Update: The WaPo has published the names of some of AIG's counterparties paid with taxpayer money. Jon Stewart at Comedy Central is getting a lot of credit in the media for taking on "Mad Money" Cramer and exposing the blatant stock boosting that passes as financial reporting in the US. But anyone who has read this blog, Zola's Money or even the history of our stock market crash in '29 knows the market is manipulated by insiders {The Invisible Hand Revealed, 6/01/07}. Now, even Joe "Not So Much" the Plumber knows it.American International Group is perpetuating the system of money rewards for its employees who wrote billions of dollars in credit default swaps, a speculative form of derivative security, that are contributing to the current world-wide financial crisis. Despite receiving $170 billion from the federal government in direct aid to keep the company going in the midst of the largest corporate loss ever recorded ($61.7 billion for the fourth quarter) AIG is preparing to pay out $165 million in so-called "retention pay". These bonuses are directly tied to employee performance. Thus, the bonus system fed the hazardous drive to write more and more speculative instruments that many experts believe lies at the foundation of the collapsing shadow banking pyramid. AIG sold over $500 billion of toxic credit default swaps. There is a growing realization that some of its bailout money has been paid to AIG's counterparts which are also receiving federal aid. Goldman Sachs was identified by the Wall Street Journal as one company getting two helping of federal funds. Both AIG and the Fed have refused to identify counterparties' names claiming it to be proprietary. If the information were released it would undoubtably reveal the extent of the incestuous, speculative web of deals that is the shadow banking system. Economist Nouriel Roubini says, "given that common shareholders are already effectively wiped out, the bailout of AIG is a bailout of the creditors of AIG that would now be insolvent without such a bailout." AIG's financial products unit is under investigation by the Department of Justice, SEC, and the UK's Serious Fraud Office (apparently the British are immune to just petty fraud). Secretary Geithner, a Street insider from the New York Federal Reserve Bank[1], politely asked in a phone call according to AP that AIG refrain from paying huge bonuses, calling the payments "unacceptable" given the company's receipt of federal financial aid. CEO Edward Liddy replied in a letter that AIG was "contractually obligated" to make the payments, and if it did not the company would face lawsuits, presumably from disgruntled AIG executives. Liddy also said he thought it would harm the company for the Feds to continue to insist that executive compensation be reduced. The government now owns 80% of AIG. This absurd situation demonstrates the desparate need for sweeping reform of US credit markets. The concern is that 44's calls for more financial regulation will not go far enough in making "the change Americans can believe in". Legislators are beginning to question whether saving AIG is in the interest of the public at large or merely the co-dependent financial institutions on the Street of Broken Dreams. The shadow banking system must be completely replaced by a well regulated commercial banking system under the control of Congress[2] because the greed of private bankers knows no shame.
[1]It was the New York branch of the Federal Reserve that engineered the bail out after the 1998 crash of the giant hedge fund Long Term Capital Management threatened Wall Street banks. The banks feared a chain reaction as LTCM unwound its speculative positions (including $1.6 billion in swaps) thereby depressing prices and forcing other companies to liquidate their own debt in a vicious circle of price deflation. Sounds familiar. On the back of an envelope make a conservative estimate that $8 trillion of derivatives will fail (about 2% of the US total). US banking capital is estimated to be only $1.6 trillion. Taxpayers have contributed so far through the rescue program $2 trillion. That still leaves a shortfall of $4.4 trillion a sum that can only come from the printing press of last resort, Uncle Sam's. Dr. Roubini, aka Dr. Doom, estimates US credit loses will peak at $3.6 trillion. The US $ has lost 95% of its value since 1913 when the Federal Reserve began operations. In 1913 a box of Kellogg's Corn Flakes cost 9 cents and butter was 30cents/lb.
[2] The Constitution gives the power to print money only to Congress. Article 1, Section 8. Rep. Ron Paul (R-TX) has taken the first step towards reclaiming that power by introducing legislation subjecting the Federal Reserve to audits by the General Accountability Office, an arm of Congress.