AIG Bonus Firestorm Misdirection - Updated

Update on yesterday's post on AIG Bonus Firestorm Misdirects Attention Away From CDS Payments.  Mike Shedlock's blog quotes Eliot Spitzer as identifying the real disgrace of the AIG scandal is the billions of dollars in taxpayer funds paid to the AIG counterparties.  Here is what Shedlock said:

The Real AIG Scandal

Eliot Spitzer is writing about The Real AIG Scandal.

Everybody is rushing to condemn AIG's bonuses, but this simple scandal is obscuring the real disgrace at the insurance giant: Why are AIG's counterparties getting paid back in full, to the tune of tens of billions of taxpayer dollars?

For the answer to this question, we need to go back to the very first decision to bail out AIG, made, we are told, by then-Treasury Secretary Henry Paulson, then-New York Fed official Timothy Geithner, Goldman Sachs CEO Lloyd Blankfein, and Fed Chairman Ben Bernanke last fall. Post-Lehman's collapse, they feared a systemic failure could be triggered by AIG's inability to pay the counterparties to all the sophisticated instruments AIG had sold. And who were AIG's trading partners? No shock here: Goldman, Bank of America, Merrill Lynch, UBS, JPMorgan Chase, Morgan Stanley, Deutsche Bank, Barclays, and on it goes. So now we know for sure what we already surmised: The AIG bailout has been a way to hide an enormous second round of cash to the same group that had received TARP money already.

Eliot Spitzer nails it. However, any rage at this point is justified. Our best hope is the rage continues and Republicans get some new found backbone to block all further bailout efforts.

In addition, several bills have been introduced into congress to tax the bonuses paid to employees of companies receiving bailout funds!  Here is our post from yesterday:

An incredible amount of outrage has been written and expressed about the $165 Million in bonuses paid by taxpayer owned AIG, and rightfully so, but the AIG bonus issue is simply a misdirection of the real outrage - the payment of $60 Billion in credit default swap bets with taxpayer bailout money. The fact remains thatpouring money into AIG is pouring money into a black hole.

The outcry is building about the AIG bonuses.  President Obama knew about the payments by at least last Thursday, and his administration knew before then. The Treasury is now making noise about either recouping the funds paid on bonuses, or reducing the next tranche of bailout funds.  Provisions are being floated around Congress to tax the bonuses at varying levels.  Frankly, while I am loathe to suggest that Congress use tax policy to penalize anyone, in this instance it could be a winner.  Tax the bonus recipients at the 75-90% level (states will follow suit as well), make the excessive payments non-deductible by AIG.  Taxpayers will recover the bonus payment and AIG will still be responsible for paying back the money borrowed (which will never happen). 

Whatever solution is proposed, however, only focuses on the bonuses.  The real outrage is the payout of billions to CDS counterparties.  Last week, AIG disclosed that it used the bailout funds to bailout its credit default swap counterparties at the same time Treasury learned of the bonuses.  Payments went to Germany's Deutsche Bank, France's Societe Generale, England's Barclay's, Spain's Banco Santander, and many others, including Goldman Sachs, Merrill Lynch, UBS, Royal Bank of Scotland, Bank of America, and Bank of Montreal.  Follow the money - this is nothing more than backdoor bailouts.  Taxpayer funds went to AIG, and AIG in turn distributed the money not only to US institutions, but international financial entities.  That means that we, the taxpayer, are not only bailing out AIG from its bad business decisions, but we are bailing out foreign counterparties that took a risk that AIG would pay off its bets.  

Where is the outrage?  The amount spent on these bailouts far exceeds the bonus payments, yet despite knowing last Thursday about the bonuses, President Obama timed his expression of outrage to coincide with AIG's disclosure of payments to counterparties.  While it isn't a cover-up, it certainly looks like our attention is being misdirected away from a major problem to focus on a relatively small problem.  It is unlikely that the taxpayers will ever see the $170 Billion of bailout funds repaid - and certainly any payment will not be made with equivalent dollars (but that is another topic), and it is likely that unless something is done, the taxpayers will continue to fund the losing propositions made by AIG and the other banks.  We are, however, not helpless while waiting (futilely) for the government to do something.  We can take matters into our own hands and stop doing business with AIG.  It is very simple.  Look at all your insurance policies and find out if any of the issuers are subsidiaries of AIG.  If so, cancel the policy and replace it with a policy from another, more solvent insurer.