The Dirty Truth About the AIG Meltdown

This week the US government approved another $30 billion in bailout money for AIG. This brings the total federal “investment” in AIG to $180 billion. Many Americans are justly outraged about the AIG bailout. Yet few know the dirty truth about the AIG meltdown and why the US government keeps saying that AIG is “too big to let fail”.

Testifying yesterday before the Senate Budget Committee, Fed Chairman Ben Bernanke said, as quoted in an FT story on the AIG meltdown: “If there is a single episode in this entire 18 months that has made me more angry, I can’t think of one other than AIG,” he said. “There was no oversight of the financial products division. This was a hedge fund basically that was attached to a large and stable insurance company.”

From the Foreign Policy website comes these burning questions about the Bernanke statements: “The critique seems both harsh and fair. But it obscures a bigger question: If AIG was irresponsible what does that make a government that has bailed them out to the tune of $180 billion and may, according to some estimates, ending up pumping $250 billion into the company before all is said and done? What is that money buying the American taxpayer? Where is all that money going? Where has it gone?”

The dirty truth about the AIG meltdown is this. The money that the US government is pouring into AIG is almost all going straight through AIG and is being paid out to settle Collateralized Debt Obligations (CDOs), a form of investment “insurance.” between AIG and various formerly fat cat counter parties, such as Goldman Sachs. And who dispersed the first bailout money to the tune of $85 billion to AIG? Why none other than the former Chairman of Goldman Sachs, the then Secretary of the Treasury under George W. Bush, one Hammering Hank Paulson. How cozy, eh?

Companies that were gambling on mortgaged backed and other securities got AIG to “insure” their bets. As the CDO market was unregulated AIG did not have to place funds into reserves as it would have to do with normal insurance products.

So AIG was happy to pocket the upfront premium money paid by the counter parties, never for a moment thinking that the deals would sour (the underlying collateral was real estate mortgages and real estate always goes up, right? Har!) and that massive payouts would be required. Now the companies that made bad bets with CDO’s are being paid 100% on the dollar while the taxpayer foots the bill. In other words the taxpayer is being played as a sucker while the government keeps saying that AIG is too big to fail.

When the loans tanked AIG did not have enough capital on hand to pay out on the massive amount of CDO “insurance” contracts that they had entered into. The companies due the CDO payouts raised a hue and cry that AIG was “too big to fail” in an effort to persuade the U.S. government to give the money to AIG… so it could pass it along to them.

In effect AIG has become a bailout laundering operation funded by taxpayer dollars. The sad thing is that the Obama government continues with the scam. AIG is a zombie institution that is being used as a conduit to make payments to other zombie institutions. AIG will be classified as “too big to fail” until it does. At some point the amount of funds poured into AIG will cause such an outcry that politicians will have to face up to a few facts.

The risks of a massive US government meltdown are increasing with each zombie institution that the government bails out. No one knows when the tipping point will come. However, those who believe in the “too big to fail” mantra may be surprised at the unpleasant consequences that huge amounts of valuable resources being committed to saving zombie institutions will eventually bring. When they do eventually fail, what then?

In the end who will save the US Dollar from rapid depreciation as the stress on the US financial system become unbearable and the government resorts to running the printing presses at flank speed? And who or what is going to save the US taxpayer? If the madness continues these questions will soon be answered. It’s a short answer. No one. The entire American enterprise, including the US government, is being placed at risk.