Bail Out AIG's Workers, But Not GM's?

"We are a country of law. There are contracts. The government cannot just abrogate contracts. Every legal step possible to limit those bonuses is being taken by Secretary Geithner and by the Federal Reserve system."--Lawrence Summers, chief economic advisor to President Barack Obama

"Perhaps you [the government] can explain to all of us why a UAW worker earning $29 an hour must give back wages and benefits to keep their company alive, while the architects of the biggest financial disaster in history get to keep their gold plated contracts."--Peter Morici, economist, University of Maryland

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American International Group, the collapsed insurer which has had to be bailed out several times by the US taxpayer, is now under heavy fire for doling out about $450 mn in bonuses, including bonuses for workers in a unit at the heart of its demise which lost $40.5 bn last year.

The bonus payments at AIG's financial-products unit are in addition to $121.5 mn in incentive bonuses for 2008 that AIG will start making this month to about 6,400 of its 116,000 employees, the New York Times reports.

Separately, AIG is also making $619 mn in retention payments to 4,200 employees, the New York Times reports.

Government and company officials, including AIG chairman Edward Liddy, a former Goldman Sachs board director who ran Allstate Corp. and was handpicked by former Treasury Secretary (and former Goldman boss) Henry Paulson to take over the insolvent insurer, now argue the bonuses must be paid  because they are contractually obligated to do so.

AIG Bailout Raises Issue of Inequity

However, the US government is forcing the renegotiation of United Auto workers' labor contracts, as well as mortgage contracts and changes to executive compensation. A bankruptcy of AIG would have allowed for a claw back of bonuses, which would be difficult to enact now.

"You really do need these people, because they are the ones who know these contracts," argues Nick Ashooh, a spokesman for AIG, who has also said the bonus contracts were in place before AIG ran itself into the ground.

Where the Taxpayer Money Went

AIG has also finally disclosed that it paid out about two-thirds of the $173.3 bn in taxpayer rescue money aid it got to

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banks here and overseas, including Goldman Sachs, Merrill Lynch, Deutsche Bank and Société Générale, as well as municipalities in states like California and Virginia.

AIG's disclosure shows that between Sept. 16 and Dec. 31 last year, that of the $120 bn in taxpayer money it has doled out, about $52 bn came to settle bad insurance bets on mortgage-backed bonds made by AIG's Financial Products unit. AIG paid out about $44 bn to banks and brokers that were clients of its securities-lending business.

And the $120 bn sum also includes billions of dollars in taxpayer money that was used to buy mortgage-backed securities that AIG insured so that the government could then rip up the insurance contracts linked to them, called credit default swaps. Many US and European banks used AIG's credit insurance to keep from having to hold capital against their long-term securities holdings.

Bailing Out Europe

The overseas banks: Germany's Deutsche Bank and French bank Société Générale, as well as Calyon/Crédit Agricole (France), Danske (Denmark), HSBC (UK), Royal Bank of Scotland, Banco Santander (Spain), Lloyds Banking Group (UK), Barclays (UK) and Rabobank (Netherlands).

Protecting the Banks' Bottom Lines

When the banks' mortgage-backed bonds dropped in value, AIG was on the hook to pay off the swaps, or the "insurance." AIG and the Fed approached about 20 counterparties with an offer to buy back these securities.

Buying the bonds has kept the banks like Goldman Sachs and Deutsche Bank from avoiding the booking of potentially massive writedowns.

[caption id="attachment_793" align="alignleft" width="195" caption="Lawrence Summers, Director of the White House National Economic Council"][/caption]

Made Whole

Counterparties received 100 cents on the dollar for the CDOs, even though the prices paid by the Federal Reserve suggest that the bonds were actually worth 47 cents on the dollar.

"The latest admission from the (defunct yet living) company [AIG] is that well over $100 billion in taxpayer monies has gone to counter-parties at 100 cents on the dollar - no haircut, no penalty, no cost to those who made bad bets or chose their counter parties poorly," notes Barry Ritholz, one of the sharpest minds on Wall Street who runs the must-read website the Big Picture Typepad.

By the end of the year, the New York Federal Reserve had paid nearly $30 bn for CDOs with a face value of $62bn, AIG said. AIG paid $32.5 bn to terminate the credit insurance on the CDOs, booking a 2008 loss of $21 bn.

Another Problem

The AIG disclosures raise still another question.

Taxpayers are being asked to bail out AIG's bad insurance bets.

But AIG paid out $12.1 bn to remunerate municipalities in many states from Sept. 16 to Dec. 31 to make whole their guaranteed investment agreements that promised a fixed rate of return, that AIG had sold to them.

However, GICS are investment products, not insurance contracts. Perhaps it's not surprising that the US taxpayer is being asked to fudge the line here on AIG when it comes to the government's bailout.

Bernanke Enraged
Ben Bernanke, Federal Reserve chairman, in a rare TV interview with CBS broadcast Sunday night said: "I slammed the phone more than a few times on discussing AIG."

Bernanke added: "If there is a single episode in this entire 18 months that has made me more angry, I can't think of

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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."

Still Problems at AIG

AIG is still plowing ahead on its efforts to cut its exposure to credit default swaps and other derivatives. The notional value of its derivatives exposure has dropped to about $1,600bn from about $2,700bn a year ago, and its CDS exposure has been cut from $433bn to $302bn.

AIG filings this week show that the company retains $12 bn in exposure to credit insurance on positions mostly involving subprime mortgages, reports indicate. As of February 18, AIG could have to pay counterparties up to $8 bn on these positions, reports show.

Bailing Out AIG Workers--But Not Others

Economist Morici notes that the threat to the US economy from both the collapse of AIG and GM were the same.

"If either shut down, the economy would plummet into chaos and depression we were told," he says.

"So Mr. [Timothy] Geithner [Treasury Secretary], instead of being outraged at AIG's last revelations, perhaps you can explain to all of us why a UAW worker earning $29 an hour must give back wages and benefits to keep their company alive, while the architects of the biggest financial disaster in history get to keep their gold-plated contracts," Morici says.