Cuomo Subpoenas AIG Swap Data in Taxpayer Fund Probe (Update5)

By Karen Freifeld
Bloomberg News
March 26, 2009

March 26 (Bloomberg) -- New York Attorney General Andrew Cuomo subpoened American International Group Inc.'s credit- default swap data to see whether its customers including Goldman Sachs Group Inc., Societe Generale SA and Deutsche Bank AG were improperly compensated with taxpayer dollars.

"Our investigation into corporate bonuses has led us to an investigation of the credit-default swap contracts at AIG," Cuomo said in a statement. "CDS contracts were at the heart of AIG's meltdown. The question is whether the contracts are being wound down properly and efficiently or whether they have become a vehicle for funneling billions in taxpayer dollars to capitalize banks all over the world."

AIG's Financial Products, the unit that sold credit-default swaps blamed for crippling the company, has been under fire after paying out $165 million in retention bonuses earlier this month while its parent company was taking taxpayer bailouts valued at $182.5 billion.

Lawmakers led by Elijah Cummings, a Democrat from Maryland, in a letter dated yesterday called for a federal probe into whether banks including Goldman Sachs received more funds than necessary from the AIG bailout. The banks got about $50 billion in payments tied to swaps. Nobel Prize-winning economist Joseph Stiglitz also has said AIG's settlement of credit-default swaps following its bailout by the U.S. government looks like "grand larceny."

Lehman Comparison

A person familiar with the New York state probe compared the winding down of AIG's contracts with those of a company such as Lehman Brothers Holdings Inc., where a firm in distress doesn't pay out 100 cents on the dollar. Lehman declared bankruptcy in September. On the other hand, AIG's payouts appear to have been 100 cents on the dollar, the person said. Cuomo is also looking into the negotiations that led to the winding down of the contracts, the person said.

The person said there's a possibility that AIG is becoming a portal through which the federal government is pouring money to capitalize banks in the U.S. and overseas.

AIG sold swaps to more than 20 U.S. and foreign banks. After the company was rescued by the U.S. from collapse last year, banks that bought credit-default swaps got $22.4 billion in collateral and $27.1 billion in payments to retire the contracts, the insurer said earlier this month. Goldman Sachs, Deutsche Bank and Societe Generale were among the largest recipients.

The letter from Cummings and 26 other members of Congress to Neil Barofsky, inspector general for the Troubled Asset Relief Program, asked whether holders received 100 cents on the dollar for their securities, a sum they wouldn't be entitled to get unless their bonds actually defaulted.

Geithner and Bernanke

Treasury Secretary Timothy Geithner and Federal Reserve Chairman Ben S. Bernanke told Congress on March 24 the U.S. needs new authority to take over and wind down failing financial companies after the government's rescue of AIG.

Mark Herr, a spokesman for New York-based AIG, declined to comment on the subpoena or the wind-down payments.

Goldman Sachs Chief Financial Officer David Viniar said March 20 that because the New York-based bank had collateral on swaps and hedges against AIG, the company wasn't willing to accept anything less than full payment from the insurer.

Credit-default swaps, conceived by bondholders, allow investors to buy protection against a possible default by a company. As the market expanded, speculators started using them to bet on a company's creditworthiness. The contracts pay the holder face value for the underlying securities or the cash equivalent should a company fail to repay its debt.

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