Were Delaware Municipalities at Risk From AIG for $260 Mill?

Filed in National by on March 16, 2009

Delaware municipalities appear to have been at serious risk of losing millions without the initial bailout of AIG, according to a press release from AIG itself. In somewhat of a surprise, AIG listed institutions that essentially were remunerated with the rescue funds, and it appears that Delaware institutions could have lost $260 million without Federal assistance. From the release:

NEW YORK, March 15, 2009 – American International Group, Inc. (AIG) recognizes the importance of upholding a high degree of transparency with respect to the use of public funds. As a result, after close consultation with the Federal Reserve, AIG is disclosing information identifying certain credit default swap counterparties, municipal counterparties and securities lending counterparties. Before disclosing this information, AIG consulted with the Federal Reserve about the potential public benefit of counterparty disclosure and the potential that such disclosure would cause competitive harm to AIG or its counterparties. 

Severe valuation losses on the super senior multi-sector credit default swap portfolio of AIG Financial Products Corp. (AIGFP) triggered collateral provisions in the swap contracts, creating a liquidity crisis for AIG in September 2008. The Federal Reserve Bank of New York (FRBNY) provided an emergency $85 billion loan to AIG to meet short-term cash needs. The aid received by AIG helped avoid severe financial disruptions by providing liquidity to important financial institutions and municipalities

As one goes through the report (in PDF format here), one discovers on a state-by-state basis how much in municipal bonds were at risk. And here’s where the First State comes in…eleventh:

State             Amt. in Billions

California $1.02 
Virginia 1.01 
Hawaii 0.77 
Ohio 0.49 
Georgia 0.41 
Colorado 0.36 
Illinois 0.35 
Massachusetts 0.34 
Kentucky 0.29 
Oregon 0.27 
Delaware 0.26 
New York 0.21 
New Jersey 0.21 
Mississippi 0.18 
Washington 0.17 
Pennsylvania 0.15 
Florida 0.15 
Rhode Island 0.14 
Arizona 0.12 
Texas 0.10
Top 20 Total $7.00
Other 5.10
Total GIAs $12.10

If El Somnambulo’s math is correct, (And Mrs. ‘Bulo does the checkbook, ‘El and Ella’, if you must know), that’s $260 million in Guaranteed Investment Agreements which AIG was only able to pay back due to government subsidies made to AIG between September and December, 2008.

That’s scary stuff. ‘Bulo encourages anyone with a more sophisticated financial mind (that’s basically everybody who reads this blog) to read the release in detail and report back on what they find.

Oh, and to any News-Journal staffers lurking here,would you please be so kind as to give Delaware Liberal credit when and if you decide to cover this story? Muchas gracias.

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  1. Unstable Isotope says:

    I don’t understand why we’re giving the money to AIG to funnel through to counterparties. Why not pay the counterparties directly? In the last release of counterparties, there are a whole bunch of foreign banks on there, including some of the zombie banks in England. Why are we bailing out foreign banks?

    I really, really don’t understand what’s going on with AIG. How in the heck is someone legally obligated to pay a “bonus.” Doesn’t bonus mean it’s not part of your pay. Something really fishy is going on. I think Geithner and the Obama administration are trying to protect us from finding out something (perhaps they’re worried about confidence in the banking system) but I wish it would all come out in the open.

  2. cassandra_m says:

    The biggest beneficiaries of the AIG “bailout” are Goldman, BOA, and a number of foreign banks. So not only is the TARP bailout out for failed US banks, we are bailing out foreign ones too. And states who invested in these. Which apparently is making the US Taxpayer the guarantor of last resort worldwide.

    And those bonuses are a mess. You can break those contracts via bankruptcy. You can break those contracts and live with the lawsuits. You can renegotiate those contracts ala the UAW. Because no one thinks that their contracts are sacrosanct and in labor’s case, they weren’t driving the train into the ditch like the AIG bonus pool recipients were.

  3. David says:

    UI, we can not purposefully collapse the world economy and think that we won’t be devistated. Go ahead and destroy foreign confidence in America and see what happens when they pull their investments and stop buying our products.

  4. David says:

    The fact that we had the insurance is smart and considering the market turned out to be quite a good move. The insurance did not put our money at risk. The insurance protected our money from being at risk. That part of the insurance business got into trouble and the government kept it afloat much to the benefit of Delaware taxpayers who could keep the original investments secure.

    AIG collapsing would have devistated the construction industry, international banking, and pension funds. It saved us money in the long run by intervening.

  5. cassandra_m says:

    So David, even though you don’t quite grasp what is at stake here, your endorsement here seems to mean that extended bailouts on the taxpayer dime are AOK, yes?

  6. David says:

    Would you rather have had a Depression?

  7. David says:

    It couldn’t go out like Shearson Lehman’s shock to the financial system. AIG would have been world wide. I don’t like the way the government took over AIG and it is showing that it has no idea how to run it. It should have been taken into a managed bankrupcy with Federal backing to get the restructured companies back on their feet.

    What they did was hurried, but they had few choices. None of them were good. I have to approve of the AIG action even though it wouldn’t be my first choice on how to handle it. These people were facing a crisis like we haven’t seen in 70 years and they beat it. I won’t criticize them to harshly.

  8. Unstable Isotope says:

    Of course I don’t want a Depression or the world economy to collapse. I’m not a neo-Hoover. But I’m sick and tired of bailing out the bad guys and hoping that it eventually helps everyone else. I also want to know why Republicans are silent about the unbelievably bad contracts that AIG has with its employees. Why no talk of BK or breaking up those contracts?

    Geithner better start getting it together and soon. AIG is making him look incredibly impotent. I also think perhaps we should get Congress to pass a 100% tax on bonuses to companies that receive government bailout funds.

    I think we have the absolute duty to criticize how the crisis is being handled. So far, a lot of this is being done in secrecy. We need more information. Public pressure is what got AIG to release counterparty information and public pressure is what’s going to get them to renounce those bonuses as well.

  9. a. price says:

    If obama comes out in support of these bonuses, count that as strike 1 in my book.

  10. Unstable Isotope says:

    Obama and Geithner don’t support them, but apparently think they have no choice, that is my understanding.

  11. cassandra_m says:

    They most assuredly HAVE NOT beat it — which is the point here. There are a range of estimates of how much it would take to finish the unwinding of AIG (meaning paying off all of their bad bets) of upwards to a trillion dollars.

    So if funneling more billions of taxpayer dollars into AIG (and more is coming, make no mistake) is OK with you, then you aren’t going to be in much of a position to criticize the river of taxpayer funds (and debt) that goes to other places.

    And a controlled unwinding of AIG would have meant that some of these firms would have had to have taken their deserved losses, but they wouldn’t have been left with nothing. At this rate, taxpayers are in the business of making all of AIGs bets good, making all of their counterparties whole.

  12. UI asked a great question, and it hasn’t been answered. Why not pay the counterparties directly and skip AIG? Why does it have to be funneled through AIG?

  13. David says:

    AIG has massive assets. It would be more expensive to pay the parties directly. Much of the money comes from the FED which is not authorized to pay money directly to the parties. That is a violation of law.

    If we took AIG into a managed bankrupcy, then you could adjust the contracts. We didn’t so you can’t.

  14. You wanna shield AIG from lawsuits from its employees? The criminals allegedly protecting the public health during the Bush Administration shows you the way. Remember this?:

    “Health and Human Services Secretary Michael Leavitt established legal immunity for public and private officials who oversee the production or distribution of the anthrax vaccine by declaring a “public health emergency” due to the risk of a bioterrorism attack. He said the emergency began on Oct. 1 and would run through Dec. 31, 2015.U.S. law provides protection from lawsuits to individuals responsible for selected countermeasures, including antibiotics, during a declared emergency.Under the Public Readiness and Emergency Preparedness Act, which President Bush signed into law in December 2005, a health and human services secretary’s emergency declaration can limit financial risk for government program planners and the manufacturers or distributors of pharmaceutical countermeasures. One exception to this immunity would be willful misconduct on the part of covered individuals.”

    That’s right, pass legislation declaring a financial emergency and screw the bastards.

  15. anon says:

    “Oh, and to any News-Journal staffers lurking here,would you please be so kind as to give Delaware Liberal credit when and if you decide to cover this story? Muchas gracias.”

    And what would you guys do without the News Journal?

  16. liberalgeek says:

    We would have to create wRonG Williams, if he didn’t exist.

  17. Unstable Isotope says:

    Public pressure seems to be working. Obama said they’re going to try to block the bonuses. Now Congress and Andrew Cuomo are looking at their options as well.

  18. Anon wrote, “And what would you guys do without the News Journal?”

    Criticizing the News-Journal is different than wanting to see it go away. ‘Bulo just wants the paper to cover the news that matters.

    This story was easy for the newspaper to flesh out. The AIG release went out yesterday. Any reporter/editor could have had the bright idea to scan the release to see if there might be any impact on Delaware. Nobody did.

    Perhaps the potential of Delaware municipalities losing $260 mill was not considered newsworthy by the Journal. ‘Bulo considers that poor news judgment.

    He also considers the News-Journal’s burying of the Tom Carper blue-dog story near the bottom of a lengthy article in yesterday’s paper to be poor news judgment as well.

    It is, of course, the editors’ prerogative to decide what is most newsworthy. The Beast Who Slumbers intends to criticize said decisions when he deems them in error, as is his prerogative.

  19. David says:

    I personally support the bonuses. The people earned them and their labor shouldn’t be stolen from them.

    We own AIG now so we have to be responsible. We can’t fight silly wealth destroying battles based on envy. The people earning these bonuses earned them from the sound parts of AIG. AIG wasn’t in trouble over all. It was a small part of the company which almost took it down. The only hope to making the company profitable is to get people confident in the more traditional products.

    Some people did. They earned their bonuses. They stayed when it was tough. They kept their noses clean and now you want to rub their noses in the other guy’s mess. Those other guys have been fired. Don’t punish the good people who stayed for the ones who are gone.

    It would be like one student being expelled so you suspend the rest of the school just to send a message. It would send a message alright. The administration is capricious and stupid.

    If we steal the bonuses from the people who got them for bringing business back, we may as well sink the company now.

  20. Unstable Isotope says:

    Wow, they earned their bonuses by selling insurance that they couldn’t back up. Get me one of those jobs. At least the UAW actually made cars that work. AIG deserves to sink.

  21. cassandra_m says:

    My money is on Cuomo. No one actually “earns” a bonus in any sense of the word at a business entity that is failing and that is entirely reliant upon the Feds to be alive. Many of the people who are getting these payouts are responsible for the bad bets that were made that got AIG so far underwater. Rewarding that is just plain stupid.

    The UAW has contracts too. And they consistently live up to their their part of the contracts — the cars and SUVs certainly got made. They are being asked to renegotiate their contracts because management couldn’t make a car people wanted to buy; because management did not do any real planning for their known retirement costs; because management did way too little to reduce their costs and reorient their business when they had their best opportunity (the SUV boom). But these are apparently contracts that no one needs to respect.

  22. David says:

    What potential of loss? The money was safe guarded by the FED and company. It is an interesting news article. Maybe people would be more supportive of the socalled bailout if they realized that without it we would have to raise local taxes a quarter of a billion dollars.

    What do you mean selling insurance that they couldn’t back up. AIG’s normal insurance operation is one of the soundest in the world. That credit swap stuff is not so hot.

  23. cassandra_m says:

    The credit swap stuff is what we are bailing out, David.

  24. David says:

    Unfortunately, we ended up with the entire company. That is why there is such a misconception. The” merit bonuses” are company wide and many could be called commissions or overrides. They should have changed the name where appropriate.

  25. cassandra_m says:

    Changing the name would not make a difference to paying bonuses to people who wrecked a once really great company.

  26. liberalgeek says:

    And the bonuses are being paid to the people in the division that did the credit swaps, not the auto insurance, not the home insurance, the credit swaps.

    Why is it that the right says stuff like, “those $70/hour union people need to come to the table and meet management halfway!” But as soon as we are talking about a “BONUS” for white collar workers that got us into this mess, it is all about meeting the commitments made to them?

  27. David says:

    I would oppose going back last year and retroactively cutting the pay of auto workers.
    It would be stealing. As I said ealier in the thread, they should have done a managed bankrupcy then they could have renegotiated the contracts back in September and October. Everyone would have known where they stood.