AIG Shares Surge In The Midst Of More Controversy

Shares of American International Group (AIG) rose 66% on Monday, after the company released the names of the financial institutions that directly benefited from the Fed’s rescue loan last year.  AIG is facing a lot of pressure from the government and the public after the company almost single-handedly brought down the U.S. banking industry.  Since the loan was made, policymakers have been pressuring AIG to disclose more on its operations and more specifically where all of the money has gone.

Almost 80 companies (domestic and international) as well as some U.S. states have received multibillion-dollar payments from AIG, thanks to the Fed.  According to a statement from AIG, banks received $22.4 billion in collateral, $27.1 billion in payments to retire credit default swaps and $43.7 billion tied to the securities-lending program.  Some of the financial companies that have benefited include Goldman Sachs (GS) ($12.9 billion), Merrill Lynch and Bank of America (BAC) ($12 billion combined), Citigroup (C) ($2.3 billion) and Wachovia ($1.5 billion).  Some large foreign banks also benefited from the rescue, including Barclays (BCS) ($8.5 billion), UBS (UBS) ($5 billion), Société Générale (GLE), and Deutsche Bank (DB).  Large states, including California and Virginia, received billions tied to guaranteed investment contracts.

These collateral calls and payouts to other financial institutions will likely spur some discussions in Washington, especially as a lot of money flowed outside of the country to European banks.  The payouts are a proven example of the cut-throat business model which Wall Street operates with.  Some of the top institutions are now thriving at the expense of the Fed and the U.S. taxpayer.  There is nothing that the Fed or policymakers can do about these collateral calls and payouts, as they were business contracts which AIG must own up to.

There has been a lot of controversy surrounding the company since the first loan of $85 billion was made by the Fed.  Within weeks, AIG announced that it had blown through almost $80 billion due to collateral calls.  Since then, that loan has grown to $170 billion, and the U.S. government now owns nearly 80% of AIG.  Both the Fed and policymakers are forcing AIG to sell assets and divisions quickly.

Ben Bernanke, the Federal Reserve Chairman, whom agreed to a rare interview on “60 minutes” on CBS on Sunday night said:  “Of all the events and all of the things we’ve done in the last 18 months, the single one that makes me the angriest, that gives me the most angst, is the intervention with A.I.G.  Here was a company that made all kinds of unconscionable bets. Then, when those bets went wrong, they had a - we had a situation where the failure of that company would have brought down the financial system.”  Mr. Bernanke has been on the front-line dealing with AIG, as one of the Fed’s jobs is to provide stability to the financial system.  AIG posed a huge systemic risk to the market and the U.S. financial system if it went bankrupt.

AIG is also under a lot of heat after the company announced that it will be awarding $165 million in bonuses.  President Barack Obama spoke out against this decision and is demanding that AIG’s management rescind or repay $165 million in bonuses.  You can expect AIG’s top managers to receive a subpoena from Andrew Cuomo, New York’s Attorney General, who will likely demand a list of all those who received the bonuses.  A new bill may surface which could tax 65-70% of a company’s bonuses if the U.S. government owns 79% or more of the institution.  This would obviously be aimed at AIG’s bonuses as the U.S. government owns nearly 80% of the company.

Disclosure:  The mutual fund the author is associated with is long GS.

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