Saturday, March 14, 2009

Atlas Insurance Group, pt 2

I had to do a double take when I saw this just a second ago on the NY Times website: A.I.G. to Pay $100 Million in Bonuses After Huge Bailout

In his letter to the Treasury, Mr. Liddy said that A.I.G. was required to pay about $165 million in bonuses on or before March 15. The company had already paid $55 million in December, but the rest was about to come due.

The bonus plan covers 400 employees, and the bonuses range from as little as $1,000 to as much as $6.5 million. About seven executives at the financial products unit were entitled to receive more than $3 million in bonuses.

Under a deal reached this week, A.I.G. agreed that the top 50 executives in the financial products division would get half of the $9.6 million they were supposed to get by March 15. The second of their bonuses would be paid out in two installments in July in September. 

WHAT?! After a $170 Billion (or whatever) taxpayer bailout, they should be giving us bonuses!

But, surely, you are thinking, these payments are going to AIG's high performers who had profitable years in AIG divisions that had nothing to do with CDO's and CDS's, right? Ha! If you think that, you have a lot to learn about High Finance:

The bonuses will be paid to executives at American International Group’s Financial Products division, the unit that wrote trillions of dollars’ worth of credit-default swaps that protected investors from defaults on bond backed by subprime mortgages.

These guys shouldn't be getting bonuses. They should be getting arrested. I can't believe it wasn't fraud to write "trillions of dollars worth of credit default swaps" when AIG lacked even a minimal capital cushion to make good on those contracts. And, why in the world are they even still working for AIG? They destroyed it! Whatever they might have "earned" last year, they more than made up for by "losing" $150 billion in two days last September.

I wrote here that, rather than being the odd man out among the Bailed Out, AIG is actually the linchpin to the financial crisis. It certainly looks more and more like that is the case. It began to fail immediately after Lehman Bros. crashed because suddenly all of AIG's CDS clients came calling at once looking for their payouts. That immediately put AIG's insurance business at immediate risk of a catastrophic collapse, thus the Fed's immediate move to prop up AIG despite its complete lack of regulatory sway over AIG. $150 billion quickly disappeared into AIG's coffers, to be paid out to the lucky institutions that were at the other end of all of those CDS's. 

The Fed has since stoutly refused to explain where that money has gone and who has been getting it. It is practically a state secret. A gov't that had no trouble "punishing" the shareholders of Bear Sternes and Lehman Bros.; that has been happily browbeating Bank of America into buying Merrill Lynch; and that has made American auto executives crawl on their knees; has suddenly become discreet and tight lipped about the biggest bailout of them all. Speculation has at least some of that money going to Europe, Japan, and China. Does anyone at the Fed or the White House want to be standing around when & if people learn what is going on?

The AIG story has been buried in highly technical language that has served to mask what is going on there. But it's really quite simple. The Fed is giving tens of billions to AIG, so that AIG can forward those billions to institutions that bought AIG's CDS's. Those instruments apparently were sold at a relatively low price, and without adequate capital on AIG's side to make good on them should there be a default. Sucks for AIG (and us), but the counter-parties are making out like bandits. Goldman Sachs and Deutch Bank have each received $6 Billion through the AIG bailout. Um, didn't Paulson work at Goldman? And isn't Deutche Bank a freakin' European bank? Shouldn't that be getting the same level of media attention as, say, the story of Sarah Palin's wardrobe?

Some have theorized that, but for the AIG payments, some institutions would be insolvent. Thus, AIG has become a sort of shadow bailout over which there has been no oversight or even the fiction of congressional approval. No wonder these guys think they can demand their bonuses. If AIG falls, then the system falls with it. 

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