Tuesday, March 17, 2009

Who's Who on AIG's List of Counterparties

Whos Who on AIGs List of Counterparties

American International Group (AIG) broke the customary code of silence around financial transactions when it published a detailed accounting of its financial counterparties on Mar. 15. The pressure to do so had come from Congress, insistent upon learning the companies to which U.S. taxpayer aid had flowed. AIG explained its disclosure as a bid for "transparency," but the data were just as much an opportunity to demonstrate the systemic risk AIG had long claimed its demise would pose.

If releasing the list was a surprise, the names on it were anything but. A Who's Who of global financial behemoths, the list included several European banks as well as U.S.-based giants like Goldman Sachs Group (GS) and Merrill Lynch (BAC).

Of course, financial ties between Europe and the U.S. have been growing in recent years, and the flow of funds has hardly been a one-way street from the U.S. taxpayer to banks abroad. Brad Setser, a fellow at The Council on Foreign Relations, notes that the Bank for International Settlements has reported that European banks had an $8 trillion balance sheet going into the crisis, with a large share of that invested in U.S. corporate bonds and asset-backed securities. If the European banks dumped those holdings, it would exact a severe, negative effect on the price of U.S. banks and their balance sheets.

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Further, if the government had not backed AIG, those who had borrowed securities from AIG and collateralized them with the company's debt surely would have sold the debt to cover their losses and brought more pressure on the insurer just as it was struggling most, notes one Wall Street source.

Congress' demands for the names came to a head earlier in the month with the very public dressing-down of Fed Vice-Chairman Donald Kohn by Senator Jim Bunning (R-Ky.), after Kohn refused to name names. The prominence of foreign firms like Barclays (BCS), Deutsche Bank (DB), and BNP Paribas, once the list was released, stirred chat room debate over the logic of American taxpayers helping foreign banks. "In a world where financial institutions operate globally, bailouts are still financed domestically, and do ultimately rely on a backstop from the taxpayers," says Setser, of the Council on Foreign Relations. "There's a complicated set of issues around burden sharing. It's not just AIG."

The transactions at the core of AIG's disclosure have little to do with its central insurance business. The counterparties named on this list were part of far more complicated financial dealings. Some were customers of its collateralized default swaps, in which AIG insured transactions between other parties, something those parties would pay to gain, due to AIG's then-sterling AAA credit rating. But when AIG's ratings were cut, the company had to come up with collateral to back those deals.

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