AIG Held A Gun To Treasury


Paying off AIG’s bonuses may have save the US taxpayers as much as $1.6T in losses.

According to internal AIG documents, which were supplied to Treasury chief Tim Geithner late last week, if AIG chose to renege on paying the $165 million bonuses, then the trouble insurer could be in technical default on most of its derivatives.

The white paper stated: “AIG Financial Product’s derivatives portfolio stands at about $1.6 trillion and remains a significant risk. Failure to pay the required retention payments [bonuses] therefore could have very significant business ramifications.”

The document went on to layout: “A cross default in many of these transactions is defined as a failure by AIGFP to make one or more payments in an amount that exceeds a threshold of $25 million.”

During AIG CEO Ed Liddy’s Congressional testimony there was no mention of this trigger by any participants, just mea cuplas on having to pay them.

Since the bonuses are said to be paid, with Congress then wanting to claw back the bonuses through a 90-percent tax rate, it appears the derivative language was an important consideration.

Some additional clarity came to light late this week into the murky pool of toxic paper residing on AIG’s balance sheet.

Wall St banks including AIG began selling mortgage-backed securities (MBS), which were regulated, marked up with a housing appreciation of 2- to 3 percent. Hedge funds and global investors quickly grasped the value-added potential in capital expansions, commissions garnered, and multiple resale opportunities for these collateralized debt obligations (CDOs).

The appetite of global investors for these derivatives could not the satisfied with prime loans, so Wall St. and AIG in particular lowered the quality of the mortgages toward subprime loans to keep the pump primed.

In order to cover the higher-risk paper, returns were increased to 15 percent – 18 percent, AIG began offering credit default swaps (CDSs), which are unregulated, at the same time that housing prices began to slide.

To keep investors funding this scheme the CDSs were used to bridge the gap as “an almost insurance policy“ against losses on MBSs.

As home prices cratered, global investors including Chinese government and Middle Eastern sovereign wealth funds feasted on CDSs to hedge their exposure.

AIG was a major player in both these markets. Selling MBSs and CDSs for pennies on the dollar, which could not cover growing “claims“ on these derivatives.

In order to discover the true value of Liddy’s admitted $1.6T notational or face value on the derivatives, the underlying value of the homes making up the toxic paper, needs to be priced at proper valuations through proper assessment tools.

Mortgage industry sources are suggesting that the government needs to tear apart the bundled paper and examine each asset using assessment professionals –– not statistical data –– to arrive at that present value. Then the CDOs can be priced.

For more on Wall and Washington and the cratering economy see:


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