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Commentary

AIG funnelled taxpayer money to the big banks

From Zero Hedge:

AIG, knowing it would need to ask for much more capital from the Treasury imminently, decided to throw in the towel, and gifted major bank counter-parties with trades which were egregiously profitable to the banks, and even more egregiously money losing to the U.S. taxpayers, who had to dump more and more cash into AIG, without having the U.S. Treasury Secretary Tim Geithner disclose the real extent of this, for lack of a better word, fraudulent scam.

He says AIG unwound trades unprofitably on purpose, after it knew they would get bailed out, in effect giving the counterparty banks (Goldman, Deutsche, Citi etc.) bloody huge profits. They did more than they needed to, knowing well that they would get depressed prices, and that the treasury would stand behind them.

Plus, he says, Tim Geithner was fully aware. After his “all-in” plan I have decided Tim G isn’t quite the great person he was made out to be – after all, that does nothing other than hand more banks free money (who else are “private investors”? You and me? Fat chance).

Additionally, it’s been possible to unwind trades at lower prices even if there was a higher bid in the market; meaning, I could sell tomatoes at Rs. 5 per kilo in the market, but I still choose to take only Rs. 3 from you. (And I’m currently funded/owned by the government)

This whole thing stinks. AIG must go down. All the top US banks must be allowed to go bankrupt – that is, the government saying they won’t save anyone. Then the boys get separated from the men – and we’ll find out they’re all men anyhow. Fat, sweaty, bald men who can’t fight anymore, but they can survive. Let the rest of the banking system – the smaller, less leveraged banks – kick their butt.

Another great read is Big Picture’s post on how CDS was disguised “Reinsurance”. AIG would write CDS on something just so that the counterparty’s capital was enhanced, but would write a side-note to the counterparty saying they do not intend to pay on the contract. (This supposedly happens a lot in the reinsurance world) That is illegal and AIG got fined $10 million for it a long time back.

Regardless of how that went, now as a taxpayer funded entity, they can ditch the side note and pay anyhow – Barry says that is what is likely to be happening, because AIG was not seized immediately and had time to destroy the evidence of “side-notes” and such fraud.

Nothing will happen if AIG goes bust. The moral hazard of leaving it alive is staggeringly large. And it stinks.