Commentaries

Now raising intellectual capital

The AIG bailout was about Europe

-

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.

from Rolfe Winkler:

“There were no discussions on AIG”

I'm sorry I missed this CNBC interview last week with Robert Wolf, chief of UBS Investment Bank in the U.S.  There's a remarkably eye-opening sound bite.   (hat tip M. Mayer)

...there were no discussions on AIG during that three day period [the weekend Lehman failed].

It’s a start, but AIG still needs lots of handholding

-

As part of the government plans to overhaul AIG’s massive bailout package (announced in March), the company said Thursday it would give the government stakes in two of its most cherished assets – American Life Insurance Company, Alico, and American International Assuarance, AIA, – in return for paying down a good portion of its loan with the central bank.

In its press release, the company was sure to say that this is “a major step toward repaying taxpayers,” which is always important to flag to help offset the anger surrounding the bonus snafu and Ben Bernanke’s public blasting of the company.  And reducing outstanding debt on the credit facility to $15 billion from $40 billion gives some comfort that little by little, the government’s AIG entanglement is getting a little less, well, twisted.

Regulators are opaque, too

Photo
-

Matthew GoldsteinSo much for more transparency in the financial system.

It’s hard for regulators to demand greater transparency from Wall Street banks when they can’t even live up to their own standard of greater disclosure. A case in point is the Treasury Department’s press release touting its decision to permit “10 of the largest U.S. financial institutions” to begin repaying $68 billion in federal bailout money. The only trouble is Treasury doesn’t name any of the banks that can begin repaying money to the Troubled Asset Relief Program.

Treasury, it appears, has left it up to each of the “10 of the largest U.S. financial institutions” to make their own announcements about their intentions to repay the TARP. And some, like Morgan Stanley, didn’t waste anytime putting out a PR trumpeting its plan to repay $10 billion in TARP money.

  •