Monday, November 3, 2008

Paulson, Goldman Sachs and AIG

There really needs to be a thorough investigation into the relationship of Goldman Sachs to the taxpayer bailout of AIG.  Paulson was the head of GS before becoming Treasury Secretary. The President of Goldman Sachs  attended the meeting where the bailout was discussed with Paulson.   Goldman was  relying on the insurance contracts underwritten by AIG to protect it against losses in its bond portfolio.  An article in the NYT claimed that a collapse of AIG would leave a 20 billion hole in  According to this article, GS was a customer of AIG's credit insurance, the primary source of AIG's downfall and the potential nightmare for taxpayers now,  and acted as an intermediary between AIG and other AIG clients.  I was reminded of the NYT article and my discussion of it in an earlier email back in September when I read an article about AIG in today's Nashville Tennessean. | The Tennessean   This article points out two facts, it is taxpayer money that is now being used as collateral for these insurance contracts and Goldman Sachs is one of the beneficiaries of that arrangement.   The article points out that GS was asking for more collateral for its credit default insurance policies back in February.  I bet that is not a problem now, since I seriously doubt that AIG money is backstopping the incredibly stupid credit default insurance policies it issued.   It is U.S. Government money that is now providing the collateral.  The gist of the article is that AIG may fail even with the 100 billion plus government bailout leaving the  customers who bought the credit insurance better off,  but leaving the U.S. government hanging with a big loss.  So, who really benefits from the AIG bailout-Goldman Sachs or the U.S. citizens?

AIG is supposed to be selling operations to pay the government back.  Nothing has been announced yet.  Given the turmoil in the insurance industry, it is unquestionably a bad time to sell any insurance operations.   

One of the measures that is not talked about in the press much is the Federal Reserve buying corporate commercial paper pursuant to its new Commercial Paper Funding Facility (CPFF).   Guess who is participating in that program?  I noticed this filing with the SEC from International Lease Finance, a wholly owned subsidiary of AIG, that contains the following eye opener: 
"  On October 27, 2008, International Lease Finance Corporation (the “Company”) was approved to participate in the Federal Reserve Bank of New York’s Commercial Paper Funding Facility (the “CPFF”) to issue up to $5.7 billion of commercial paper. As of October 30, 2008, the Company has issued approximately $1.7 billion, which proceeds were used to repay certain intercompany loans from the Company’s parent, American International Group, Inc. The commercial paper will be due January 28, 2009 and the Company will pay a lending rate of 2.78%. The Company expects to refinance the commercial paper when it matures, subject to the terms and conditions of the CPFF."e8vk

I had expected International Lease to have been sold by now.  It is heavily in debt but  profitable. 

I am not trying to cast aspersions here.  It may very well be that a collapse of AIG would have triggered a Financial Armageddon.  I would  also say without equivocation that I would not trust any of these people to do what is in the nation's interest as opposed to their own personal self-interest.  This needs to be fully investigated during the first session of the next Congress. 

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