A key question at the heart of the controversial bailout of AIG is just how much money the government lost. The Federal Reserve and Treasury Department have worked to keep that number secret and to conceal who was on the winning end.
An unredacted document obtained by the Huffington Post list the damage in detail. Goldman Sachs alone, for instance, got $14 billion in government money for assets worth $6 billion at the time — a de facto $8 billion subsidy, courtesy of taxpayers.
The list was produced as part of a congressional investigation led by the House Oversight and Government Reform Committee into the federal bailout of AIG.
The Federal Reserve Bank of New York, then led by now-Treasury Secretary Tim Geithner, purchased a slew of souring assets from the world’s biggest banks for 100 cents on the dollar in November and December 2008. A scathing report by a government watchdog held Geithner responsible for the overpayments.
The New York Fed initially pressured AIG to keep the list hidden from investors, regulators and the public. When it was eventually filed with the Securities and Exchange Commission, the SEC allowed the Fed and AIG to keep the details secret. A heavily-redacted version was made public last March.
The document is part of 250,000 pages of internal documents on the AIG deliberations subpoenaed by the oversight committee. It lists the toxic mortgage bonds that banks insured through AIG.
Those insurance contracts, called credit default swaps, are what the New York Fed ultimately took off AIG’s books, paying the banks 100 cents on the dollar for toxic mortgage bonds — home mortgages that were bundled together and securitized. The banks could never have gotten anywhere near such a generous deal on the open market, so the move served essentially as a direct subsidy to those banks from taxpayers.
Up until now, taxpayers had no way to know exactly what they owned. They knew they owned a certain amount of assets, but none of the details: which bundles of mortgages it purchased from AIG; how the banks were valuing those mortgages; how much collateral they had demanded from AIG on those securities; or which bank bundled those mortgages into securities.
Rep. Darrell Issa of California, the top ranking Republican on the oversight committee, told HuffPost that he was not persuaded by government and Fed arguments that the transactions should be kept secret.
“Just because the government happens to own the bonds, which means–by the way, they don’t have to be sold at all until they are worth what we want them to be worth — that somehow they have to be kept a secret,” Issa said during a break in the today’s AIG oversight hearing, where Treasury Secretary Tim Geithner testified about his role in the bailout as then-head of the New York Fed.
The troubled insurer tried to publicly disclose these details in December 2008 before being thwarted by the Geithner-led New York Fed. A month later Geithner left to head the Treasury Department.
Issa said that the public had a right to see the document. “I mean, think about it: What the government owns it can keep as long as it wants. It would be like saying you can’t appraise federal land. Why? It is one of those things that’s outrageous. We know we paid a hundred percent for them. We know who got the money. This document shows who ultimately were the beneficiaries. And we believe since that they’ve asked to have it locked up until 2018 — and nobody today defended that — that it’s time to release that,” Issa said.
A government audit this month found that as of Sept. 30, 2009, the Treasury Department was expecting a $30 billion loss on its TARP-related AIG investment. The value of the securities could ultimately rise, though.
“The way the AIG bailout was engineered was to specifically benefit Goldman Sachs and its trading partners,” said Janet Tavakoli, a Chicago-based derivatives expert and founder of Tavakoli Structured Finance. “Goldman’s past and present officers used crony capitalism to put their own interests ahead of the public.”
The nation’s fifth-largest bank by assets ultimately got $14 billion through what members of Congress are calling a “backdoor bailout” of the world’s biggest banks.
“The suppression of the details of the [credit default swap] trades protected Goldman Sachs and its trading partners,” said Tavakoli, who’s examined Goldman’s credit default swap arrangements with AIG. “The $182 billion bailout overall kept AIG alive, and its trading partners, including Goldman Sachs, benefited from the funds made available to the securities lending transactions and other subsequent trading transactions.”
At the time the document was prepared, Goldman’s $14 billion in souring derivatives had a market value of just $6 billion. Goldman had more than $8 billion in collateral from AIG to protect it from losses, meaning it was still about $6 billion short.
But more than $2 billion of those collateral payments came from AIG after it was bailed out on Sept. 16 of that year, according to a Nov. 2008 presentation prepared for the New York Fed that was released this week. So that $2 billion was made possible partly due to taxpayer assistance.
Combined with the $6 billion deficit it faced in the face value of those securities, Goldman Sachs ultimately received about $8 billion from taxpayers via AIG. Goldman posted a $1.3 billion profit for 2008.
Despite the Fed’s protestations that full disclosure would harm AIG — and thus the taxpayer — the financial blog Naked Capitalism has largely pieced together many of the key details using public sources — and traders who were interested in buying the bonds from the government would easily have access to the rest.
HuffPost published the unredacted document at 2:47 p.m. ET. One minute earlier AIG shares were trading at about $24.59. It closed the day at $24.91.
The document also includes detailed information about the transactions involved. The document, a Schedule A Shortfall Agreement, can be viewed here.