AIG Payments to Banks Should Be Probed, Lawmakers Say (Update4)

By Hugh Son
Bloomberg News
March 26, 2009


March 26 (Bloomberg) -- Lawmakers called for a federal probe into whether banks including Goldman Sachs Group Inc. received more funds than necessary from the bailout of American International Group Inc.

"We would like to know if the AIG counterparty payments, as made, were in the best interests of the taxpayers," said 27 members of Congress led by Elijah Cummings, a Democrat from Maryland, in a letter dated yesterday to Neil Barofsky, inspector general for the Troubled Asset Relief Program. Banks got about $50 billion in payments tied to credit-default swaps.

The demand reflects widening frustration among lawmakers with the rising cost of AIG's bailout, now valued at $182.5 billion. The U.S. has propped up New York-based AIG four times since September after a cash shortage left the insurer unable to back up protection sold to banks on their fixed-income holdings. The lawmakers asked why banks weren't asked to take some losses to help stabilize AIG and the financial system.

"Was any attempt made to renegotiate and close out these contracts with ‘haircuts?'" the letter asked. "If not, why not?"

The query from the lawmakers concerns payments made to unwind some of AIG's credit-default swaps, contracts similar to insurance that pay investors if bonds don't pay as promised. AIG sold swaps to more than 20 U.S. and foreign banks.

Imposing ‘Haircuts'

After AIG 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 AG and Societe Generale SA were among the largest recipients. The letter 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.

Kristine Belisle, a spokeswoman for Barofsky, didn't return a call for comment. Societe Generale spokeswoman Stephanie Carson-Parker declined to comment, as did Ronald Weicher of Deutsche Bank and Lucas van Praag of Goldman Sachs.

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.

‘Unwind it Slowly'

If a federal agency had such powers in September, when AIG agreed to turn over an 80 percent stake in exchange for an emergency loan, "they could have been used to put AIG into conservatorship or receivership, unwind it slowly, protect policyholders and impose haircuts to creditors and counterparties, as appropriate," Bernanke told a congressional panel that day.

Banks were able to avoid losses when the Federal Reserve created a vehicle, known as Maiden Lane III, to purchase assets they'd insured with AIG. The members of Congress asked in the letter whether the U.S. negotiated to acquire the holdings at less than face value and if there was any assessment of the financial strength of the banks, including Goldman Sachs.

Cummings, 58, a member of the House Oversight and Government Reform Committee, was among the first lawmakers last year to question AIG's plans to pay $1 billion in retention bonuses. A firestorm of criticism this month about the payments prompted President Barack Obama to demand that the bonuses be blocked or recovered.

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.

Cuomo Probe

New York Attorney General Andrew Cuomo expanded his probe into bonuses paid by AIG to see whether the firm's customers were improperly compensated with taxpayer dollars.

"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," Cuomo said in a statement today.

Maurice "Hank" Greenberg, 83, AIG's former chief executive officer, said at a Hong Kong luncheon that bankruptcy would have produced better results because the contracts could be redone.

Bankruptcy Option

"The counterparties all become general creditors, and they get in line with everybody else," Greenberg said, adding it's "puzzling" the government didn't try to get new contracts. "You renegotiate things all the time. In fact, if you had declared Chapter 11, I guarantee you that the judge in bankruptcy would be renegotiating terms on almost everything."

Bernanke also addressed questions from lawmakers this week about why banks outside the U.S. benefited from the AIG rescue.

"I would point out that the Europeans have also saved a number of major financial institutions," Bernanke said. "And the issue of whether those institutions owed American companies money has not come up. So I think that there is a sense that we all have the obligation to address the problems of companies in our own jurisdictions."

The $50 billion in payments made to banks for credit- default swaps after AIG's bailout represent about half of the money that the insurer sent to financial firms and U.S. states from the middle of September to the end of 2008. Banks also got about $44 billion tied to securities lending, AIG said in a March 15 statement.

Copyright © 2009 FBIC (www.badfaithinsurance.org)


Click here to return to FBIC homepage