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U.S. Bore AIG Bailout Risk, but Foreign Banks Reaped the Rewards, Says Watchdog

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The offices of insurer American International Group Inc. on Sept. 17, 2008, in New York. The U.S. Federal Reserve had just pumped $85 billion into the company to stop it from a possible collapse. (Stan Honda/AFP/Getty Images)

Foreign financial firms indirectly reaped more than $14 billion in U.S. taxpayer dollars through Goldman Sachs alone after the U.S. Treasury bailed out AIG, according to the government’s bailout watchdog.

That's just one example of how how the billions that the Treasury poured into the economy also bailed out foreign banks, according to a report released on Wednesday by the Congressional oversight panel. The report detailed how through Goldman Sachs, significant portions of the $70 billion that the Treasury committed to bailing out AIG has ended up in the hands of foreign investors. From the report:

Taxpayer aid to AIG became aid to Goldman, and aid to Goldman became aid to a number of domestic and foreign investors. In some cases, the aid was in the form of repayment in full of obligations that, without government help, could have ended in default.

As the Wall Street Journal noted last week ($), significant questions still remain about how Goldman calculated how much cash it was owed by AIG for its bets against the risky collateralized debt obligations that precipitated AIG’s collapse. (Goldman in a memo to regulators, responded, "We believe our marks were accurate," but acknowledged that "a certain degree of judgment was necessary.")

As it turns out, many foreign investors also took the same bets -- with Goldman as the middleman -- that called for such payouts. Those investors also took home billions when the Treasury bailed out AIG. Though the report calculated that foreign banks received $14 billion in bailout funds through Goldman, previous calculations of what they received in all -- and not just through Goldman -- were around $58 billion.

And that's not to mention the credit default swaps that Goldman Sachs took out to protect itself in case of AIG's failure. According to the Congressional oversight panel's report, when the U.S. government rescued AIG, it spared 87 companies -- about half of which were foreign -- from having to pay out insurance money to Goldman that they would've had to pay if AIG had been allowed to fail. Late last month, Goldman handed over a list of these companies to the Congressional oversight panel and the Financial Crisis Inquiry Commission. According to that list (PDF), which was released by Sen. Charles Grassley, R-Iowa, Goldman stood to receive $1.7 billion in payments if AIG had defaulted. (The panel's report suggests that the correct number may have been $2.8 billion.)

The full report is long [PDF], and the Goldman-AIG case study is one of the more detailed sections, but the report concludes that across the board, other bailed out institutions probably had similar relationships that would ultimately channel “significant indirect benefits” to foreign institutions. Given that the U.S. subprime mortgage bubble--and the securities derived from those risky mortgages--destabilized the global financial system and incurred losses for investors both domestic and foreign, perhaps it's not a surprise that the U.S. government's rescue has reached those foreign entities as well.

But the panel's chairman, Elizabeth Warren, noted that "the U.S. bore the whole $70 billion risk of the AIG capital injection program," only to have foreign banks reap billions in benefits. The U.S. should've been keeping better track of these funds and where they would go, according to the panel.

"Treasury gathered very little data on how TARP funds flowed overseas," read the panel's report. "As a result, neither students of the current crisis nor those dealing with future rescue efforts will have access to much of the information that would help them make well-informed decisions."

The report also emphasized that other countries tailored their bailout own programs more narrowly, and thus the U.S. received less benefit from their bailouts than foreign nations received from the U.S. bailout. According to The Washington Post, that left the United States “shouldering far more risk” than those nations.

The concept of risk, from my lowly socioeconomic position, consists of “if we lose anything, we’re sunk.” Our family works hard, makes little money, and if we were to play the system like these gigantic slush funds, and their multibillion-dollar shell game: either we would be millionaires—or, more likely, be in the slammer. What, in the name of capitalism, justifies saving these pyramid schemers from their own game?  Let them fail: I think living like a normal human might give them a badly needed dose of reality. If I was in the position to gamble with impunity without even the chance of losing (is that gambling?)I might go for it. The perverse consequence of rescue, regardless of behavior, gives me pause.  My family lives within it’s means, as meager as they might be. We have no debt. Nothing in the current system rewards us for our thrift or prudence.

I don’t think for a second that letting the financial system go belly up was a viable approach.  This seems to have becone a popular trope.  The guys who brought us to the brink have lined their pockets all along and likely would not have been the ones that suffered most from a “walk away and let it collapse” approach.  I’m as frustrated as anyone about the bailout, but what upsets me is the lack of real emotion related to the two primary causes which point to obvious longer term solutions (mind you “long term” is a dirty word these days - yet a third problem).

The first cause was the steady erosion of the regulatory environment and the allowing of CDS’s to become a major market.  They were originally illegal because they were considered by many states to be betting.  Indeed that is just what they were and are,  How passionate were folks about pushing real financial reform, not so much, too complicated and thorny an issue.

This regulatory problem also impacted the mortgage business where loads of money was made and walked away with in fees by folks encouraged by the “ownership society”, remember that catch phrase, and the notion that the market would correcdt all the excesses that were going on in this sector.

The other cause was the way we finance political activity.  The fat cats buy what they need in the legislative domain.  The return on their political investments is really quite good.  A few thousand dollars for favorable legislation can buy millions in decreased taxes or sleazy but no longer illegal business activity.

So far all I see is vitriol aimed at attempts, not perfect, but attempts nonetheless, to act to stabilize a failing system and to correct the regulatory failings.  I think that the same folks who brought us to this long lasting crisis have reasserted their control by simply telling folks “be angry” but leaving any real constructive path for addressing these issues off the table.  If people buy into that they diserve what they get.

My mom, who lived through the great depression, recounts how she had to steal milk from the neighbor’s stoop to eat.  The family sent her because she was the youngest.

William Adams

Aug. 15, 2010, 5:31 p.m.

That the machinations of high finance had such a reciprocally devastating effect upon the American taxpayer is a sad but necessary consequence of the ongoing march to globalization.

Early evangelists of the wonders of globalization had the same mindset as their peers in the development of atomic energy.  Now, in both cases, everyone knows how powerful and dangerous they both are. 

But the real problem is not the tool set.  It is the human that uses the tool.  Humans can not be trusted with absolute power.  Human frailty manifests itself in ways that range from horrific to beautiful. The independent variable is the human whose nature is as potentially diverse as the universe is infinite.

We are now realizing that we truly are ‘all in it together’.

That is the real beginning of the 21st century.

Fear and anger go hand in hand. Both of these shut down the power of reason to look at the larger problem: the effect of globalization of business without the parallel construction of a global regulation set with an enforcement agency which has the authority to enforce universally agreed upon rules. The system that globalists are working within now regulates business only within a single country, and—in the case of many financial regulations—within a single state. Multinational companies need multinational regulators. When capital moves to the point of least resistance(from the US to China, Mexico, India, etc.)without any requirement to assure worker rights, environmental regulations, financial limitations; in all of these aspects of business, corporations are orders of magnitude more powerful in imposing their will.  The fear and anger generated by the “great recession” has blinded us and paralyzed us into blaming the one entity which had the capacity to “save the system”: the US government. The impending collapse of the financial industry in 2008, if placed in the hands of the financial industry—as a problem to be solved by those who caused it—rather than floating gigantic loans (TARP). I do not trust those who created the problem, I do not trust the relationship that they have with the highest levels of our government.  Giving stimulus money to those who would have truly invested it in their lives rather than back fill irresponsible speculation would have truly stimulated the economy—those who need to buy stuff would have bought stuff, we would have had to make more stuff and to do so would have needed to build up the workforce: more people working would have had jobs to buy more stuff. 
The financial institutions would have had a very lean couple of years, but at least the rest of our economy would be healthier than it is now.

Until the behemoth which is global business has a babysitter with authority to control it’s behavior, we can be sure that populations around the world will suffer the unlimited greed which is the the only real driver of our system.

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