Senators Asks TARP To Probe AIG Use Of Bailout Cash

BY ARTHUR D. POSTAL
National Underwriter News
March 18, 2009


WASHINGTON--The leadership of the Senate Banking Committee urged overseers of the Troubled Asset Relief Program (TARP) today to investigate why American International Group paid back investors in troubled AIG mortgage security offerings on a dollar-for-dollar basis even though the securities had not yet defaulted.

Sen. Chris Dodd, D-Conn., chairman of the panel, raised the issue at a hearing on insurance regulation today.

Mr. Dodd said he was very interested in determining why the counterparties to the AIG credit default swaps were paid 100 percent of the insurance AIG had provided to guarantee collateralized debt obligations.

Questions over the decision to provide full payment to such investors, he said, are a "secondary issue" to those provoked by disclosure that AIG was paying bonuses to the people who worked for the AIG Financial Products division that brought AIG to the brink of failure.

Sen. Richard Shelby, R-Ala., ranking minority member of the committee, asked Sen. Dodd to have the Inspector General for the TARP program to look into "where all this [TARP] money is going."

The matter was brought up at the hearing because AIG disclosed Sunday that it had used $52 billion of taxpayers' money to pay off counterparties to the CDS program that had been run from the London offices of the disastrous AIGFP operation that the company is now winding down.

The issue is related to the bonus question because the bonuses and retention payments, which have stirred congressional and White House outrage, were for people who work for AIGFP.

Under the data disclosed Sunday, Goldman Sachs Group Inc., New York, has received almost $13 billion in support as a result of the rescue efforts.

The Goldman Sachs total includes $5.6 billion in payments relating to the company's role as a credit default swaps counterparty, $4.8 billion in payments relating to its role as a securities lending counterparty, and $2.5 billion in credit default swaps collateral postings, AIG has announced.

Deutsche Bank A.G., Frankfurt, Germany, received about $12 billion in support; Barclays P.L.C., London, $8.5 billion; Societe Generale S.A., Paris, $7.8 billion; Merrill Lynch & Company Inc., New York, $6.8 billion; Bank of America Corp., Charlotte, N.C., $5.2 billion, and UBS A.G., Zurich, Switzerland, $5 billion.

Under ordinary circumstances, the issuer of a CDS only has to pony up more collateral when its credit rating deteriorates, as AIG was forced to do last September when its troubles began to grow.

AIG problems raising new capital to provide more backing to the counterparties whose collateralized debt obligations it had insured were what led the government to provide aid for the company last fall in exchange for an interest in the company.

Under the deal, AIG gave the government 79.9 percent of its stock to secure up to $85 billion in cash. Under the original agreement, reached Sept. 16, AIG was to pay back the government by selling valued assets.

But, the deal failed.

Under the data disclosed Sunday, AIG had paid out $120 billion of the $173 billion it has received in federal bailout money to counterparties of its derivatives transactions, including its CDS counterparties, its securities lending operation counterparties, and to municipalities. This includes at least $20 billion to European banks.

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