The decision to pay the banks owed money by American International Group 100 percent of what AIG owed them cost American taxpayers at least $13 billion, Bloomberg reports.
Janet Tavakoli, founder of Chicago-based Tavakoli Structured Finance Inc., a financial consulting firm, says the government squandered billions in the AIG deal.
“There’s no way they should have paid at par,” she says. “AIG was basically bankrupt.”
Before then New York Fed President Tim Geithner intervened, AIG was negotiating with these same banks, which were counterparties to all the credit default swaps — insurance-like contracts that backed soured collateralized-debt obligations — AIG had written.
The insurer wanted to settle with the banks for substantially less than what it owed them as an alternative to the banks taking their chances in bankruptcy court.
“In cases like this, the outcome is always along the lines of 50, 60 or 70 cents on the dollar,” notes Donn Vickrey of financial research firm Gradient Analytics.
Then Geithner stepped in, opening an $85 billion line of credit for AIG that acquired 77.9 percent and effective control of the AIG for the government.
Shortly thereafter, Geithner, the U.S. Treasury Department, and Federal Reserve chairman Ben Bernanke took over negotiations with the bank counterparties from AIG.
After less than a week of private negotiations with the banks, the New York Fed instructed AIG to pay them 100 cents on the dollar.
The content of its deliberations has never been made public; however, the government’s commitment to AIG through credit facilities and investments eventually grew to $182.3 billion.
Bloomberg News has filed a Freedom of Information Act request seeking copies of the term sheets related to AIG’s counterparty payments, along with e-mails and the logs of phone calls and meetings among Geithner, Friedman and other New York Fed and AIG officials.
The request is pending.
MarketWatch reports that Geithner recently told Wall Street's main trade group that the economy is showing signs of recovery but the financial services industry remains fragile and to expect more regulation for some time.
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