Background to AIG bonus mess

This is partial background of the failures of Congress, Government and the leaders of America during March leading to the AIG fiasco. (Not necessary to read.)

12 MAR Where did the money go?

Today, March 2, 2009, it was announced that we gave AIG more money

NYTimes: March 2, 2009, 5:46 pm Who’s Really Being Propped Up in the A.I.G. Bailout? By Joe Nocera
Answer: The US Government, Treasury Department, Obama Administration and Congress all refuse to give information. “And at this point — after Bailout No. 4, with the government handing A.I.G. another $30 billion to go with the previous $150 billion — you would think that the taxpayers would have the right to know that information.”

March 2, 2009 1:44 PM (The AmLaw Daily) Davis Polk, Weil, S&C Lead on New AIG Bailout. (by Zach Lowe) Chew on this for a second: AIG lost $99 billion in 2008, according to Bloomberg. AIG the recipient of four different government bailouts--the latest of which came this morning, when the Treasury Department agreed to kick in another $30 billion in taxpayer money.
Both the Bloomberg story mentioned above and this New York Times piece have full breakdowns on the deal announced today, which also forgives some of AIG's debt to the government by turning it into equity; attaches a lower interest rate to AIG's outstanding debts.
In terms of lawyers, this deal illustrates the monopoly about half-dozen firms and 50 or so high-powered partners have on the bailout work. Sullivan & Cromwell served as counsel to AIG, just as it did in the company's three prior bailout agreements; Weil, Gotshal & Manges served as S&C's co counsel this time. Weil has helped AIG unload some of its units to raise cash and has reportedly been retained as bankruptcy counsel should AIG ever have to file for Chapter 11.
Michael Wiseman led the S&C team along with firm chair H. Rodgin Cohen and partners Robert DeLaMater, Robert Reeder III and Ann Fisher, according to sources familiar with the talks.
Partner Michael Aiello led the Weil team along with partners Matthew Gilroy, Marcia Goldstein, Robert Carangelo and Joseph Allerhand.
Lawyers from both firms declined to comment.
Meanwhile, a team from Davis Polk & Wardwell advised the federal government on the newest round of talks--just as they've done in prior AIG deals. That's a switch from last week, when the firm advised Citigroup in talks that resulted in the government agreeing to take up to a 36 percent share in the banking giant.
Partners Ethan James, Marshall Huebner and Robert Heckart led the Davis Polk team on the deal. The lawyers declined to comment or didn't return messages from The Am Law Daily.
Simpson, Thacher & Bartlett partner James Gamble represented the AIG board of directors, sources said. Gamble has repped the company

12:00 AM CST on Tuesday, March 3, 2009
By TODD J. GILLMAN / The Dallas Morning News tgillman@dallasnews.com / The Dallas Morning News s Pamela Yip in Dallas and Dave Michaels in Washington contributed to this report.
WASHINGTON – Ron Kirk's excess deductions for basketball tickets and failure to report speaking fees as income have cost him $10,000 in back taxes, a Senate committee disclosed Monday, in the latest IRS-related embarrassment for an Obama Cabinet pick.
The problems are the first indication of potential trouble for Kirk's nomination to be U.S. trade representative, though White House officials and key senators called the errors minor and predicted the former Dallas mayor will be confirmed by the Senate.
"When you put anybody's tax filings under a microscope, people don't have to be dishonest," said Senate Majority Leader Harry Reid, D-Nev. "It's just hard to do all the right things. It certainly shouldn't disqualify him."
Aides to the Senate Finance Committee uncovered Kirk's tax shortfall during weeks of vetting. Kirk, a lawyer and the Texas Democratic Party's 2002 Senate nominee, will file amended tax returns for the last three years and pay the Internal Revenue Service $9,975 plus interest.
That pales beside the lapses of some Obama Cabinet picks, though independent tax experts agreed that Kirk had made some "careless" errors.
Treasury Secretary Timothy Geithner paid $43,000 in back taxes before his confirmation. Tom Daschle, the former Senate majority leader who withdrew his bid to lead the Health and Human Services Department, paid $128,203 in back taxes, plus interest, for failing to report as income the car and driver a friend had provided to him.
Labor Secretary Hilda Solis' confirmation was delayed for weeks amid questions about her husband's unpaid taxes. Outside the Cabinet, an Obama pick for a top White House job withdrew over questions about her tax compliance.
The series of problems prompted the White House to review its vetting process and slow the pace of nominations. It was hard to gauge Monday how badly Kirk might suffer from the snafus' cumulative effect.
"We are confident that Mayor Kirk will be confirmed," said White House spokesman Ben LaBolt. Kirk did not pay taxes, did not declare income and made false deductions. Kirk was further endorsed by Obama and confirmed.
Annette Nazareth proposed deputy to Geithner. Former SEC. Withdrawn because of previous actions and associations.
Though popular in policy circles, Nazareth has drawn criticism for her role in creating what some considered to be lax oversight of the banking industry.
Nazareth, 53, a partner at the law firm Davis Polk & Wardwell, could not be reached for comment. White House officials said they would not comment.
Geithner has been criticized for staffing his department too slowly as it grapples with a banking crisis that has crippled the economy. Uncertainty about Treasury staff also has unnerved financial markets.
Five weeks into his tenure, he has yet to name a single top deputy or assistant secretary. This has left Treasury with too few people authorized to make decisions or represent the department in meetings with stakeholders.
After initially declining to comment, Treasury spokesman Isaac Baker e-mailed a statement saying 50 political appointees at the department already are hard at work.
"Any rumors of vetting problems or delays in the process are simply not true," Baker's statement read.
The department has been meeting with members of the financial services industry as it oversees the government's $700 billion financial bailout and other parts of President Barack Obama's financial stabilization plan.
But at a Senate hearing Thursday about failed insurance giant American International Group Inc. — which has received four separate bailouts totaling more than $170 billion — Sen. Chris Dodd said he had asked Treasury for someone to appear, but that no one was available.
"I am not pleased that we don't have someone here from Treasury to explain what their role in this is," Dodd said.
Geithner's choice for undersecretary of international affairs, Caroline Atkinson, also withdrew from consideration, the Wall Street Journal reported Thursday.
Some at Treasury and other financial regulators had looked forward to Nazareth's appointment. She is well-known in policy circles and is close with Geithner and Obama economic team members, including Paul Volcker, a former Federal Reserve chairman.
Nazareth joined the SEC in 1998 as senior counsel to then-Chairman Arthur Levitt, later directing the Division of Market Regulation. She is credited with creating numerous key policy changes.
She created the voluntary program intended to supervise large investment banks including Goldman Sachs, Morgan Stanley and the now-defunct Bear Stearns and Merrill Lynch. The program was canceled in September as the financial crisis erupted and the remaining investment banks converted themselves into bank holding companies.
Some on Capitol Hill had expressed concern that Nazareth was too closely associated with the weak federal oversight that contributed to the banking collapse. Among her responsibilities at Treasury would have been overseeing the creation of a new regulatory system for large financial institutions.
Geithner told a Senate panel Wednesday that he hoped "to come up for the committee soon with a full slate of very strong people."
"We're doing this carefully, as you would expect, and ... trying to make sure we have the best talent in the country," he said.
Geithner's lack of a senior staff has raised concerns on Wall Street.
"This doesn't help confidence," said David Wyss, chief economist at Standard & Poor's in New York. "Geithner is stuck there all by himself trying to do everything. They don't have anybody confirmed, and Treasury is a big shop to try to run with one person, especially right now."
Wyss, who previously worked at the Federal Reserve, said the administration needed to have made a much bigger push before taking office to get people cleared to take over the top jobs at Treasury so that Geithner could assemble his team quickly.
David Jones, head of Denver-based economic consulting firm DMJ Advisors, said that Geithner's missteps in putting together a financial rescue program and his inability to assemble a team at Treasury were raising concerns about whether the new administration's economic team is up to the challenges confronting them.
"There is no question that Wall Street is losing patience," said Jones, who for more than three decades served as a top economist at a major bond trading firm. "If there was ever a time when we need an effective and strong Treasury secretary, it is now."
Jones said that investors had initially viewed the economic team that Obama was assembling favorably because it included experienced hands such as Summers and Volcker.
"There were high expectations for this team, but at this time of crisis, it doesn't seem to be functioning effectively," Jones said.
A list obtained by Fortune includes the names of many foreign banks - as well as U.S. giants such as Goldman Sachs.
By Carol J. Loomis, senior editor at large
Last Updated: March 7, 2009: 1:28 PM ET
NEW YORK (Fortune) -- Donald Kohn, vice chairman of the Federal Reserve, learned this week about blackmail, Senate style, when he refused to disclose the names of financial institutions benefiting from the bailout of American International Group.
Testifying about AIG (AIG, Fortune 500) before the Senate Banking committee, Kohn respectfully resisted all of its attempts to extract the names. Several committee members grew frustrated and finally got to the point of threatening Kohn with no more dollars for the credit crisis - ever - if he didn't spill the information.
Said Sen. Jim Bunning, R-Ky., "You will get the biggest 'no' you ever got. I will do anything possible to stop you from wasting the taxpayers' money on a lost cause."
Why so much fuss over these names? While the government has maintained that saving AIG was necessary to prevent an even wider catastrophe, senators contend the move has also bailed out counterparties who took unwise risks, so the legislators want to know who those companies are.
While The Wall Street Journal Saturday reported many of the names of the 25 counterparties involved, FORTUNE has independently obtained a somewhat different group of 15 names, listed in an intriguing order (see below).
The information that riled the Senate committee this week concerns about $80 billion of credit default swaps - contracts that insure investors against losing principal and interest - that AIG wrote on super-senior tranches of collateralized debt obligations (CDOs) that were backed by mortgage securities, some of them subprime. (See The Company that Came to Dinner, FORTUNE, Jan. 19).
When AIG suffered rating downgrades, the resulting collateral calls on the credit default swaps proved ultimately to be much more than AIG could handle and became the main reason the company was bailed out - with government commitments that now exceed $150 billion.
The counterparties to the swaps were 25 financial institutions spread around the world. Many of them would have been vulnerable to a domino effect if they hadn't received, first, the collateral AIG paid them and, later, billions of dollars from the U.S. government that made the counterparties whole.
In this whole disaster that began to play out last September, neither AIG nor the government has ever divulged the names of the counterparties - and that's what infuriates Bunning and other senators.
Committee chairman Christopher Dodd, D-Conn., describes the counterparties as less than "innocent victims" who used AIG's rating (then AAA) to take "enormous, irresponsible risks." He complains, "It is not clear who we are rescuing."
The Fed's Kohn argued that he couldn't give out the names because the counterparties had entered into contracts with AIG not expecting their identity ever to be disclosed. Naming them, he said, might deter them from doing business with AIG again.
In the end, however, Kohn said he would carry the committee's request back to the Fed and see what might be worked out.
A reliable source, however, has given FORTUNE a list of 15 counterparties, with no dollar figures attached. The list contained the names in the following order. FORTUNE sought comment from all of the financial institutions and none said their inclusion on the list was inaccurate.
Société Générale (France)
Goldman Sachs (GS, Fortune 500)
Merrill Lynch International
Deutsche Bank (Germany)
Calyon, Crédit Agricole (France)
UBS (Switzerland)
Barclays (England)
Coral Purchasing, DZ Bank (Germany)
Bank of Montreal (Canada)
Rabobank (the Netherlands)
Royal Bank of Scotland
Bank of America
Wachovia
HSBC (England)
Barclays Global Investors
What is the significance of the rank order of the list? Since it is not alphabetical, one possible interpretation is that the banks are listed in order of the amount of CDOs they insured with AIG.
Goldman Sachs' No. 2 position fits several press reports that it was an important counterparty, perhaps having insured $20 billion of CDOs with AIG. Goldman has never confirmed that figure, but it has said that its "net" exposure to AIG - after collateral it received and hedging it did - was minimal.
If indeed France's Société Générale ranks No. 1 by exposure, it's a distinction the bank certainly didn't need. Early last year, the company was staggered by the news that a rogue trader had lost $7.5 billion. Had a domino effect ensued from AIG's collapse, Société Générale would have been in an especially vulnerable position.
The Fed's Kohn admitted in the Senate hearings that paying off these counterparties in the course of the AIG rescue "will reduce their incentive to be careful in the future," which helps explain why the names have become such sought-after information in the political debate over "moral hazard."
A transcript of Thursday's hearings that was done by Congressional Quarterly contains a typo that nicely describes the whole disastrous mess that AIG has turned out to be for U.S. taxpayers. The speaker was New York superintendent of insurance Eric Dinallo, and what he said was, "AIG is a microcosm of our regulatory regime."
But the transcript says not "microcosm," but "microchasm." And that's what AIG has proved to be, a money pit of gaping proportions.
First Published: March 7, 2009: 1:18 PM ET