Thank you for an objective, dispassionate article. It today's world, revisionist history is being produced after only six months! I agree with your conclusion that we should better understand, and manage, what got AIG into their mess in the first place. WRITE YOUR CONGRESSMAN!

Yes, the bailout of AIG was a conspiracy and a travesty, a financial crime of the higest magnitude.

But mostly it has been endlessly bailed out because, as the author notes, China has so much money invested in the company and thus to let it fail would have meant a HUGE blow to the Chinese economy - not just the American economy. Thus the U.S. government decided to placate our new Chinese economic overlords and bailout AIG.

Elliot Spitzer is just desperate to make everyone forget what a slimeball he really is. Enough with all of the armchair quarterbacks pretending to know "what the American people want." It's easy in the cheap seats. The American people made their choice loud and clear. Lead, follow or get the hell out of the way right now. There is just too much at stake. This is a very well-written article.

A fine start, but the gloss begins after the identification of the crux of the problem. This crux was pointed out in the statement, "The immediate problem was that AIG had loaned out much of the stock in its insurance companies portfolio to banks...,"

In real ilfe, if you "loan" something that belongs to someone else, or sell that something, you are guilty of conversion. Conversion, my attorney tells me, is a synonym for theft. Okay, if AIG loaned out stock, which belongs to others (shareholders) they are guilty of the same offense.

All this discussion about derivatives, is at its heart, a discussion about people borrowing other people's stock, "temporarily loaning" this stock to somebody else,
and when the stock's value changes, making a profit on the back of that change.

This is where we need laws to protect us. Shenanigans are part of the human psyche, and are going to occur anytime, and anywhere. The only hope we have, the only protections afforded are in the supreme law of the land. If we are truly a society ruled by law, rather than by a king or queen, then the Law that governs and protects, must be structured so that little kings and queens like AIG, Goldman Sachs, and by extension the Henry Paulsons of the world are not able to game us with their smoke and mirrors.

A Law that protects, that establishes a regulatory framework that provides protection would have also barred good old Bernie Madoff from his little version of borrowing what belonged to others (cash flow from the stock trades), and then making a profit from that cash flow.

Years ago, the Safeway corporation had a shipping warehouse in Richmond, California that burned. As a result of the smoke from the fire, there were numerous claims filed for damages. AIG was the insurance carrier for these general liablity claims. There were so many outraged citizens whose claims were ignored by AIG, that the San Francisco Chronicle did an in-depth investigation and published the results of an internal AIG document.

This document was from the head of the claims department of AIG, and stated something to the effect of, "It is AIG's position to not respond to any claimant, until five attempts were made by the claimant." This was not a directive to either settle or not settle a claim, but simply to stall the process. AIG would not even discuss the merits of the claim, until there were five documented attempts to even file the claim.

During the same era, when I was working as an insurance broker in San Francisco, I had placed worker's compensation coverage for a commercial client (business) with one of the AIG insurance companies. This was back during the heyday of Maurice Greenberg, who is being touted as some great corporate leader today.

But, on October 31, halloween, 1986 a worker at my client's business cut his finger while on the job, and had to go to the hospital for what amounted to $386.00 in stitches and antiseptics. On October 31, 1987, a full year later, my client called me to advise that not only had AIG not paid the $386.00, but that the poor employee was being hounded by a collection agency for this piddling bill that AIG should have paid an entire year before.

My point is that a corporate culture that thinks it can take in money, without having to pay its obligations is an outlaw in its very core. Little surprise, then to discover that AIG took additional liberties with other people's money and stock. And do not think it is okay for the company to "loan" its own stock to others on a temporary, or even permanent basis. They were loaning stock belonging to shareholders. Otherwise, they were loaning stock belonging to corporate officers, who should in no way benefit from a government bailout.

I don't know if this qualifies as a conspiracy, but it sure does smell like rotting fish.

"While no conspiracy theory is needed to explain why Bernanke, Geithner, and Paulson pushed the $85 billion panic button in mid-September, one may be necessary to unravel how a world-class insurance company turned into a near Death Star. Certainly, AIG needed enablers to so permeate the globalized financial system."

The conspiracy at work here is called monopoly capitalism. The conspirators are the government bureaucrats who allowed financial institutions whose primary product is debt to control the economy to the point where we are all held hostage. American government has had a clear responsibility since the Presidency of Teddy Roosevelt to guard against this type of exploitation. Republicans and Democrats are equally responsible for being bought off and enabling the current situation to occur.

zeitgeistmovie.org

if you want a whole slew of conspiracy theories that make a little more sense. the movie from 2007 is a lot better than the 2008 episode

Poor Spitzer. Imagine. He must have made some really bad enemies that his piddly little money transfers where tracked at all. That's what you get for pissing off Wall Street.

Those b@$t@rd$ -- in AIG, Goldman, Lehman , et al -- should end up with far worse ruined reputations. But they won't.

Why not let this bloated, rotting, enorged company go belly-up? I do not care about the rest of the world. That is what sucks in today's economy. We are always having to look after the rest of the world.
I absolutely believe that some kind of hush-hush conversations were going on between Bernanke, Paulson, Geithner (who is inept at best) and anyone else responsible for the bailout.
Why shouldn't we be able to read the exact transcripts from those fateful meetings? Mr.Epstein thinks we should be like children, who get a pat on the head and are told not to worry about anything. The adults at the Fed, the treasury, AIG, will take care of the problem.
I am so tired of the bullsh*t that the media continues to push concerning this problem. Actually you hardly hear it all anymore. The GM CEO has taken center stage, even though he has not done NEAR the damage AIG has wrought.
AIG, the treasury, the fed are all in this together.
And yeah, Eliot Spitzer slept with prostitutes. But he didn't bankrupt the enter world when he did it. Nor did he require billions of dollars to get out of his situation.
If he can find anything that proves the federal agencies and the private companies conspired to rob the American taxpayers, then by all means, I wish him Godspeed.

Having said that, I wonder when we as citizens will wake up and get tired of being f*cked in the ass by rich corporations and basically the wealthy citizens of this country.

Where is the revolution? There is strenght in numbers. Why are we so afraid?

I could also care less about the rest of the world.
All of our moral obligation, empire building and wars are what makes our country weak. But hey what can you do when the Fed sells out the treasury from underneath us. All the bs about free trade good, tariffs bad. Now we have to play by chinas rules because they own a trillion in our treasury. you dont have much leverage with tariffs and human rights when you owe a trillion.
And I could give a crap if spitzer f'd a hooker. So have most of the rest of us

Spitzer should be ashamed to show his face in public
let Alone come forward to speak out on corruption

He Broke laws that He put on the books
and Guilty as sin
walked away without Any legal repercussions

Eliot, maybe you have brain washed your wifey into forgiving and forgetting

as for the rest of us
please crawl back under your rock!!!!!!!!
corruption personified

Where is the revolution? There is strenght in numbers. Why are we so afraid?
____________________________________________________
What? Whatching Glenn Beck much? What does that even mean? Do you want to storm the capitol? Should we put you in charge Texas Tiger? What's your plan for fixing this mess? You would have let AIG go under right? And - as for the the 30-40 facts mentioned above that it would have created an even further and deeper global crisis - f it right? Get EM!!!!! What is wrong with you people....As a broad generalization - Southerners are nuts.

The real conspiracy here is saying that "AIG is too big to fail"

What does that mean? Supposedly World financial markets will implode... Why? Oh well, that's too complex to explain.

I call bullshit. AIG isn't that complex. None of their transactions can possibly be so complex that they can't be explained. The truth is their transactions are riddled with fraud and no one who is "in the know" wants to say it. And the books are closed to everyone else (meaning a full scale investigation would be needed to uncover the skeletons).

AIG should fail with GM. Sink 'em, fire all of management, and rebuild.

Fire them all is correct but after that some of them need to spend some time in the gray bar hotel. It is not possible that the billions of dollars being handed on a silver platter to these Wall street crooks was not planned & not something that people shoud not be put into jail for.

It is absolutely true that AIG was too big to fail. The real conspiracy is how they had been permitted to pick their own regulator and write so many credit default swaps for customers who did not even hold the underlying assets. Are you allowed to take out a million dollar policy on your neighbor in whom you have no financial interest? And if you were allowed to, would the rest of the street be able also to take out million dollar policies on the same neighbor?

The push for deregulation - led by Phil Gramm, Alan Greenspan, Robert Rubin and Chris Cox - resulted in very few laws restraining the production and distribution of credit default swaps. As a result, they increased 100-fold in the last eight years.

That is one outrage. Another is the fact that AIG's counterparties should have performed their due diligence on the degree to which AIG was leveraging their capital. The investment banks involved in these transactions have dozens, if not hundreds, of individuals qualified to perform this analysis. To purchase such "insurance" without performing this due diligence flies in the face of fiduciary duty. As such, these CDS holders have no business being bailed out 100 cents on the dollar. I do not know what the ratio should be, but they should not be receiving full value from an investment that they should have known was very risky. Caveat emptor.

As to Hockeydog, you make a number of good points, but you do not understand securities lending. This is a perfectly legitimate activity that generates revenues for many pension funds as well as agent lenders and investment banks. When done properly, it is very low risk. Most securities lenders, however, invest their collateral in very safe Treasuries. AIG invested their collateral in Mortgage Backed Securities, trying to capture a few extra basis points of performance. So not only were they writing multiple policies against mortgage backed securities, they were also investing in it their collateral that would have to be returned to those who borrowed their securities. Over-exposure anyone?

"The question Spitzer does not ask, and which goes to the heart of the issue is: What would have happened if the Fed and Treasury had not acted decisively to bail out AIG after it informed them it was unable to meet its obligations?"

Yeah that is the heart of the matter, isn't it? What made it so imperative that we needed to engage in corporate welfare and increase government authority and power? Someone as educated as yourself surely took some basic economics courses right? The only true correct action to take was to let it fail despite the consequences because we live in a free market society.

BluegrassInNyc makes some excellent suggestions, particulary concerning the need for the counterparties to the default swaps to share in the loss. Afterall, I suspect when they finally begin to unravel things this whole counterparty idea will resemble nothing more than reinsurance from one entity to another. In fact AIG and the Warren Buffet group of insurance companies are probably like two peas in this same pod. Remember our President proclaiming Warren as his "friend"?

you are absolutely right that this hockeydog does not understand securities lending. You stated that "when done properly, it is very low risk." I accept this as true, and would advocate for laws and regulation that would require such lending be done properly, by defining exactly what would and would not be allowed.

Part of the problem is systemic, in that the traditional insurance policies and risks are regulated at the state level. And there used to be a separation between businesses that transacted insurance, and those that dealt in financial securities.

When exactly, the regulatory walls between these institutions began crumbling is open to question, but I suspect the regulatory structures were zapped pretty heavily during the last eight years. I do not mean to be beating the dead W. horse here, as it makes no difference now, except as a learning experience.

I know that many sections of the overall insurance industry, including AIG, and most banks and savings and loan institutions wanted the walls to come down.

I would suspect, there was miscalculation of risk related to oil derivatives (gas maker), along with the miscalculation of credit default swaps, for example GM, (gas guzzler maker), during a time where we were in conflict with countries who produce oi.

Such a conflict, triggered an energy crisis in 1974, a crash in the stock market, and many things were similar, the difference is possibly the rate of trade, due to the computers, and the number of traders who were making bonuses related to the risks they were taking, possibly.

And then the mortgage credit default issue related to Freddie Mac, and Fanny Mae, all came tumbling down at once, revealing, Ponzi schemes, that from the surface appeared to be another brilliant exploitation of the split strike conversion anomaly, issues that are iffy at best, but could not be reconstructed if a forensic accountant tried, so didn't seem possible.

Hedge, an idea, that is not a bad idea, if it diversifies risk.

Exploiting risk, or betting on bank's failure, aig's failure, GM's failure, making them even more vulnerable as they were finding the capital market, and the related products they needed to diversify their risk, or to insure their debt, to be getting costlier, as the swaps were being bidded up.

Without the regulation, what did they think was going to happen?

People were being paid bonuses to take risks, so the risk taking probably was culturally reinforced.

We know money can be the root of many evils. This is common knowledge.

Conspiracy, like inside trading for example, I bet happens all the time, especially if SEC, for what ever reason isn't able to stop or understand what Madoff was doing, of course investors will lose confidence, another reason for the increase capital.

Right?

Look how much the g20 are pledging to the world bank and related what have yous, one trillion dollars (I assume US),


[The price of GM's credit-default swaps, which are insurance in case the carmaker can't pay back its loans, have soared in the past month. They now cost a premium of 12 percentage points of the value of the debt that they insure, four times what they cost in January.] http://www.businessweek.com/magazine/content/05_50/b3963114.htm?campaign_id =rss_topStories

I have reported before that GM has a $trillion or so in credit default swaps written on it (but my information on this is well over a year old). If banks stocks rally tomorrow (or even if they simply do not collapse), you will know that banks are fully hedged or on the right side of those swaps.

However, given the swaps dwarf GM bonds, it is virtually guaranteed that someone is on the wrong side of them.]
http://globaleconomicanalysis.blogspot.com/2009/03/obama-denies-funding- to-automakers-what.html.

]SEC reportedly probing AIG over credit default swaps - MarketWatch
6 Jun 2008 ... The SEC reportedly has been probing blue-chip insurance giant AIG over its involvement in credit default swaps.]
www.marketwatch.com/news/story/sec-reportedly-probing-aig-over/story.asp x?guid=%7B269259F5-610B-46AA

I meant: during a time when we were in conflict with countries who produce oil, the oil prices went crazy, oil derivatives possibly went crazy, people who may have been getting bonuses for taking risk, possibly should have been more regulated at such a time of vulnerability, and I think the reason why the derivative market was not better regulated at such a vulnerable time, could be anyone's guess.

So who wants to buy a gas guzzler when oil costs so much? Similar to what happened in 1974, the crash.

Don't tell me someone did not know the vulnerability, and the risk? Tell the people are are going to have to explain this to their kids. We are leaving the cost of this mess to our young people, who are not even old enough to vote, some are yet to be born. That is why this is not a joke and should be really investigated, so it will never happen again.

That link I posted points to a story that is gone.

But still cached. :)

"SEC reportedly probing AIG's swaps
Insurer says it has 'consistently and promptly' updated value of positions
By Riley McDermid & Alistair Barr, MarketWatch
Last update: 2:04 p.m. EDT June 6, 2008
NEW YORK (MarketWatch) -- American International Group Inc. is being investigated by federal regulators about whether the giant insurer overstated the value of derivatives partly linked to subprime mortgages, The Wall Street Journal reported on Friday, citing unidentified people familiar with the matter.
The Justice Department in Washington and the U.S. Attorney's office in Brooklyn have requested that the Securities and Exchange Commission turn over any information gleaned from the investigation into AIG (AIG:
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AIG 1.14, 0.07, 6.5%) , signaling that a criminal inquiry could follow, the newspaper said.
SEC declined to comment and the Justice Department didn't immediately respond to an email seeking comment.
"We generally don't comment on specific matters of this nature, but we always cooperate with all our regulators whenever we are asked to do so," Chris Winans, a spokesman at AIG, said in an email sent to MarketWatch.
AIG shares fell 6.2% to $34.20 during afternoon trading on Friday, leaving the stock down 41% so far this year. ]
http://209.85.173.132/search?q=cache:HeS0aM9jUC4J:www.marketwatch.com/ne ws/story/sec-reportedly-probing-aig-over/story.aspx%3Fguid%3D%257B269259F5- 610B-46AA-8D84-17F71D5830B4%257D sec-reportedly-probing-aig-over/story.asp x%3Fguid%3D{269259F5-610B-46AA&cd=1&hl=en&ct=clnk&gl=ca&client=firefox-a

What does conspiracy mean anyway? What matters is fully disclosure. How can the markets function properly without it?

Makes you wonder?

[ "This latest piece of unsettling news heightens our concern that the current management team may not be able to successfully navigate this storm," Catherine Seifert, an insurance analyst at Standard & Poor's Equity Research, wrote in a note to clients.
"Longer term, we see value in the AIG franchise, but we expect current turmoil to limit upside in the shares and we would not add to positions," she added, keeping her hold recommendation on the stock.
A lot of AIG's problems are centered on collateralized debt obligations, or CDOs, which are investment products that are partly backed by mortgage securities. As house prices have fallen and delinquencies and foreclosures surged, the market value of many CDOs dropped sharply. See related story.
AIG's Financial Products unit sold guarantees on CDOs, using credit-default swaps, a type of derivative-based insurance that pays out in the event of a default. AIG sold "super senior" credit-default swaps that guaranteed higher-quality parts of CDOs. But as the credit crunch widened, the market value of even the best parts of some CDOs declined.
The complexity of these securities and a slump in trading activity has made them tricky to value, adding to concerns.
AIG has "consistently and promptly" provided the company's best estimates of the value of its credit default swap portfolio and potential exposures, Winans said on Friday.
"With each update going back to August 2007, we have provided a substantial amount of detail on our investor web page, as well as in meetings with investors and in regulatory filings on how these estimates were calculated, based on the data available at the time," the spokesman explained.
"Every time that they were discussed, we made clear that these were estimates and that they were subject to significant change given the illiquid and unpredictable state of the credit markets," he added.
In February, AIG said its auditor PricewaterhouseCoopers had found a "material weakness" in the insurer's accounting. However, AIG stressed on Friday that this doesn't mean any of its reported results were wrong.
AIG has been beset by a rash of legal and regulatory troubles lately, with some former executives convicted in federal court of illegally inflating the company's reserves.
Former CEO Maurice "Hank" Greenberg is also the target of a separate, civil investigation by the SEC into whether he had colluded with that scheme.
The company also paid $1.6 billion in 2006 to settle allegations of accounting improprieties and other regulatory missteps. End of Story
Riley McDermid is a MarketWatch reporter based in New York.
Alistair Barr is a reporter for MarketWatch in San Francisco.]
http://209.85.173.132/search?q=cache:HeS0aM9jUC4J:www.marketwatch.com/ne ws/story/sec-reportedly-probing-aig-over/story.aspx%3Fguid%3D%257B269259F5- 610B-46AA-8D84-17F71D5830B4%257D sec-reportedly-probing-aig-over/story.asp x%3Fguid%3D{269259F5-610B-46AA&cd=1&hl=en&ct=clnk&gl=ca&client=firefox-a

This is what the problem is.

One looks for an answer to one question, then you find more questionable things, and just wonder.

What would have happened if SEC had some regulated this credit default swap products, if this kind of accounting issues coming up.

How are economic models supposed to work, if the this kind of information is not known as part of of the risk, and as part of the equation, it should be known.

When the market crashes, and hurts so many people, we should get passionate, and then somehow we have to find a place in our hearts to forgive them, for they don't appear to know what they are doing.

How could they have let this happen? Madoff, this, it goes and on.

I meant: What would have happened if SEC had made more regulations on these credit default swap products, if these kind of accounting issues were coming up back then?

The public is going to have to eat the losses, I assume is the point of the bailout, but who gets the gain?

They must have known the risk, they let it happen. and again we are asking all the wrong questions.

This part from this article {So what Bernanke, Geithner, and Paulson were looking at on September 15 was financial armageddon with AIG as the Death Star. We do not need a transcript of their "precise conversations," or even to know who else they consulted in or out of government that day, to figure out why they decided to intervene. It was what Geithner meekly called "systemic risk." In other words, preventing the AIG Death Star from destroying world financial markets.}

I think you have the date wrong, I think SEC allowing this swap thing to continue, knowing the accounting issues were beyond their ability at AIG to estimate.

The date of this article I think is June 6, 2008, so what happened in the time in between.

That is question I would be asking, why didn't SEC continue with this investigation, if it did why did they let this risk take over, knowing the risk couldn't be estimated, and was unknown.

That decision could have been a turning point, I would suspect, whenever that decision was made, the share price in this story, reminds you what AIG used to be.

The proper metaphor is not, as David Harvey said on DN! today, of banksters thieving gold from the hold of our ship of state; they're cannibalizing our bank accounts, our very lives, for their fiendish profits.

Like hockeydog, there are many things one does not understand about deriviatives, credit default swaps, and the like. However, one thing is clear. We need a strong regulatory framework for our economy, that cannot be monkeyed with by political monkeys.

Take our recent history of deregulating the Savings and Loan industry - Neil Bush made a bundle of cash in that debacle. Then, of course, who could forget Kenny Boy Lay, Andy Fastow, and the cretins behind the packaged energy scam following deregulation of the electricity markets. Oh, and the deregulation (or relaxation of oversight) of the securities markets have given us a mad-house mess following right on the heels of (total lack of oversight) the oil price gouge.

So, when one part of the economy is allowed unbridled autonomy (think oil) to gouge the system, it leads directly to another part of the economy (think auto industry) running into trouble, and indirectly (think "iffy" mortgages) other parts of the economy's subsequent dive into the tank.

And right smack in the middle of all this deregulation, we were given a phoney war that benefitted our very own sitting Vice President (think Haliburton, think military lobbyist). In a sense, by allowing a President to declare war (usurping Congressional authority by calling it a police action, or other cute term like rounding up "enemy combatants") we have what amounts to deregulation of our Constitution.

The conclusion, to my simple farmer's mind is that deregulation leads to corruption-manifest. So, perhaps we do need to become, as a country, more like China. The human rights abuses of America are not materially different from those of China. The only apparent difference is in who is getting abused, by whom.