|Inquiry Asks Why A.I.G. Paid Banks
The New York Times | March 26, 2009
Members of Congress and the New York State attorney general demanded detailed information Thursday on how tens of billions of taxpayer dollars flowed through the American International Group during its crisis last fall and ended up in the coffers of several dozen big banks, shielding them from losses.
The new inquiries shine a spotlight on a question that is exponentially bigger, in dollars, than the $165 million in bonuses that A.I.G. paid out this month, but which has been overshadowed until now by the uproar over the bonuses.
“We would like to know if the A.I.G. counterparty payments, as made, were in the best interests of the taxpayers who provided the funding,” said Representative Elijah E. Cummings, Democrat of Maryland, in a letter to Neil M. Barofsky, the special inspector general for the Troubled Asset Relief Program. The letter was also signed by 26 other members of the House, all of them Democrats.
The representatives asked Mr. Barofsky to find out who had made the decision to shield A.I.G.’s trading partners from any losses during last fall’s crisis, and what factors had shaped the decision.
Their letter mentioned that Mr. Barofsky’s office had been created to investigate the uses of TARP money, and that A.I.G., the biggest recipient of government aid in recent months, was among the largest recipients of money from the TARP.
Andrew M. Cuomo, the New York State attorney general, meanwhile subpoenaed A.I.G. on Thursday for extensive information about its derivatives portfolio and how it is being managed, including the names of people in charge of the negotiations and other activity.
The new phase of Mr. Cuomo’s investigation is civil, although the subpoena was served under the Martin Act, a state law that gives the attorney general broad prosecutorial powers.
A spokesman for A.I.G. said the company had no comment on the new inquiries.
The banks and investment firms that ended up with A.I.G.’s bailout money last fall were, in many cases, counterparties to derivatives contracts it had sold, known as credit-default swaps, which guaranteed the value of assets in their investment portfolios. Had A.I.G. not been bailed out, and simply allowed to go bankrupt, they would have suffered investment losses running into the billions of dollars.
A.I.G. released the names of its major counterparties this month, at the urging of the Federal Reserve Board of Governors. They included Wall Street firms, like Goldman Sachs, JPMorgan Chase and Merrill Lynch, that have successfully resisted efforts to regulate credit derivatives in the past, on the argument that such contracts were valuable risk management tools, safe in the hands of the experts.
In several hearings this month, members of Congress said they believed the derivatives had often been used to speculate, not to manage risk. They have expressed outrage that A.I.G.’s trading partners got 100 cents on the dollar for their money-losing trades when ordinary Americans paying for the bailout have suffered big losses in their 401(k) accounts and other investments.
Some have also been dismayed to learn that taxpayer money had ended up bailing out foreign banks. Some of the biggest beneficiaries of the bailout of A.I.G. were banks in Europe, including Société Générale of France and Deutsche Bank of Germany, each of which received nearly $12 billion, Barclays of Britain, which received $8.5 billion, and UBS of Switzerland, which received $5 billion.
Officials of the Federal Reserve and the Treasury have said they believed A.I.G.’s financial obligations had to be honored to prevent a domino effect. Had A.I.G. suddenly disappeared, banks and other financial institutions around the world would have suffered losses, bad enough in some cases to cause additional failures.
But in their letter, the representatives said that while they were aware of “systemic risk,” they still wanted to know who had decided that the way to contain such risk would be to completely insulate the banks from losses.
“We would like to know if assessments were made of the health and total exposure risks of counterparties, such as Goldman Sachs,” they wrote, pointing out that Goldman Sachs had claimed it had no material exposure to A.I.G., but turned out to have received almost $13 billion during the rescue. “If such assessments were made, by whom were they made and what were the criteria guiding the assessments? Further, was any attempt made to renegotiate and close out these contracts with ‘haircuts?’ If not, why not?”
A person briefed on Mr. Cuomo’s investigation said that A.I.G.’s list of its counterparties gave information only through the end of 2008, and the company was still winding down a vast portfolio of derivatives, including more swaps. He said the attorney general wanted to see whether the termination of the derivatives contracts was being done as efficiently as possible, given the federal resources available to A.I.G.
“Credit-default swap contracts were at the heart of A.I.G.’s meltdown,” Mr. Cuomo said in a statement. “The question is whether the contracts are being wound down properly and efficiently, or whether they have become a vehicle for funneling billions in taxpayers’ dollars to capitalize banks all over the world.”