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Wednesday, 28 October 2009

Burning other people's money

We know that government's are never good with other people's money, but a story emerging from the US on the AIG bailout takes the biscuit.

The story in brief: Before the NY Federal Reserve stepped in to bail out AIG the chief financial officer for the AIG division that oversaw AIG Financial Products negotiated with banks that had bought $62 billion of credit-default swaps from AIG, trying to persuade the banks to accept discounts of as much as 40% on the amounts due to settle the swaps.

By Sept. 16, 2008, AIG was running out of cash, and the U.S. government stepped in with a rescue plan. The Federal Reserve Bank of New York opened an $85 billion credit line for AIG, and took a 77.9% stake in the company and effective control. After less than a week of private negotiations with the banks, the New York Fed told AIG to pay them at par.

The New York Fed’s decision cost AIG, and thus American taxpayers, at least $13 billion. The details of the Federal Reserve's deliberations have not been published. Well you wouldn't expect them to, would you?

Worth mentioning that the chairman of the board of directors ofthe NY Fed at the time was Stephen Friedman, a former chairman of Goldman Sachs. Goldman recovered $14billion from AIG on the swaps, although it was never clear whether Goldman had taken out a CDS as protection against an AIG default and thus got paid out twice.

1 comment:

Steven_L said...

I think people expect to read this sort of thing these days rather than find them surprising or getting angry about them.

But then again I always was a cynic.