AIG… A Stealth Conduit For a Government Money Laundering Plan
AIG paid $165 million in bonuses, but angry lawmakers and administration officials insisted the money belonged to taxpayers and vowed to get it back. The clamor over compensation overshadowed AIG’s weekend disclosure that it used more than $90 billion in federal aid to pay out to foreign and domestic banks, including some that had multibillion-dollar U.S. government bailouts of their own. The counterparty list is a veritable who’s who of the world’s top financial institutions, including Goldman Sachs (GS), Bank of America (BAC), British bank Barclays (BCS) and Germany’s Deutsche Bank (DB). The question arises - Why did the United States Government insist on honoring these legally questionable obligations?
At the heart of this transfer of billions of taxpayer dollars to the world’s leading financial institutions is Credit Default Swaps (CDS). Undecipherable CDS contracts were written with the intent of creating a quasi-insurance product for the financial industry that avoided traditional insurance regulations and permitted investors to make huge bets even though they did not have an “insurable interest”. (i.e. In essence investors did not own the bonds that were being “insured”.) One could view the $60 trillion CDS business as a giant unregulated betting parlor where one could bet on anything. For example, some investors bet that Lehman Brothers would default on certain of their bonds within a six-month period, even though they didn’t own any!
In the convoluted world of Credit Default Swap contracts, the parties have neither an “insurable interest” nor are they at “risk” if there is a default on the underlying asset. Therefore, CDS’s are not legally an insurance contract. Courts in New York and London ruled on this matter more than a decade ago. These opinions opened the unregulated door to this odious business. In my view CDS are a form of wagering contract, which can be declared null and void using the same legal theory that States have used to declare other wagering contracts void. Cancelling these bets (i.e., declaring them null, void, and legally unenforceable) would let swap sellers off the hook. It would virtually leave the swap buyers high and dry. But remember, these were theoretically long-shot bets and the “premiums” where minuscule.
I do not mean to suggest that AIG was an innocent victim; they were in fact, at the center of the CDS scam. For reasons that are not clear both the Bush and Obama administrations appear to have had the power to cancel all of the CDS contracts and not use AIG as a stealth conduit to funnel billions of dollars to favored financial institution. Instead they choose a path less well-traveled to shore-up anointed financial institutions with tens of billions of dollars of taxpayer money. Why? How did this decision benefit the economy and the taxpayers?
The critical question remains will the main-steam media ask the tough questions or are they in the tank for the Obama administration? Stay Tuned!
