The AIG Money Laundering Bailout

Under considerable pressure from the American people Congress finally demanded that AIG come clean as to where all that money pouring into that uniquely constructed black money hole was really going. With the total amount of funds being forked over to AIG approaching $180 billion dollars some citizens were getting worked up about all of that money going so quickly to money heaven.

Just this weekend AIG caved in to congressional pressure and produced a list of financial firms who were immediately paid off by AIG as soon as the taxpayer funds hit their accounts. To AIG's less than enlightened managements way of thinking they proved how solid of a company they are (and deserving of huge bonuses) by showing the world how well they took care of counterparties on credit default swaps(CDS) deals gone bad.

Yeah, right on. AIG used taxpayer money to pay off a series of bad bets and to make the counterparties whole for the bad bets that they had made (they recovered all of their money) while hosing down the taxpayer.

A credit default swap is basically a sports bookie type of financial instrument whereby AIG would receive an up front fee, paid annually, for entering into a contract with a counterparty that guaranteed that the counterparty would suffer no loss if the crazy bet that the counterparty had made on certain financial instruments went bad. As they did. Into the many billions so far.

CDS are one of Wall Street's creations that encouraged monstrous misallocations of financial institutions resources and proved for once and for all that excessive greed can be a nasty playmate for financial managers. The AIG managers were greedy for the fees that CDS's produced and completely underestimated and mispriced risk. The financial institution who were AIG's counterparties thought that since AIG was providing "insurance" on their crazy deals they could safely use financial leverage of 30 to 40 to 100 to 400 to one. After all if the underlying security went bad, as they did in the trillions of dollars, AIG would pay for their investment mistakes.

As the worldwide financial bubble expanded, and then expanded even more, this arrangement suited everyone. Since the CDS market was unregulated AIG could collect the underwriting fees and not have to set up a cash reserve, as required with regulated insurance products. AIG's counterparties loved the CDS deals as they could leverage their risky financial market positions up to the moon and back and have protection on the downside by virtue of the AIG contracts.

Of course, in the bright glow that burst financial bubbles produce the whole arrangement of CDSs looks to be ridiculous, as it is. Smart grown men thought that they could create wealth by transferring huge piles of toxic paper around the globe. And for a while it appeared that they did. Especially the AIG counterparties.

And who were these ever so deserving counterparties? On the list finally and very reluctantly released by AIG the top recipients of CDS-related collateral were France's Societe Generale, with $4.1 billion, Germany's Deutsche Bank (DB), with $2.6 billion, Goldman Sachs with $2.5 billion and Merrill Lynch, $1.8 billion. And that is only the top four in CDS related transactions. There is more, much, much more. Not only in CDS's but billions and billions in collateralized debt obligations (CDO's) and no telling what else.

So what we have here is the sad sight of the US government basically using AIG as a front organization to indirectly transfer taxpayer's billions to financial institutions who made some very bad bets on the future of the US housing market and the worth of collateralized securities. The public is being told that AIG is too big to fail when really AIG has already failed as a decent financial institution and is being used as a money laundering front to channel billions of dollars to banks, a good number of them foreign banks at that.

On the one hand we have a government that treats money laundering as a serious crime and on the other hand we have the US government engaging in some serious money laundering. We are living though some unbelievable times. Money laundering and Ponzi schemes, a la Social Security and Medicare, have become vital parts of the operations of our federal government.

So is the US taxpayer once again being screwed and scammed? Of course, the answer is yes but taxpayers seem ready to forgive and forget just as long as they too are put on the bailout list. In time perhaps the government will come around and do just that. Probably it would be less expensive to just give every taxpayer a $100,000 annual check, maybe even $1,000,000, rather than to keep on pushing money out to AIG, the zombie banks, and all of the "too big to fail" corporations.

The problem for the masses is that by the time that happens your $100,000 will probably not even cover one week's grocery expense. Even the $1,000,000 probably won't fill up the gas tank on your new made in China car.

We do live in most interesting times.