AIG Bank Payments – Is the Media Missing the Point?

By | March 16, 2009

The Reuters article does basically explain that AIG made payments to Goldman Sachs and “foreign” banks, but it becomes a bit confusing as to why those payments were made. It also muddies the waters with a lot of unrelated comments on AIG’s bonus payments (see related articles) and what various politicians think about the situation.

As a French banker, who requested anonymity, asked rhetorically: Why did the U.S. government bailout AIG in the first place, if it wasn’t to enable it to honor its obligations?

Look at what Fed Chairman Bernanke said. AIG had written contracts guaranteeing payments on credit default swaps, CDO’s and other securities. These were insurance contracts. AIG was obligated to pay off, if the counterparties went into default. An insurance contract is above all a promise to pay claims.

AIG couldn’t do so, as it didn’t have the funds required. Had it been allowed to fail, a total breakdown of the global financial system was a distinct and frightening possibility – much worse than the fallout from allowing Lehman Brothers to fail.

Therefore, at least in Larry Summers’ view, the U.S. government had no alternative, but to back, and to continue to back AIG. The “bailout” was to provide the funds to pay off AIG’s obligations. This is exactly what AIG did.

As Prof. Morici points out (in the last paragraph in the article), the fact that some of the recipients of these payments happen to be located outside of the U.S. should make no difference. The banks insured their transactions with AIG, not with their respective governments.

The U.S. government’s purpose was to provide AIG with the means to honor its policy commitments to the global financial sector in exchange for 80 percent of the company. If AIG hadn’t been obligated to do so, it wouldn’t have needed all that money to begin with.

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