life Insurance Company and $9 billion in American International Assurance Company Ltd., which would be placed in special purpose vehicles.
The insurer said that the special purpose vehicles would prepare the two subsidiaries for initial public offerings or third-party sales, and in a separate statement said it was moving forward with the separation of American Life Insurance.
The liquidation preference is an undisclosed percentage of the estimated fair market value of the two A.I.G. units. A.I.G. retains the common interests in American Life and American International Assurance, and thus would benefit should the market valuation of the two units be in excess of $25 billion.
A.I.G. said that as of Tuesday, its outstanding principal balance under the New York Fed credit facility was about $17 billion and the total amount available under the facility had been reduced to $35 billion from $60 billion.
“We continue to focus on stabilizing and strengthening our businesses, but expect continued volatility in reported results in the coming quarters, due in part to charges related to ongoing restructuring activities,” the A.I.G. chief executive, Bob Benmosche, said in a statement.
Missed dividend payment to the Treasury
- Source: AIG Trustee Sought Exit, But Agreed to Remain Wall Street Journal, November 20, 2009
"One of the three trustees who oversees U.S. taxpayers' nearly 80% stake in American International Group Inc. recently said he wanted to quit his post, but was persuaded to stay on, people familiar with the matter said.
Separately, the federal government is seeking out possible candidates to add to AIG's board.
Douglas Foshee, who also is president and chief executive of natural-gas producer and pipeline operator El Paso Corp., is one of three trustees overseeing the government's stake in the insurer. He said in a letter about a month ago that he wanted to withdraw as a trustee, but agreed to stay after talking to several individuals, including William Dudley, president of the Federal Reserve Bank of New York, people familiar with the matter said...
...Separately, the Treasury this past week hired an executive-search firm to help seek out possible candidates that it may appoint as directors to AIG's board, according to people familiar with the matter.
The move came after AIG in early November missed a fourth quarterly dividend payment on about $44 billion in preferred shares it issued to the Treasury under the Troubled Asset Relief Program.
Because of the missed payment, the Treasury gained the right to elect two or three directors to AIG's board, but it hasn't decided when or if it will appoint them."
Claims paying capability questioned
- Source: Report Cites Shortfall in Key A.I.G. Business New York Times, November 30, 2009
"An independent analysis of whether the insurance industry has been setting aside enough money to pay claims has found that the American International Group has a shortfall of about $11 billion in its all-important property and casualty business.
The finding is at odds with the often-repeated refrain that A.I.G.’s troubles were caused solely by its derivatives portfolio, while its insurance operations were sound.
Other researchers have raised doubts about A.I.G.’s total worth since it was bailed out last year, and even the federal government has acknowledged the company may have difficulty repaying all of the money it owes, currently about $120 billion.
But the report by Sanford C. Bernstein documents a big shortfall in A.I.G.’s property and casualty insurance business — the part that has been renamed Chartis, which is supposed to be its core once it has restructured and sold other operations.
The author, Todd R. Bault of Sanford C. Bernstein, called the results “a big surprise” in his report, which was distributed to the firm’s clients on Monday.
A spokesman for A.I.G., Mark Herr, said the company had no comment on the report. The company and its regulators have previously denied reports of hidden weakness in its property and casualty business, including one in The New York Times.
A spokeswoman for the Pennsylvania Insurance Department, which regulates A.I.G.’s largest property and casualty business, declined to discuss the report, but said the state was “continuing to closely monitor the A.I.G. companies.” The spokeswoman, Roseanne Placey, also said that A.I.G.’s most recent regulatory filing showed it was gaining strength.
Insurance regulators in New York, another major regulator, were not available to comment.
A.I.G.’s stock fell by almost 15 percent, to $28.40 from $33.30, in trading on Monday. Sanford C. Bernstein cut its price target for A.I.G.’s stock by 40 percent, to $12 from $20 — an unusually large reduction even for a firm with a track record of research that moves stock prices downward.
Mr. Bault, a senior securities analyst who is also an actuary, explained that he had set out to find something entirely different — whether any American insurers had the strength to raise their prices soon. His first rough cut of the data “made no sense,” he wrote, and when he looked more closely he found that the shortfall at A.I.G. was distorting the industry as a whole.
“At a minimum, if these results are reasonable, A.I.G. would likely have to take some kind of reserve charge,” before bringing Chartis to market in an initial public offering, he wrote. But if Chartis had to bolster its reserves, it “would probably greatly increase the difficulty of implementing such a deal in the first place.”
He estimated that on an after-tax basis, filling the gap would mean coming up with about $10 per diluted share of A.I.G., or about a third of the company’s market value.
Mr. Bault wrote that once he had excluded A.I.G. from his data, the rest of the industry appeared to have adequate reserves across the board.
AIG and the Federal Reserve
Federal Reserve releases Maiden Lane details
- Source: Fed Gives Details on Assets in Bear Stearns, AIG Portfolios Bloomberg, March 31, 2010
The Federal Reserve Bank of New York for the first time released information on individual securities in the portfolios acquired in the 2008 rescues of Bear Stearns Cos. and American International Group Inc.
The New York Fed posted the securities’ identification numbers and principal balances as of Jan. 29 on its Web site today, totaling 161 pages of documents. Previously the Fed provided values of groups of assets in each of the three portfolios.
- How Lou Lucido Let AIG Lose $35 Billion With Goldman Sachs CDOs Bloomberg, March 31, 2010
"...By December 2008, more than 170 AIG-insured pieces of CDOs, including parts of Davis Square III, had been taken over by a U.S. taxpayer-funded asset pool called Maiden Lane III after the street where the Federal Reserve Bank of New York is located.
Goldman Sachs and TCW’s parent, Paris-based Societe Generale SA, were paid the most before and after the New York Fed reimbursed AIG’s customers in full. Societe Generale got $16.5 billion, more than any other firm. Goldman Sachs was second with $14 billion. Together they accounted for almost half of the payouts.
New York-based Goldman Sachs was the biggest underwriter of CDOs taken over by Maiden Lane III. TCW managed about twice as many CDO assets that ended up in Maiden Lane III as anyone else, according to the AIG list and data compiled by Bloomberg..."
- Fed Said to Plan Reining in AIG’s Credit Line by $3.6 Billion Bloomberg, August 23, 2010
- Thoughts on Maiden Lane III The Aleph Blog, April 5, 2010
- Author William Cohan Discusses AIG's Losses on CDOs: Video Bloomberg, Mar. 31, 2010
- Thomas Adams Discusses AIG Loss on CDO Investments: Video Bloomberg, Mar. 31, 2010
- Fed Opens the Books on Bear, AIG Toxic Assets Wall Street Journal, April 1, 2010
AIG payments to counterparties
- Watchdog: Foreign financial firms received $14B through AIG bailout The Hill, August 12, 2010
- Testy Conflict With Goldman Helped Push A.I.G. to Edge New York Times, February 6, 2010
AIG Schedule A Shortfall Agreement
- Source: Revealed: See Who Was Paid Off In The AIG Bailout Huffington Post, January 27, 2010 (Click here for document)
"...The troubled insurer tried to publicly disclose these details in December 2008 before being thwarted by the Geithner-led New York Fed. A month later Geithner left to head the Treasury Department.
Issa said that the public had a right to see the document. "I mean, think about it: What the government owns it can keep as long as it wants. It would be like saying you can't appraise federal land. Why? It is one of those things that's outrageous. We know we paid a hundred percent for them. We know who got the money. This document shows who ultimately were the beneficiaries. And we believe since that they've asked to have it locked up until 2018 -- and nobody today defended that -- that it's time to release that," Issa said.
A government audit this month found that as of Sept. 30, 2009, the Treasury Department was expecting a $30 billion loss on its TARP-related AIG investment. The value of the securities could ultimately rise, though.
"The way the AIG bailout was engineered was to specifically benefit Goldman Sachs and its trading partners," said Janet Tavakoli, a Chicago-based derivatives expert and founder of Tavakoli Structured Finance. "Goldman's past and present officers used crony capitalism to put their own interests ahead of the public."
The nation's fifth-largest bank by assets ultimately got $14 billion through what members of Congress are calling a "backdoor bailout" of the world's biggest banks.
"The suppression of the details of the [credit default swap] trades protected Goldman Sachs and its trading partners," said Tavakoli, who's examined Goldman's credit default swap arrangements with AIG. "The $182 billion bailout overall kept AIG alive, and its trading partners, including Goldman Sachs, benefited from the funds made available to the securities lending transactions and other subsequent trading transactions."
At the time the document was prepared, Goldman's $14 billion in souring derivatives had a market value of just $6 billion. Goldman had more than $8 billion in collateral from AIG to protect it from losses, meaning it was still about $6 billion short...
- Additional Perspectives On The AIG Fiasco ZeroHedge, January 28, 2010
AIG disclosure on counterparty payments
Source: A.I.G. Payments to Counterparties Original Document (PDF) New York Times, March 15, 2009
"Collateral on Derivatives:
Many of the institutions that received the Fed payments were owed money by A.I.G. because they had bought its derivatives, known as credit-default swaps — in essence, a type of insurance intended to protect buyers should their investments turn sour.
As it turned out, many of their investments did sour, because they were linked to subprime mortgages and other shaky loans. The swap contracts called, in many cases, for A.I.G. to post collateral to its customers if their investments lost value, or if A.I.G.’s own credit rating went down.
When A.I.G.’s credit rating was indeed downgraded last September, the company suddenly owed billions of dollars in collateral and was unable to honor its promises. That left its trading partners exposed to potentially big losses."
An annotated version of an announcement by American International Group on March 15, 2009, outlining the counterparties involved in credit default swaps and other transactions in which bailout funds were used to meet A.I.G. obligations.
Rating agencies role in AIG crisis
- Source: Guest Post: The Dirty Little Secret About AIG's AAA Pyramid Scheme ZeroHedge, January 27, 2010
The insufficiently unexamined issue regarding the timing of AIG’s downfall is the AAA pyramid scheme embedded inside of AIGFP’s CDO portfolio. The ratings agencies defined reality in the alternate universe of CDOs, where bona fide due diligence was impossible and opportunities for abusive self dealing were rife.
The newly released CUSIPS, which more of less confirm the information yielded from the prior memo obtained by CBS. And again, the noteworthy point is that, on September 15, 2008, almost none of the subject CDO tranches had been seriously downgraded. They had all been rated Aaa at closing. Their ratings collapsed a few months later. There’s abundant circumstantial evidence that the ratings agencies delayed and dragged out the downgrade announcements for these black box CDOs. But they had must have done the math, and realized that AIG’s reliance on their ratings proved to be fatal.
That’s why I believe that the ratings agencies, cognizant of their indirect role in setting up AIG for its demise, would have been receptive to a request by the U.S. government on September 15, 2008 to show some forbearance and delay announcement of a downgrade just at the moment when the Lehman bankruptcy was close to setting off a financial panic. The downgrades made all the difference in the world, everyone knew it, and the refusal by Dan Jester, Paulson’s special deputy, to forcefully ask Moody’s for a delay in the downgrade is shocking beyond words.
- Dead deals, or, AIG in pics FT Alphaville, January 28, 2010
Goldman Sachs drove most costly AIG bargain
- Source: Goldman Sachs Drove Most Costly AIG Bargain, Document Shows Bloomberg, January 26, 2010
"Goldman Sachs Group Inc. was the most aggressive bank counterparty to American International Group Inc. before its bailout, demanding more collateral while assigning lower values to real estate assets backed by the insurer, documents obtained by lawmakers show.
A month before the September 2008 rescue, Goldman Sachs approached AIG about tearing up contracts protecting the bank against losses on collateralized debt obligations, or holdings backed by mortgages, according to a BlackRock Inc. presentation dated Nov. 5, 2008. Goldman Sachs was the only counterparty willing to cancel the credit-default swaps and bear the risk of further CDO losses, provided that AIG make payments based on the bank’s larger-than-average estimate of market declines.
“Goldman Sachs is the least risk-averse counterparty,” according to the presentation, which was prepared by the asset manager for AIG and later given to the Federal Reserve Bank of New York. The firm is “the only counterparty willing to tear up CDS with AIG at agreed-upon prices and retain CDO exposure.” The document was obtained by the Congressional panel scheduled to hold a hearing tomorrow on AIG’s $182.3 billion bailout.
The presentation offers the clearest picture yet of the negotiations between AIG and its counterparties before a rescue that fully reimbursed banks including Goldman Sachs for $62.1 billion in CDOs. The BlackRock materials indicate that Goldman Sachs, which has been pilloried by lawmakers for its dealings with AIG, may have been betting that the securities would rebound from the values it assigned to them..."
Goldman was an AIG conduit which was fully hedged
- Source: Presenting The BlackRock-AIG Presentation In Which It Becomes Clear That Soc Gen Had Pledged Sub-50 Cent Securities To The Fed's Discount Window ZeroHedge, January 26, 2010
"...Yet one wonders just how many billions of dollars Goldman had in margin variation between collateral posted to it via AIG, and how the amount of money it had paid to buyers of CDS sold by Goldman. We are certain that since no Goldman client had the same negotiating power as Goldman did with AIG, Goldman likely had a positive balance in the hundreds of millions if not billions simply on the collateral variance.
As page 10 indicates, whereas all counteparties had requested collateral at a price for the underlying CDOs of 49, Goldman was extremely aggressive, demanding collateral for a price-equivalent of 37. The latter compares to a BlackRock model price for Goldman of 44, meaning that even the Fed's advisor in good faith could not recommend such a generous treatment of Goldman in the context of all its other counterparties. Were Goldman to receive the same collateral as everyone else, it would be due 8.1 billion: $1 billion less than the 10/24 collateral request.
Now keep in mind, that of the top 5 counterparties, SocGen, GS, Deutsche Bank, Merrill and Calyon, only Goldman had subsequently sold off its entire CDO book: once again implying that unlike the other 4 firms, who at least held the exposure on their own balance sheet, and thus one can say deserved to receive some insurance, Goldman had bought then sold its entire portfolio, in essence making Goldman nothing than an AIG conduit, which was fully hedged and, as noted above, only had counterparty risk, yet which had the benefit of up to $1 billion in excess cash on its books due to day-to-day marking of its CDS exposure and its advantage collateral arrangement.
Futhermore, as Goldman owned CDS on AIG itself (as a counterparty hedge), Goldman had absolutely no risk in its relationship with AIG whatsoever!!! Of course, It is critical to remember that Goldman not only received par between the collateral previously posted to it, and actual cash from Maiden Lane III, it also made billions by selling actual AIG CDS (which as we claimed previously was done while in possession of material non-public information). Amusingly, while Goldman bought all of its CDO protection from AIG exclusively, it definitely used a very broad seller base when it loaded up on the actual AIG protection. Therefore, Goldman's only, ONLY risk, was that of a complete systemic collapse and the repudiation of all contracts, CDS and otherwise. Which is why Goldman's various agents did everything they could to prevent that from happening, up to and including loading the Federal Reserve with trillions of toxic debt in the upcoming 12 months.
And speaking of the Federal Reserve, while reading the SocGen section, we came across this little stuner on page 3:
We have heard second-hand from a trader that Soc Gen has pledged much of the portfolio to the Fed discount window for future liquidity
Aside from the fact that in October 2008 France-based Soc Gen was not a Primary Dealer (it only just applied for this position a few weeks ago), one needs to turn to page 5 of the presentation to realize that Soc Gen's portfolio had a value of 49 cents on the dollar. What this implies is that in October of last year (and ostensibly prior) Soc Gen, a foreign, non Primary Dealer, had access to the Federal Reserve's Discount Window, where it had pledged securities that had a value of 49 cents on the dollar, and for which the Fed would have taken arguably no haircut, thereby funding the French firm at par for securities that were worth less than half, and which the taxpayer was on the hook for. Indeed, these securities may well have been completely worthless: lower on page 3 we read:
Soc Gen and AIG are currently in dispute over existing events of default and credit events under transaction [ineligible] for 2 deals, totaling $650 million of notional exposure.
We would not be at all surprised if the defaulted securities were part of the crap that had been given to Tim Geithner, at the time head of the New York Federal Reserve.
And what Soc Gen was doing by pledging reference assets to the Fed, we are certain that all the other counterparties (those which unlike Goldman still held on to the securities) were doing as well.
The fact that the Fed was willing to risk taxpayer capital with such reckless abandon, first in the form of accepting literally worthless reference securities from Soc Gen (as documented by BlackRock), and subsequently by bailing out Goldman at well over par (remember the money the firm made on its actual AIG counterparty-risk) protection, would have been sufficient to terminate Geithner's career in any self-respecting banana republic. Too bad America is no longer even that."
Secret AIG document shows Goldman Sachs minted most toxic CDOs
- Source: Secret AIG Document Shows Goldman Sachs Minted Most Toxic CDOs Bloomberg, February 23, 2010
"...Tavakoli also says that the poor performance of the underlying securities (which are actually specific slices or tranches of CDOs) shows they were toxic in the first place and were probably replenished with bundles of mortgages that were particularly troubled. Managers who oversee CDOs after they are created have discretion in choosing the mortgage bonds used to replenish them.
“The original CDO deals were bad enough,” Tavakoli says. “For some that allow reinvesting or substitution, any reasonable professional would ask why these assets were being traded into the portfolio. The Schedule A shows that we should be investigating these deals.”
Among the CDOs on Schedule A with notional values of more than $1 billion, the worst performer was a tranche identified as Davis Square Funding Ltd.’s DVSQ 2006-6A CP. It was held by Societe Generale, underwritten by Goldman Sachs and managed by TCW Group Inc., a Los Angeles-based unit of SocGen, according to Bloomberg data. It lost 77.7 percent of its value -- though it isn’t in default and continues to pay.
SocGen spokesman James Galvin and TCW spokeswoman Erin Freeman declined to comment..."
Bebchuk - "Haircut" derivatives counterparties
- Source: AIG Still Isn’t Too Big to Fail Lucian Bebchuk, Harvard University, March 20, 2009
"The AIG bailout — at $170 billion and rising — may end up as the costliest rescue of a single firm in history. There is much debate about bonuses paid to AIG’s executives. But there is far too little debate on the government’s willingness to back all of AIG’s obligations.
The company claims any failure by the government to do so would have catastrophic consequences. This claim is exaggerated. Serious consideration should be given to forcing AIG’s partners in derivative transactions — which are mainly buyers of credit default swaps from the company — to take a substantial haircut.
AIG is a holding company, conducting most of its business through insurance subsidiaries organized as separate legal entities. The financial products subsidiary, which has produced the huge losses from derivative transactions that brought AIG down, is also a separate legal entity — but AIG has guaranteed the subsidiary’s obligations.
While AIG has thus far been able to cover derivative losses using government funds, the possibility of large additional losses must be recognized. AIG recently stated that it still has about $1.6 trillion in “notional derivatives exposure.” Suppose, for example, that AIG ends up with losses equal to, say, 20% of this exposure — that is, $320 billion. Suppose also that the value of AIG’s current assets, including the shares in its insurance subsidiaries, is $160 billion. In this scenario, the government’s fully backing AIG’s obligations would produce an additional loss of $160 billion for taxpayers. Should the government be prepared to do so? The alternative would be to put AIG into Chapter 11. In this case, AIG’s creditors, including its derivative counterparties, would obtain the company’s assets. They would end up with a 50% recovery on their claims, bearing those $160 billion of losses themselves.
AIG recently stated that failure to meet all of the company’s obligations could lead to a “run on the bank” by customers seeking to surrender insurance policies and “would have sweeping impacts across the economy.” But insurance policyholders wouldn’t be at risk if AIG failed to meet its obligations. The insurance subsidiaries are not responsible for the debts of their parent AIG, and insurance policy claims are backed both by the subsidiaries’ required reserves and state insurance funds.
Still, what about the concern that losses to derivative counterparties — which are now known to include major U.S. and foreign banks — would substantially deplete the capital of some of them? That concern would be best addressed by the U.S. government (or foreign governments in the case of their banks) infusing capital directly — in return for shares — into the banks that need it. There is no reason to back AIG’s obligations as an instrument for infusing capital (with taxpayers getting nothing in return) into, say, Goldman Sachs or Spain’s Banco Santander.
It is true that the collapse of Lehman Brothers last September led to a crisis of confidence among depositors in banks and money-market funds, which had a dramatic effect on markets. Letting AIG’s derivative counterparties take a significant haircut, however, should not lead to such a crisis. AIG’s obligations are to derivative counterparties, not to depositors. Moreover, governments world-wide are now committed to backing fully the claims of depositors in financial institutions.
It is important to understand that the government can also employ intermediate approaches between fully backing AIG’s derivative obligations and no backing. For example, the government could place AIG in Chapter 11, but commit to provide supplemental coverage that would make up any difference between the value that creditors would get from AIG’S reorganization and, say, an 80% recovery. Such an approach could allow setting different haircuts for different classes of creditors. The government, for example, might elect not to provide such supplemental coverage to executives owed money by AIG.
At a minimum, the government should conduct “stress tests,” estimating potential losses in alternative scenarios, and formulate a policy on the magnitude and fraction of derivative losses it would be willing to cover. A policy that doesn’t fully back AIG’s obligations should be seriously considered.
Mr. Bebchuk is a professor of law, economics and finance, and director of the corporate governance program at Harvard Law School. This op-ed is based on his forthcoming paper, “Is AIG Too Big To Fail?”
Treasury had refused to provide a guarantee
- Source: Two at Fed Had Doubts Over Payout by A.I.G. New York Times, January 26, 2010
"...Amid this increasingly perilous situation, Fed officials discussed how to eliminate the risk of even more collateral calls, the internal documents show. One proposal involved the government guaranteeing the contracts; this meant the banks would no longer be able to demand collateral because the government would cover any losses on the mortgage bonds. Many of the bonds on which A.I.G. had posted collateral had not defaulted; instead, their market prices had dropped.
Under this proposal, the $30 billion in collateral would have been returned to the insurer to help pay off some of its loan from the Fed, the documents show. A.I.G. executives may have preferred this approach because it would have reduced the company’s reliance on the government rather than expand it.
This alternative, though, would have most likely met with opposition from the company’s counterparties, which would have had to return to A.I.G. all the collateral they had received over the previous year. But with the failure of Lehman Brothers and the seizing up of the money markets still fresh in everyone’s minds, bankers wanted to keep as much cash on hand as possible. According to an Oct. 26, 2008, presentation by Morgan Stanley, an adviser to the Fed, Goldman would have had to return $7.1 billion to A.I.G. and Merrill, $3.1 billion.
The debate within the Fed centered on which part of the government could provide the guarantee, according to the documents. Staff at the Board of Governors told Fed officials in New York that a Fed guarantee “was off the table,” according to an e-mail message to Mr. Geithner and others on Oct. 15 from Sarah Dahlgren, the New York Fed official overseeing the A.I.G. rescue.
“We countered with questions about why it was so clearly off the table and suggested, as well, that perhaps this was something that Treasury could do,” Ms. Dahlgren continued.
Supporters of the plan considered a guarantee a good option because A.I.G.’s debt rating was at risk of a downgrade by the credit rating agencies and the company would then have to post more collateral with the banks.
“If a ratings downgrade happens at any time in the next three weeks or afterward, we will need this to protect any value in the insurance companies and, importantly, to avoid a disorderly seizure,” Ms. Dahlgren wrote.
The New York Fed pursued the guarantee option with the Treasury, the documents indicate. But by Oct. 23, the Treasury had refused to provide the guarantee, according to an e-mail message sent by Ms. Dahlgren to Mr. Geithner. In early November, the Fed decided to make the counterparties whole on their insurance contracts."
Banque de France - AIG's French regulator
- Source: AIG Financial Products
Banque AIG is authorized by the Banque de France, and is regulated by the Comité des Établissements de Crédit et des Entreprises d'Investissement, the Commission Bancaire and the Autorité des marchés financiers, in France..."
- How French Held Legal Maginot Line Wall Street Journal, January
The Federal Reserve's decision to pay billions of dollars to Goldman Sachs Group Inc. and other big banks as part of its bailout of American International Group Inc. has spawned criticism and conspiracy theories. Treasury Secretary Timothy Geithner, who presided over the New York Fed at the time, was summoned to Congress to explain why AIG paid off the $62.1 billion in soured derivatives in full, far more than they were worth in the market.
One element of the decision hasn't been well explored—how the Fed agreed to the full-payment demands of France's bank regulator and two of AIG's largest creditos, Société Générale SA and Calyon Securities, a unit of Crédit Agricole SA. The French banks and their regulator, it now appears, masterfully outmaneuvered the Americans to avoid discounts, or "haircuts," on their securities.
The Federal Reserve gave in to French demands for full payment for two of AIG's largest creditors, Société Générale SA and Calyon Securities, a unit of Crédit Agricole SA. Dennis Berman says the Fed was had.
The French won the day by using a legal argument that some leading French scholars and corporate attorneys variously described in interviews as highly dubious and lacking real legal ground.
The banks and the regulator, known as the Commission Bancaire, said bank executives could be criminally liable for accepting a discount on their contracts, according to a November report of the inspector general of the Troubled Asset Relief Program.
While true in the abstract, "their argument was very overstated," said Pierre-Henri Conac, a University of Luxembourg law professor and a director of France's oldest corporate-law review. "Banks give haircuts every day."
French banks aren't always the best negotiators, Mr. Conac added, but this time "the French were very good."
A spokeswoman for the Commission Bancaire said "you're the first to call" when asked about the issue, but otherwise declined to comment. Officials for SocGen and Calyon also declined repeated requests for comment, as did a representative for Mr. Geithner.
It's easy, of course, to second-guess the behavior of people caught in the confused, scary world of late 2008. Yet a look at the French role is a reminder of how much of that period remains unexplained. Congress might want to ask: Why did the Fed show such little vigor attacking what now appears a legal Maginot Line?
In November 2008, the Fed, having already committed $85 billion to rescue AIG, was worried about a set of AIG holdings tied to mortgage securities that were draining cash from the company, according to the inspector general's report.
At the top of the counterparty list: Société Générale, with $16.5 billion in contracts. Calyon Securities, part of Crédit Agricole, was sixth, with $4.3 billion. Goldman Sachs was second with $14 billion.
The Fed and AIG finally seized on a plan, according to the inspector general's report. Step one: Let the banks keep $35 billion of collateral already posted by AIG. Two: Purchase the banks' underlying securities, which were derivatives tied to low-grade mortgages. Three: Cancel the contracts. Over one frenzied weekend in early November, Fed and AIG officials struggled with the final step: What should they pay for those securities? By contract, the banks were guaranteed full payment.
There were some factors to suggest a lower, negotiated price was in order. The securities' market value had fallen significantly. And absent the extraordinary U.S. bailout, AIG would have been in bankruptcy, potentially leaving counterparties with zero.
A call went out from the New York Fed to Société Générale and Calyon, as well as to France's Commission Bancaire, according to the report by Neil Barofsky, the TARP inspector general. They wanted to treat all the parties equally. By demanding payment in full, the French helped the other banks get the same treatment.
"\[T\]he French banks concluded they were precluded by law from making concessions and could face potential criminal liability for failing to comply with their duties to shareholders," Mr. Barofsky found in interviews with Fed officials.
The French were "indignant that we would even contemplate asking for this," added one person close to the New York Fed.
Other banks, including Goldman Sachs and Merrill Lynch, rebuffed the Fed on similar grounds at the same time. In the end, no one took a haircut. But the response from the French "played a significant role in complicating" the Fed's efforts at structuring haircuts for all the parties, Mr. Barofsky wrote.
There also were deep worries about stability of the financial system. And it was important to show that contract law was being respected, said the person close to the New York Fed. "Price was a worry, but not the only worry," added this person.
Yet there appear plenty of grounds for challenging the French conclusion, said lawyers and law professors.
"To say that these people would have gone to jail if they cut a deal and signed the same agreement as Goldman Sachs is really pushing beyond what goes on in France," said Christopher Mesnooh, a partner at Paris's Fields Fisher Waterhouse who has authored a book on French corporate law.
"There is no clear-cut provision that would have prevented SocGen or Calyon" from negotiating a discount, said one of Paris' top lawyers, who asked not to be named because he works for the banks.
More information may shake loose as Congress continues its study of AIG. At the upcoming hearings, one can only hope the French role is carefully examined. There may well have been compelling reasons for making good on the $20.8 billion owed the French banks. But —as is now clear—not for the legal reason that the Fed and the French banks claim.
- 2 Executives Leave A.I.G. French Unit New York Times, March 26, 2009
"The two top executives have resigned at the French unit of the American International Group’s financial products business, the insurer said Thursday, as part of an exodus of employees after an outcry over bonuses.
Mauro Gabriele, the president and chief executive of Banque A.I.G., and his deputy, Jim Shephard, resigned because of “shared concerns regarding their ability to conduct business in the current hostile environment toward Banque A.I.G. and A.I.G. F.P. employees generally,” the company said in a statement from New York, referring to A.I.G. Financial Products.
The financial products division, based in London, helped to create the credit-default swaps that are blamed for causing A.I.G. to nearly collapse, necessitating a taxpayer rescue that so far has led to more than $170 billion in bailout funds from the federal government being pumped into the company. News of the Banque A.I.G. resignations was first reported Thursday by The Wall Street Journal.
The departure of the two executives could, in theory, have prompted a default on $234 billion of credit-default swaps. French regulators could have appointed provisional administrators to the job, a move with the potential to activate a “change of control” provision in the derivatives contracts. In practice, neither French regulators nor the American government would have allowed that to happen, officials say.
A.I.G. said it had cautioned Treasury Secretary Timothy F. Geithner in a March 14 letter “that resignations at Banque A.I.G. could raise risks with respect to derivatives written out of Banque A.I.G., and we are in ongoing discussions with French and U.K. regulators, as well as with the Federal Reserve Bank of New York and the U.S. Treasury Department, about this matter.”
The executives “are fully committed to ensure that Banque A.I.G. continues to operate normally and meet its obligations in these extraordinary conditions,” the A.I.G. statement said, “and, as a result, they remain in their roles and have committed to effect an orderly transition. “
Xavier Dubois, a spokesman for the Banque de France, the central bank, declined to comment.
An A.I.G. spokeswoman, Christina Pretto, said the financial products division continued to unwind derivatives contracts. It has reduced the number of trades outstanding by almost 40 percent, to 44,000, she said. The notional value of the outstanding derivatives contracts had fallen to $1.6 trillion by year-end, from $2.1 trillion a year ago, she said."
Bebchuk - The government, AIG and Chapter 11
- Who Should Be Bailed Out? Project Syndicate, December, 2009
"... A United States Special Inspector General recently issued a report criticizing the US government for failing to insist that AIG’s counterparties in the market for financial derivatives bear some of the costs of bailing out the company. Indeed, bailouts of failed institutions should never extend the government’s safety net to such counterparties.
The AIG bailout was one of the largest in history, with the US government injecting more than $100 billion into the company. The bailout was brought about by AIG’s large losses on derivative transactions with financial institutions, mostly sophisticated players such as Goldman Sachs and Spain’s Banco Santander.
After the government’s infusion of funds in September 2009, AIG’s losses continued to mount, so the government provided substantial amounts of additional capital two months later. At this point, the government asked AIG’s derivative counterparties to take a voluntary “haircut” – that is, accept a discount on the amount owed to them. When some of these parties refused, the government backed down and financed AIG’s payment of all of its derivative obligations in full.
The US government felt that it had a weak hand, because it was not prepared to allow AIG to default on any of its obligations. This was a mistake. The government should have been prepared to place AIG into reorganization under Chapter 11 of the US bankruptcy code and force the derivative parties to take the desired haircut.
AIG is a holding company, and most of its business is conducted through insurance subsidiaries organized as separate legal entities. The huge losses on derivate transactions were generated by AIG’s financial products unit. Although this unit was also a separate legal entity, AIG guaranteed its obligations toward derivative counterparties.
Had the government placed AIG into Chapter 11 reorganization in November 2008, AIG’s creditors, including its derivative counterparties, would have ended up with the value of AIG’s assets, which consisted mainly of shares in AIG’s insurance subsidiaries. Without necessarily affecting the operations of AIG’s insurance subsidiaries, the reorganization process would have simply shifted ownership of AIG’s assets from AIG’s existing shareholders to AIG’s creditors.
To the extent that the value of these assets would not have been sufficient to cover all of the derivative creditors’ claims, they would have had to bear some losses. Would that have been an unacceptable outcome? Not at all.
The government’s reluctance to use such a process might have been motivated by AIG’s major role in insurance markets around the world. But a reorganization of AIG and a shift in its ownership should not have been expected to endanger insurance policyholders. The insurance subsidiaries were not responsible for the obligations of their parent company, and their claims toward policyholders were backed by required reserves.
In any event, concerns about insurance policyholders should have led, at most, to a governmental commitment to back their claims if necessary. It did not require taxpayers to bail out the parent company’s derivative counterparties.
The government might also have been motivated by concerns that losses to the derivative counterparties would deplete the capital of some significant financial institutions at a difficult time. Again, such concerns would have been better addressed in different ways – in particular, by providing institutions that needed capital with funds directly, and in return for securities. To address a potential capital shortage at Goldman Sachs, say, taxpayers would have been better off providing $13 billon to Goldman in exchange for Goldman securities with adequate value, rather than footing the bill for the $13 billion that AIG gave to Goldman.
In the future, governments should not bail out failing financial institutions’ derivative counterparties, even when they provide a safety net to some of these institutions’ creditors (such as depositors). Governments should not only follow such a policy, but also make absolutely clear in advance their commitment to doing so. Communicating such a commitment clearly would induce parties to derivative transactions not to rely on a governmental safety net, but to monitor whether their partners have adequate reserves.
A governmental commitment to exclude derivative creditors from any safety net extended when financial institutions fail would reduce future costs to taxpayers from cases like AIG. Indeed, it would reduce the likelihood that cases like AIG would ever arise.
Dinallo on ringfenced AIG assets
- Source: Testimony to the United States Senate Committee on Banking, Housing and Urban Affairs, Hearing on "American International Group: Examining What Went Wrong, Government Intervention and Implications for Future Regulation" by Superintendent Eric Dinallo, New York State Insurance Department, Thursday, March 5, 2009
"... The only reason that the federal rescue of AIG is possible is because there are strong operating insurance companies that provide the possibility that the federal government and taxpayers will be paid back. And the reason why those insurance companies are strong is because state regulation walled them off from non-related activities in the holding company and at Financial Products.
In most industries, the parent company can reach down and use the assets of its subsidiaries. With insurance, that is greatly restricted. State regulation requires that insurance companies maintain healthy reserves backed by investments that cannot be used for any other purpose. I’ve said that the insurance companies are the bars of gold in the mess that AIG has become. There are activities that the states need to improve, such as licensing and bringing new products to market. But where we are strong has been in maintaining solvency.
I would note that at a time when financial services firms are in trouble because they do not have adequate capital and are too highly leveraged, at a time when commercial banks and investment banks have very serious problems, insurance companies remain relatively strong.
There is justified concern about AIG’s securities lending program, which affects only AIG’s life insurance operations. I would like to review for you some facts about that program and the actions the New York Department has taken in regards to that program. It is important to understand that securities lending did not cause the crisis at AIG. AIG Financial Products did. If there had been no Financial Products unit and only the securities lending program as it was, we would not be here today. There would have been no federal rescue of AIG. Financial Products’ trillions of dollars of transactions created systemic risk. Securities lending did not...
... In 2008, New York and other states began quarterly meetings with AIG to review the securities lending program. Meanwhile, the program was being wound down in an orderly manner to reduce losses. From its peak of about $76 billion it had declined by $18 billion, or about 24 percent, to about $58 billion by September 12, 2008. At that point, the crisis caused by Financial Products caused the equivalent of a run on AIG securities lending. Borrowers that had reliably rolled over their positions from period to period for months began returning the borrowed securities and demanding their cash collateral. From September 12 to September 30, borrowers demanded the return of about $24 billion in cash.
The holding company unit that managed the program had invested the borrowers’ cash collateral in mortgage-backed securities that had become hard to sell. To avoid massive losses from sudden forced sales, the federal government, as part of its rescue, provided liquidity the securities lending program. In the early weeks of the rescue, holding company rescue funds were used to meet the collateral needs of the program. Eventually the Federal Reserve Bank of New York created Maiden Lane II, a fund that purchased the life insurance companies’ collateral at market value for cash.
There are two essential points about this. First, without the crisis caused by Financial Products, there is no reason to believe there would have been a run on the securities lending program. We would have continued to work with AIG to unwind its program and any losses would have been manageable. In fact, the New York Department has worked and continues to work with other insurance companies to unwind their securities lending programs with no serious problems. Second, even if there had been a run on the securities lending program with no federal rescue, our detailed analysis indicates that the AIG life insurance companies would not have been insolvent. Certainly, there would have been losses, with some companies hurt more than others. But we believe that there would have been sufficient assets in the companies and in the parent to maintain the solvency of all the companies. Indeed, before September 12, 2008, the parent company contributed slightly more than $5 billion to the reduction of the securities lending program.
But that is an academic analysis. Whatever the problems at securities lending, they would not have caused the crisis that brought down AIG. And without Financial Products and the systemic risk its transactions created, there would have been no reason for the federal government to get involved. State regulators would have worked with the company to deal with the problem and protect policyholders...
...On September 22, 2008, the Department sent what is known as a Section 308 letter to all life insurance companies licensed in New York requiring them to submit information relating to security lending programs, financing arrangements, security impairment issues and other liquidity issues. My staff then conducted a thorough investigation of the securities’ lending programs at New York life insurance companies. The results were reassuring. Almost all of the companies had modest sized programs with highly conservative investments, even by today’s standards. Companies with larger programs had ample liquidity to meet redemptions under stress. What became clear was that AIG, because of the Financial Products problems, was in a uniquely troubling situation...
... Our primary principle throughout the effort to assist AIG has been to continue to protect insurance company policyholders and stabilize the insurance marketplace. And it is appropriate to recognize that all our partners in this effort, including officials from the Federal Reserve Bank of New York, the Federal Reserve Board, the U.S. Treasury, AIG executives and their financial advisors, investment and commercial bankers, private equity investors, other state regulators at all times understand and agree that nothing should or would be done to compromise the protection of insurance company policyholders. The dependable moat of state regulation that protects policyholders remains solid..."
Greenberg alleges Goldman Sachs behind AIG's collapse
- Source: Hank Greenberg Tells WSJ Goldman Sachs Behind AIG’s Collapse Bloomberg, January 9, 2010
" Hank Greenberg, former chief executive officer at American International Group Inc., said Goldman Sachs Group Inc. is responsible for the collapse of the insurer during the economic crisis, the Wall Street Journal reported yesterday.
“It certainly wouldn’t be difficult to come to that conclusion,” Greenberg is quoted as telling the newspaper.
Greenberg blamed new standards for credit-default swaps - -pushed by Goldman or Deutsche Bank AG, he said -- and subprime, housing-backed derivatives sold and then shorted by Goldman as contributing to AIG’s collapse, the newspaper reported.
“Mr. Greenberg appears to base his views on news reports rather than facts,” Lucas van Praag, a Goldman spokesman, said in an e-mail to Bloomberg News. “It is interesting that he doesn’t mention the devastating conclusions about AIG reached by the company’s own auditors.”
To contact the reporters responsible for this story: Sylvia Wier at email@example.com; Vivek Shankar at firstname.lastname@example.org
Multi-sector CDOs and AIGFP
- Source: What Really Happened with the AIG Swaps? It's Not What You Think The Agonist, November 19, 2009
AIGFP was not regulated by any financial oversight agency. It didn’t even have to keep reserves on potential payouts on these CDSs, and even if it did, it has stated that the reserve amount would have been very small because it did not anticipate significant losses on the underlying debt instruments it was insuring. What AIGFP had going for it, and what the banks liked, was that it was a wholly-owned subsidiary of AIG, which carried a Aaa rating in its own name for everything it did. By virtue of this rating, AIG was viewed as one of the highest quality companies in the financial world – almost as safe and sound as a government.
The most common type of CDOs brought to AIGFP were called multi-sector: they had a little bit of everything mixed into them – loans, bonds, mortgage-backed securities on sub-prime mortgages as well as higher-quality instruments like prime mortgages. As long as none of these different types of instruments experienced unusual rates of default, the entire CDO would be traded on the market at a price close to par, and the ratings agencies would have no cause to downgrade the security.
What began to cause AIGFP trouble with its portfolio of credit default swaps backing up about $72 billion of multi-sector CDOs, was not that there were so many defaults on the CDOS that AIGFP had to make large payments under the swaps. The real problem was a series of collateral obligations AIGFP undertook every time it entered into a CDS, and the collateral conditions varied from one swap to the next.
There were three possible triggers for a collateral payment from AIGFP to the banks that bought insurance in the form of CDSs. The first occurred if the underlying CDOs being insured in the swap experienced a drop in price on the market – say from par value to 48 cents. The second occurred if the ratings given by Moody’s or some other agency on the CDOs were downgraded. The third occurred if AIG’s Aaa rating itself was downgraded.
Judge refuses to dismiss AIG investor lawsuit
- Source: Judge Refuses to Dismiss AIG Investor Lawsuit Reuters, September 28, 2010
A judge refused to dismiss a securities fraud lawsuit accusing American International Group Inc of misleading investors about its subprime mortgage exposure, which led to a liquidity crisis and $182.3 billion of federal bailouts.
Monday's ruling by U.S. District Judge Laura Taylor Swain allows the case to go forward and could pave the way for a trial. The government rescue led taxpayers to take a nearly 80 percent stake in the New York-based insurer.
Investors led by the State of Michigan Retirement Systems, which oversees several state pension plans, accused AIG, executives and directors of failing to disclose the risks that AIG had taken on through its portfolio of credit default swaps and a securities lending program.
They said the failures led investors to buy stock and debt they otherwise would not have bought, resulting in billions of dollars in losses.
Swain wrote that the allegations in the consolidated class-action lawsuit were sufficient to suggest "a strong inference of fraudulent intent" in how AIG communicated publicly about the risks of its credit default swaps.
She also said that plaintiffs made sufficient arguments to claim that AIG "materially misled the market" in hiding its "expansive" credit default swap underwriting, repeatedly expressing confidence in its ability to manage risk and justifying a May 2008 capital raising.
Among the defendants are Martin Sullivan, a former AIG chief executive; Joseph Cassano, who ran AIG's Financial Products unit, which managed the credit default swap portfolio; current and former directors; 34 banks that underwrote AIG securities, and former accountant PricewaterhouseCoopers LLP. The lawsuit covers investors who bought AIG securities between March 16, 2006, and Sept. 16, 2008, when AIG received its first bailout.
Earlier this year, the U.S. Justice Department and Securities and Exchange Commission closed probes arising from AIG's use of the credit default swaps.
AIG spokesman Mark Herr in an email said that when all facts are revealed, "it will be clear that no fraud occurred and shareholders were not misled as to any of the risks." E. Powell Miller, a lawyer for the lead plaintiff, declined to make an immediate comment, saying he had yet to confer with his client.
Brad Karp, a lawyer for the banks, declined to make an immediate comment. James Gamble, a lawyer for the outside directors, declined to comment. Lawyers for Sullivan, Cassano and PwC did not immediately return calls seeking a comment.
Shares of AIG rose $1.38, or 3.8 percent, to $37.85 in afternoon trading on the New York Stock Exchange.
The case is In re: American International Group Inc 2008 Securities Litigation, U.S. District Court, Southern District of New York, No. 08-04772. (Reporting by Jonathan Stempel; Editing by Maureen Bavdek,Steve Orlofsky and Bernard Orr)
- AIG Subprime Mortgages Securities Fraud Suit To Continue Financial Fraud Law, September 29, 2010
IN RE AMERICAN INTERNATIONAL GROUP, : INC. 2008 SECURITIES LITIGATION
No. 08 CV 4772 (LTS) ORAL ARGUMENT REQUESTED
Suit - AIG was an illegal money laundering scheme
- Presentation By David Yerushalmi Suing The Fed On Grounds AIG Takeover Was Illegal Money Laundering Scheme ZeroHedge, April 15, 2010
"The Law Offices of David Yerushalmi, P.C. presents an online PowerPoint presentation fully narrated illustrating rather graphically just how Timothy Geithner, who was then (Sept. 2008) the president of the Federal Reserve Bank of New York, orchestrated the illegal acquisition of 77.9% of AIG's equity and voting rights. As the presentation makes clear, while the FED certainly had authority to loan AIG billions and to take all of the company's assets as collateral, which it did, it had no legal authority to acquire nearly 80% of AIG's shares and voting rights. But this is exactly what it did when it created with great fanfare what is called the AIG Credit Facility Trust."
- Understanding the governments takeover of AIG Murray v. Geithner et al., Case No. 2:08-cv-15147-LPZ-MKM, 2010
AIG settles shareholder suit for $725 million
- AIG Settles Investor Suit for $725 Million; May Sell Shares Bloomberg, July 16, 2010
American International Group Inc., the bailed-out insurer, agreed to a $725 million settlement with investors who lost money as the insurer’s stock plunged amid a New York probe into bid rigging and faulty accounting.
The insurer will pay $175 million within 10 days of preliminary court approval, New York-based AIG said in a regulatory filing today. The payment of the remaining $550 million depends on AIG’s ability to raise funds in common stock offerings, according to the filing. If the company is unable to raise that sum, the agreement may be terminated.
AIG, led by Chief Executive Officer Robert Benmosche, is resolving litigation tied to conduct investigated by then-New York Attorney General Eliot Spitzer in 2004. The insurer agreed in November to settle all legal disputes with former CEO Maurice “Hank” Greenberg, who was ousted amid the probe in 2005.
“The key here is for the company to go forward and make money and do business and have issues dealing with supervisors and shareholders all in the past,” said Ernest “Ernie” Patrikis, a partner at White & Case and a former general counsel at AIG. “It’s another major impediment behind them.”
AIG settled with Spitzer and federal regulators in 2006, agreeing to pay $1.64 billion. The suit covered by today’s agreement was filed by plaintiffs including Ohio public pension funds that invested in the insurer and suffered losses as the investigations depressed the company’s share price.
‘Restoring the Value’
“We are pleased to have resolved this matter,” AIG spokesman Mark Herr said in a statement. “This settlement ends a long-standing lawsuit, allowing AIG to continue to focus its efforts on paying back taxpayers and restoring the value of our franchise for the benefit of all our stakeholders.”
AIG last sold stock in May 2008, when it needed funds to cushion losses tied to bad bets on subprime mortgages. The company dropped to $35.64 today at 4:15 p.m. in New York Stock Exchange composite trading. That compares with $767.40 on May 12, 2008, when the last offer priced, according to data compiled by Bloomberg.
The insurer was forced in September 2008 to take a government bailout that swelled to $182.3 billion. The U.S. took a stake of almost 80 percent. Andrew Williams, a spokesman for the Treasury Department, had no immediate comment.
- AIG agrees to pay $725M to investors in settlement AP, July 16, 2010
AIG to issue shares to pay shareholder settlement
- Source: AIG Plans Stock Offering to Pay Ohio Funds Settlement Securities Law Prof Blog, July 17, 2010
How is AIG going to pay the $725 million settlement with the Ohio pension funds?
According to AIG's 8-K Report:
Under the terms of the Settlement, if consummated, AIG will pay an aggregate of $725 million, $175 million of which is to be paid into escrow within ten days of preliminary court approval. AIG’s obligation to fund the remainder of the settlement amount is conditioned on its having consummated one or more common stock offerings raising net proceeds of at least $550 million prior to final court approval (“Qualified Offering”). AIG has agreed to use best efforts, consistent with the fiduciary duties of AIG’s management and Board of Directors, to effect a Qualified Offering, but the decision as to whether market conditions or pending or contemplated corporate transactions make it commercially reasonable to proceed with such an offering will be within AIG’s unilateral discretion. In the event that AIG effects a registered secondary offering of common stock on behalf of the U.S. Department of the Treasury (“Treasury”) resulting in Treasury receiving proceeds of at least $550 million, then market access will be deemed to have been demonstrated and AIG shall be deemed to have consummated a Qualified Offering. AIG, in its sole discretion, also may fund the $550 million from other sources. If AIG does not fund the $550 million before final court approval of the Settlement, the plaintiffs may terminate the agreement, elect to acquire freely transferable shares of AIG common stock with a market value of $550 million provided AIG is able to obtain all necessary approvals, or extend the period for AIG to complete a Qualified Offering.
AIGFP to retain $500 billion CDS book
- Source: AIG drops entire derivatives portfolio sale plan Financial Times, February 18 2010
AIG has shelved plans to sell the whole of its derivatives portfolio, which nearly destroyed the insurer in 2008. It believes that keeping up to $500bn worth of complex positions could help it to survive as an independent entity and repay US taxpayers.
The decision underlines the management’s confidence in AIG’s future but could prove controversial in Washington, where officials have baulked at the cost of the US government bail-out of the insurer and scrutinised its use of derivatives.
Gerry Pasciucco, who joined AIG after it was rescued by the government in September 2008 to wind down AIG Financial Products, said the troubled unit would still be out of business by the end of this year. AIGFP caused a storm in Congress last year with plans to pay some of its 200-plus staff large bonuses.
The original plan, devised by then chief executive Edward Liddy and the government after the rescue, was to sell off all the positions and close down AIGFP as soon as possible. But Mr Pasciucco said that derivatives with a notional value of between $300bn and $500bn – or between 15 and 25 per cent of the derivatives portfolio’s original size – would not be sold. The assets could either be managed by AIG or outsourced to an external fund manager, he added.
AIG’s management, led by chief executive Robert Benmosche, believes that such a move reduce the need for fire sales and enable AIG to reap the benefits of rallying credit markets, Mr Pasciucco said. AIG recorded billions of dollars in paper profits on its derivatives in the third quarter of 2009.
AIG, which is majority-owned by the US authorities, has sold derivatives – and reduced the risk attached to them – since the bail-out. Its derivatives book, which had a notional value of $2,000bn in September 2008, stood at $940bn at the end of December 2009, the insurer is expected to announce with its fourth quarter results.
Mr Pasciucco said his team would continue to reduce the size and the risk of the portfolio until it reaches $300bn-$500bn. The number of derivatives positions has fallen from 44,000 in late 2008 to 16,100 at the end of December while the “gross vega” – a measure of risk – in the portfolio has gone from $1.3bn to $310m
AIG executives said the Treasury and the New York Federal Reserve, which took an 80 per cent stake in the insurer in return for more than $80bn in federal funds, had been consulted on the decision to keep the derivatives. Peter Hancock, the derivatives expert who has just been hired to oversee AIGFP, among other responsibilities, is also believed to back the move.
- Analysis: AIG's Derivatives Trades Go Back Decades Wall Street and Tech, March 1, 2010
- Keycorp’s Hancock to oversee AIG risk Financial Times, February 8, 2010
Source: Bloomberg, June 30, 2009 "Unwinding at AIG Prompts Pasciucco to Ponder Systemic Failure"
AIG, more than any other institution, has thrown a spotlight on the tangled world of derivatives -- securities whose value is derived from underlying stocks, bonds, currencies or commodities -- and especially on credit-default swaps. CDSs are lightly regulated insurance-like contracts used to protect investors against the default or loss in market value of a security they hold.
The government rescued AIG to avert “systemic failure,” Federal Reserve Chairman Ben S. Bernanke said at the time. If AIG had collapsed, a dozen other big financial companies that were counterparties in its derivative trades and insurance contracts might have gone down along with it, Bernanke told Congress in March.
By the end of 2008, more than $60 billion was paid to AIG counterparties that had bought CDSs from AIG. In a May 2009 filing to the Securities and Exchange Commission, AIG disclosed for the first time the full extent of those payments, including cash that had flowed to banks before AIG’s bailout.
Paris-based Societe Generale got $16.5 billion in collateral and other payments from late 2007 through 2008; New York-based Goldman Sachs Group Inc. received $14 billion; Frankfurt-based Deutsche Bank AG, $8.5 billion; and Merrill Lynch & Co., $6.2 billion.
The payments were triggered by the credit-rating downgrades of AIG and declines in the market value of the assets protected by the swaps. The most volatile of those assets were collateralized-debt obligations, or CDOs, which are agglomerations of subprime mortgages and other debt that are divided up and sliced into tranches, each of which has a different risk and income stream.
The filing, which is heavily redacted and uses abbreviations for counterparty names, reveals the extent to which Goldman Sachs was the leader in demanding -- and receiving -- collateral on the problem CDOs that AIG had insured. It got $5.9 billion before the insurer was forced into the government’s arms on Sept. 16, more than any other counterparty. Goldman Sachs spokesman Michael DuVally declined to comment.
'No Reason to Pay’
“There was no reason to pay the contracts in full,” says Janet Tavakoli, founder of Tavakoli Structured Finance Inc. in Chicago and author of “Dear Mr. Buffett: What an Investor Learns 1,269 Miles From Wall Street” (Wiley, 2009). “We’ve run roughshod over the interests of the American taxpayer; we’ve bailed out the Wall Street creditors; we’ve used AIG as a huge slush fund.”
In September, Moody’s Investors Service, Standard & Poor’s and Fitch Ratings all downgraded AIG two or three grades in response to its accelerating cash crunch. The company was rated AAA from 1983 to March 2005, when it lost that designation after CEO Maurice “Hank” Greenberg was forced to resign.
The September downgrades sealed the firm’s fate by triggering the collateral calls by Goldman Sachs and the other banks to which AIGFP had sold swaps.
Sales of assets
AIG since September 2008 has marketed its assets to pay off its government loans. A global decline in the valuation of insurance businesses, and the weakening financial condition of potential bidders, has challenged its efforts. If the U.S. government decides to continue to protect the company from falling into bankruptcy, it may have to take the assets itself in exchange for the loans, or offer further direct financial support.
On March 2, 2009, AIG reported a fourth quarter loss of $61.7bn (£43bn) for the final three months of 2008. This was the largest quarterly loss in corporate history at that time. 
The announcement of the loss had an impact on morning trading in Europe and Asia, with the FTSE100, DAX and Nikkei all suffering sharp falls. In the US the Dow Jones Industrial Average fell to below 7000 points, a twelve-year low. 
The Treasury Department suggested that the potential losses to the US and global economy would be 'extremely high' if it were to collapse and has suggested that if in future there is no improvement, it will invest more money into the company, as it is unwilling to allow it to fail. 
The firm's position as not just a domestic insurer, but also one for small businesses and many listed firms, has prompted US officials to suggest its demise could be 'disastrous' and the Federal Reserve said that AIG posed a 'system risk' to the global economy.
In a testimony before the Senate Budget Committee on March 3, 2009, the Federal Reserve Chairman Ben Bernanke stated that "AIG exploited a huge gap in the regulatory system,” ... and "to nobody’s surprise, made irresponsible bets and took huge losses".
2009 employee bonus payments
In March 2009, AIG announced that they were paying out $165 million in executive bonuses. Total bonuses for the financial unit could reach $450 million and bonuses for the entire company could reach $1.2 billion. President Barack Obama, who voted for the AIG bailout as a Senator  responded to the planned payments by saying "[I]t’s hard to understand how derivative traders at A.I.G. warranted any bonuses, much less $165 million in extra pay. How do they justify this outrage to the taxpayers who are keeping the company afloat?" and "In the last six months, A.I.G. has received substantial sums from the U.S. Treasury. I’ve asked Secretary Geithner to use that leverage and pursue every legal avenue to block these bonuses and make the American taxpayers whole."
Politicians on both sides of the Congressional aisle reacted with outrage to the planned bailouts. Senator Chuck Grassley (R-Iowa) said "I would suggest the first thing that would make me feel a little bit better toward them if they'd follow the Japanese example and come before the American people and take that deep bow and say, I'm sorry, and then either do one of two things: resign or go commit suicide."
Senator Chuck Schumer (D-New York) accused AIG of "Alice in Wonderland business practices" and said "It boggles the mind." He has threatened to tax the bonuses at up to 100%. 
Senator Richard Shelby (R-Alabama) said "These people brought this on themselves. Now you're rewarding failure. A lot of these people should be fired, not awarded bonuses. This is horrible. It's outrageous." 
Senator Mitch McConnell (R-Kentucky) echoed his comments, saying "This is an outrage."
Senator Jon Tester (D-Montana) said "This is ridiculous." and AIG executives "need to understand that the only reason they even have a job is because of the taxpayers." 
Senator Dick Durbin (D-Illinois) said "I've had it." and "The fact that they continue to do it while we pour in billions of dollars is undefensible."
US president Obama, Congress call for blocking of executive bonuses at AIG insurance company. Representative Barney Frank (D-Massachusetts), Chairman of the House Financial Services Committee, said paying these bonuses would be "rewarding incompetence" and "These people may have a right to their bonuses. They don't have a right to their jobs forever."
Representative Mark Kirk (R-Illinois) said "AIG should not be on welfare from Uncle Sam, and yet paying bonuses and transferring a considerable amount of taxpayer funds to entities overseas."
Federal Reserve Chairman Ben Bernanke said "It makes me angry. I slammed the phone more than a few times on discussing AIG."
Lawrence Summers, Director of the National Economic Council, said "The easy thing would be to just say, you know, ‘Off with their heads,’ and violate the contracts."
Austan Goolsbee, of the Council of Economic Advisers said "I don't know why they would follow a policy that's really not sensible, is obviously going to ignite the ire of millions of people." and "You worry about that backlash."
On March 24, 2009, The New York Times printed the resignation letter of Jake DeSantis, executive vice president of AIG’s financial products unit, to Edward M. Liddy, the chief executive of AIG. DeSantis stated he had nothing to do with the credit default swaps, he lost much of his life savings in the form of deferred compensation invested in the capital of AIG Financial Products; he had agreed to work for an annual salary of $1 out of a sense of duty, that he was assured many times the bonuses would be paid in March 2009, and that he believed he and others were let down by Liddy's lack of support. He also stated he was going to donate his bonus to those suffering from the global economic downturn. 
It was reported that Senator Christopher Dodd (D-Con) (who first denied, then admitted to amending the legislation to allow the AIG bonuses), received $160,000 from employees of AIG.  
A memo issued in 2006 by Joseph Cassano, AIG Financial Products chief executive, urged AIG employees to donate to Dodd, saying that as "next in line to become chairman of the Senate Banking, Housing, and Urban Affairs Committe... Senator Dodd will now have the opportunity to set the committee's agenda on issues critical to the financial services industry."
AIG breakup nets Wall Street $1 billion
Source: AIG breakup nets Wall Street $1 billion bonanza: report Reuters, August 6, 2009
"Wall Street banks and lawyers could collect nearly $1 billion in fees from the Federal Reserve Bank of New York and American International Group Inc to help manage and break apart the insurer, The Wall Street Journal said on Wednesday, citing its own analysis.
Morgan Stanley could collect as much as $250 million, the newspaper said, citing banking experts and documents released by the New York Fed.
Bank of America Corp, private equity firm Blackstone Group LP, law firm Davis Polk & Wardwell LLP, accounting firm Ernst & Young, Goldman Sachs Group Inc and JPMorgan Chase & Co are among others that have or could get big paydays for helping dismantle AIG, the newspaper said.
To calculate dollar amounts, the newspaper said it tallied estimated fees for transactions already announced and those AIG is considering, planning or may be forced to pursue. It said it obtained assistance from Freeman & Co, Thomson Reuters and documents provided by the New York Fed.
According to the newspaper, the situation creates potential conflicts of interest in oversight by causing the government to employ many companies it regulates.
The government owns nearly 80 percent of AIG, and has given the insurer a series of bailouts estimated at $180 billion.
AIG was felled by big bets on credit default swaps that left it on the hook for tens of billions of dollars of payouts it could not make.
Shares of AIG closed Wednesday up 62.7 percent at $22 on the New York Stock Exchange, as investors rushed to cover short positions. AIG has said it plans to report second-quarter results on Friday."
- AIG's near-collapse yields gold for Wall Street Reuters, March 26, 2010
Speculators feast on AIG remains
- Source: Traders Seek Fortune in AIG, a Stock Once Left for Dead WSJ, September 23, 2009
"A year after the government sought to avert a market meltdown by rescuing some of the country's biggest financial firms, speculative traders are feasting on these companies' remains. Shares of two government wards, mortgage giants Fannie Mae and Freddie Mac, bounced between about 60 cents and $2 in August. Shares of Lehman Brothers, left to fail by the government and currently in bankruptcy proceedings, rose from five cents to 20 cents in recent weeks.
AIG, arguably, has been the biggest casino of all. In the past seven weeks, its common shares have careened between $13 and $55, surging past $54 on Tuesday before closing at $45.80.
The extraordinary price action is a dramatic display of an unintended consequence of the U.S. bailout of AIG. Last Sept. 16, the government propped up the faltering company by trading $85 billion in loans for an 80% stake in AIG in the form of preferred shares, which don't trade on the market. It allowed the other 20% of the company's equity -- its millions of common shares -- to continue to trade publicly.
Some analysts declared the deeply indebted company's common shares basically dead money. Many buy-and-hold investors bailed out. That has left AIG's common shares -- $6.2 billion worth, as of Tuesday -- trading most actively between short-term traders, who buy and sell based on market momentum and bet against each other in risky options trades. Often they use borrowed funds, amplifying their gains and losses.
Increasingly toxic pool of CDS
Source:AIG’s European Derivatives May Take Decades to Expire July 17, 2009, Bloomberg
"July 17 (Bloomberg) -- American International Group Inc.’s trading partners may force the insurer to bear the risk of losses on corporate loans and mortgages for years beyond the company’s expectations, complicating U.S. efforts to stabilize the firm, analysts said.
European banks including Societe Generale SA and BNP Paribas SA hold almost $200 billion in guarantees sold by New York-based AIG allowing the lenders to reduce the capital required for loss reserves. The firms may keep the contracts to hedge against declining assets rather than canceling them as AIG said it expects the banks to do, according to David Havens, managing director at investment bank Hexagon Securities LLC.
“For counterparties to voluntarily terminate those contracts makes no sense,” Havens said in an interview. “There’s no question that asset values have soured on a global basis. With the faith and credit of the U.S. government backing those guarantees, why would they give that up?”
The falling value of holdings backed by the swaps may force AIG to post more collateral, pressuring the insurer’s liquidity and credit ratings in a repeat of the cycle that caused the firm’s near collapse in September, Citigroup Inc. analyst Joshua Shanker said last week. The insurer needed a U.S. bailout valued at $182.5 billion after handing over collateral on a different book of swaps backing U.S. subprime mortgages.
The average weighted length of the European swaps protecting residential loans is more than 25 years, while the span tied to corporate loans is about 6 years, AIG said in a regulatory filing. Contracts covering corporate loans in the Netherlands extend almost 45 years, and the swaps on mortgages in Denmark, France and Germany mature in more than 30 years."
AIG sets stage for first bond sale since bailout
- Source: AIG Sets Stage for First Bond Sale Since Bailout Wall Street Journal, August 19, 2010
American International Group Inc. is laying the groundwork for its first debt offering in two years, in what could be a key measure of whether investors think the bailed-out insurance giant can stand on its own and ultimately repay taxpayer funds.
Earlier this month, AIG expanded an existing registration statement for securities offerings to include debt, an indication the company could try to sell bonds or other securities quickly and from time to time when market conditions are favorable.
AIG didn't say when it will try to raise money, but analysts and people familiar with the matter say the government-controlled insurance giant could issue new debt before year-end. An Aug. 9 prospectus filed by AIG said net proceeds from securities sales would likely go toward repaying some of its debt to the Federal Reserve Bank of New York, which the company recently owed $23.7 billion.
AIG declined to comment.
- AIG pays back $4 bln of U.S. loan Reuters, August 23, 2010
AIG to retire Fed credit line
- Source: AIG Strikes Deal to Retire Fed Credit Line, Wind Down Bailout Bloomberg, December 9, 2010
American International Group Inc. struck a deal to repay the Federal Reserve, the regulator that first bailed out the insurer in 2008, and then focus on retiring obligations to the U.S. Treasury Department...
..AIG will use proceeds from the sales of two non-U.S. life insurers to repay the line, on which it owed about $21 billion as of last week, the company said yesterday. Chief Executive Officer Robert Benmosche is focusing on global property-casualty coverage and domestic life and retirement units to entice private investors to replace the government capital that propped up the firm after losses tied to subprime home loans.
Treasury, which invested about $49 billion in New York- based AIG, plans to convert its preferred stake into 1.66 billion shares of common stock, or 92 percent of the total, by March 15. The securities will then be sold to private investors.
Treasury expects underwriters to be selected by early next year for an offering of some of its stake, and will determine how many shares to sell based on market conditions, according to a person familiar with the plan. The person, who declined to be identified because the plan is private, said it’s too early to estimate how much stock would be sold in the first offering.
- New York Fed Publishes Web Page on Actions Related to AIG Federal Reserve Bank of New York, June 9, 2010
- No Wonder AIG Needed a Bailout Huffington Post, February 25, 2011
- Will AIG Implosion 2.0 Lead To QE 3.0? Zerohedge, February 25, 2011
- Bailing out - American taxpayers should not cheer the sale of AIG’s Asian arm too loudly The Economist, October 21, 2010
- AIG Announces Plan to Repay U.S. Government Marketwatch, September 30, 2010
- U.S. Is Said to Seek Way to Sever Ties With A.I.G. New York Times, September 28, 2010
- A.I.G. in Talks to Pay U.S. Debt, Chief Says New York Times, August 7, 2010
- AIG Rescue Spared European Banks From $16 Billion Capital Raise Bloomberg, June 14, 2010
- US Congressional panel attacks AIG rescue Financial Times, June 10, 2010
- AIG's problems far greater than Bush officials told public McClatchy, June 8, 2010
- AIG won’t haggle?! Reuters, June 1, 2010
- A.I.G. Said to Dismiss Goldman New York Times, May 6, 2010
- Goldman Sachs: Too Big For Jail? Huffington Post, April 18, 2010
- AIG, Goldman Unwind Soured Trades Wall Street Journal, April 11, 2010
- U.S. Said to Interview AIG’s Cassano About Subprime Losses Bloomberg, April 7, 2010
- Betting on the Blind Side Vanity Fair, March, 2010
- AIG's near-collapse yields gold for Wall Street Reuters, March 26, 2010
- AIG Was Unprepared for Crisis, Former Top Lawyer Says Bloomberg, March 12, 2010
- Fed Shoulders AIG Loan Losses to Ease Sale to MetLife Bloomberg, March 11, 2010
- AIG ‘Still Exposed’ Amid Losses From Mortgage Insurer, Lender Bloomberg, March 4, 2010
- U.S. may use Citi exit strategy at AIG Reuters, March 3, 2010
- AIG’s derivatives go back decades February 26, 2010
- Statement Regarding Appointment of New Trustee to AIG Credit Facility Trust NY Fed, February 26, 2010
- AIG Posts Loss on Charges Tied to Rescue; Shares Fall Bloomberg, February 26, 2010
- AIG Death Spiral Ends as Bailout Support Brings Stable Revenue Bloomberg, February 22, 2010
- Suspicious Timing Surrounding The "De-risking" of AIG's Toxic Obligations OpEdNews, February 12, 2010
- Geithner’s Other Hot Mess ZeroHedge, February 9, 2010
- The NYT’s Latest Goldman/AIG Salvo: Missing the Real Targets? Naked Capitalism, February 7, 2010
- Mystery Men of the Financial Crisis New York Times, February 4, 2010
- The Great American Financial Sandwich: Goldman Sachs, PwC and AIG HuffPo, Feb 4, 2010
- AIG to pay $100 million in new round of bonuses Washington Post, February 2, 2010
- ‘Everything that could go bad, did not’ Financial Times, January 31, 2010
- Geithner Was ‘Not Doing His Job’ at Fed, Issa Says Bloomberg, January 28, 2010
- More of the Fed’s “Secret” Maiden Lane III Transaction Level Detail Naked Capitalism, January 28, 2010
- The Press Angle of the Fed’s Backdoor-Bailout Cover-up Columbia Journalism Review, January 25, 2010
- SEC Charges General Re Corporation for Role in AIG and Prudential Accounting Frauds SEC, January 20, 2010
- The Bank Job Vanity Fair, January, 2010
- In Battle With U.S. Over Pay, AIG Chief Meets His Match Wall Street Journal, December 24, 2009
- Three Strikes on Ben Bernanke: AIG, Goldman Sachs & BAC/TARP The Institutional Risk Analyst, December 7, 2009
- Frank Op-ED: "A Comprehensive Solution to Combustible Markets" House Fin Services Committee, December 4, 2009
- AIG’s ‘Tainted Brand’ in U.K. Hurts Life Insurer Unit Bloomberg, December 2, 2009
- AIG Price Target Cut 40% by Bernstein on Reserves Bloomberg, November 30, 2009
- The uncomfortable position of UBS FT Alphaville, November 17, 2009
- AIG May Be Able to Pay Back Fed Loan, Moody’s Says Bloomberg, November 9, 2009
- Cassano Back in the U.S. - Analysis and Discussion with Columbia University Professor John Coffee Bloomberg News video (running time 3 minutes), Sept 29, 2009
- Ex-AIG unit head Cassano back in US; probe intensifies, Reuters, September 28, 2009
- The secret to Goldman Sachs' good fortune NY Post, September 29, 2009
- U.S. to Take Over AIG in $85 Billion Bailout; Central Banks Inject Cash as Credit Dries Up WSJ, Sept 16, 2008
- Barney Frank on AIG New York Times video
- "The AIG Bailout" Paper by William Sjostrom, Jr. (2009)
- An Insurance Giant, Brought Down 2008-09-27, New York Times (Graphic)
- "Losses in Perspective" New York Times. September 17, 2008. (Graphic of AIG quarterly net profit & losses over five years, comparing Finance vs. Insurance activities.)
- A Tally of Federal Rescues New York Times, 2008-09-28
- How a Market Crisis Unfolded: Some of the key events in the upheaval 2008-09-17, New York Times (Graphic and interactive timeline.)
- Why Paulson Blinked on AIG Washington Independent, September 18, 2008
- House Panel Examines Bond Insurance, Ponders Federal Action Dewey & LeBoeuf, February 19, 2008
- For a list of counterparties receiving U.S. taxpayer dollars, see: Business Week - List of Counterparties and Payouts
- GAO Report on the AIG Bailout
- AIG at the New York Times Index to NYT coverage.
- Reuters profile of American International Group Inc. New York Stock Exchange listing information
- 90% Tax on AIG & Others' Bonuses HR1586 passed the house on March 19, 2009
- AIG Discloses New Risk on Derivatives Sold to Banks Bloomberg, June 30, 2009
- In-Depth Look Goldman's Ties To Paulson Bloomberg News video, (running time - 6:30 minutes) Aug. 10, 2009
- AIG to hand out retention bonuses disguised as loans to 6,000 reps, advisers Investment News, Sept 2, 2009
- Ex-A.I.G. Chief Is Back, Luring Talent From Rescued Firm New York Times, October 26, 2009