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04 March 2024

At least 24 US and European banks got payouts from AIG's bailout

By Reuters

The federal bailout of insurance giant American International Group (AIG) has benefited at least two dozen US and foreign financial institutions who collected some $50 billion (Dh183.5bn), media reports say.

Citing a confidential document and people familiar with the matter, The Wall Street Journal said recipients of AIG money include Goldman Sachs Group and Germany's Deutsche Bank, each of which received roughly $6bn in payments between mid-September and December 2008.

Also receiving AIG money last year were Merrill Lynch, now part of Bank of America Corp, French bank Societe Generale and, to a lesser extent, Morgan Stanley, Royal Bank of Scotland Group, Wells Fargo, Calyon, Barclays, Rabobank, Danske, Wachovia, Bank of America, and Lloyds Banking Group and HSBC Holdings, the newspaper said

Morgan Stanley and Goldman Sachs declined to comment when contacted. Bank of America, Calyon, and Wells Fargo, which has absorbed Wachovia, could not be reached for comment.

The US Federal Reserve has refused to publicise a list of AIG's derivative counterparties and what they have been paid since the bailout, riling the US Senate Banking Committee.

Federal Reserve Vice- Chairman Donald Kohn testified before that committee last week that revealing names risked jeopardising AIG's continuing business. Kohn said there were millions of counterparties around the globe, including pension funds and US households.

He said the intention was not to protect AIG or its counterparties, but to prevent the spread of AIG's infection.

The Wall Street Journal, citing a confidential document and people familiar with the matter, reported Goldman Sachs and Deutsche Bank each got about $6bn in payments between the middle of September and December last year.

Once the world's largest insurer, AIG has been described by the United States as being too extensively intertwined with the global financial system to be allowed to fail.

The Federal Reserve first rode to AIG's rescue in September with an $85bn credit line after losses from toxic investments, many of which were mortgage related, and collateral demands from banks, left AIG staring down bankruptcy.

Late last year, the rescue packaged was increased to $150bn. The bailout was overhauled again a week ago to offer the insurer an additional $30bn in equity.

AIG was first bailed out shortly after investment bank Lehman Brothers was allowed to fail and brokerage Merrill Lynch sold itself to Bank of America Corp.

Bankruptcy for AIG would have led to complications and losses for financial institutions around the world doing business with the company and policy holders that AIG insured against losses.

Representative Paul Kanjorski told Reuters on Thursday that he had been informed that a large number of AIG's counterparties were European.

"That's why we could not allow AIG to fail as we allowed Lehman to fail, because that would have precipitated the failure of the European banking system," said Kanjorski, a Democrat from Pennsylvania who chairs the House Insurance Subcommittee.

As part of its business, AIG insured counterparties on mortgage-backed securities and other assets. The collapse of the US sub-prime mortgage market, which triggered a global financial crisis, left the insurer and some of its policy holders facing possible ruin as the value of assets declined.

US regulators failed to recognise how much risk AIG was piling on in credit-default swaps, and by the time they understood, they had no choice but to pour in billions of public dollars, Kohn and other officials told the Senate panel.

Senators were outraged by the lack of details about where the bailout money has gone.

"That we find ourselves in this situation at all is... quite frankly, sickening," said Senator Christopher Dodd, the Democrat who chairs the committee. "The lack of transparency and accountability in this process has been rather stunning."

Eric Dinallo, superintendent of New York State's Insurance Department, railed on Friday against AIG's failed business model, likening its insuring credit-default swaps as gambling with somebody else's money.

"It's like taking insurance on your neighbour's house and even maybe contributing to blowing it up," he said at a panel sponsored by New York University's Stern School of Business.

US lawmakers have said they are running out of patience with regulators' refusal to identify AIG's business counterparties.

Richard Shelby, the top Republican on the banking committee, said: "The Fed and Treasury can be secretive for a while but not forever."