The AIG bailout was about Europe

June 30, 2009

It makes for a much better storyline to say the federal government’s bailout of AIG was all about saving evil Goldman Sachs from collapse. But the reality is the bailout was driven more by a desire to keep scores of European banks from taking massive capital hits.

Don’t believe it? Well, look at the latest regulatory filing from American International Group about the derviatives mess caused by its AIG Financial Products group. In the late Monday filing, the defacto government-owned insurer talks about its potential exposure to “market valuation losses” in its $192 billion “regulatory capital credit default swap portfolio…written for financial institutions, principally in Europe.”

That’s a lot more than the $70 billion or so in credit default swaps AIG Financial Products wrote on collateralized debt obligations formerly held by Goldman Sachs, Merrill Lynch, Deutsche Bank and other banks. Those CDOs were purchased with money from the Federal Reserve and are now rotting away in a special purpose vehicle called Maiden Lane III.

Sure the big bailout of AIG helped Goldman and other banks holding CDOs. But if AIG had collapsed, all those lesser known European banks that purchased CDS to lower their required levels of regulatory capital, would have faced the prospect of raising tens of billions in capital during last autumn’s market meltdown.

No one likes to talk about that because it’s not as compelling as linking the AIG bailout to the government’s desire to save a single Wall Street firm. But it’s the truth.


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