AIG = Bernie Madoff:
Pressure is mounting on the government to revise its bailout of AIG to ensure that taxpayers are repaid as much as possible of the $170 billion lent to the troubled insurer.
Experts warn we shouldn't expect to get much back.
The problem stems from AIG's obligations to its trading partners. So far, the hobbled insurance giant has honored in full its contracts with U.S. and foreign banks. It's paid out more than $90 billion in taxpayer money to keep some of the biggest names in finance from losing money on bad bets linked to subprime mortgages and other risky assets.
As the cost of the rescue swells, experts says it's becoming harder to envision a scenario in which the government could recoup its full investment. Even though the AIG payouts to major banks have angered critics of the bailout, it might be legally impossible to claw back any of the billions already doled out.
"A contract is a contract," said Russell Walker, a risk management professor at Northwestern University. "That money all went to people who bought protection from AIG."
The government agreed to uphold those contracts when it seized control of American International Group in September. It argued that failing to repay the debts of the globally interconnected company could cause catastrophic losses at big international banks, potentially toppling the financial system.
Scrutiny of AIG's dealings with its trading partners comes after revelations over the weekend that the insurer planned to pay out tens of millions in executive bonuses. President Barack Obama on Monday accused AIG of "recklessness and greed." He pledged to try to block the bonuses, which AIG insisted it's contractually obligated to pay.
Later, White House spokesman Robert Gibbs said the administration would modify the terms of a pending $30 billion bailout installment for AIG to at least recoup the $165 million the bonuses represent. That wouldn't rescind the bonuses, just require AIG to account for them differently.
Obama's aggressive stance toward the AIG bonuses raises the question of whether the government could also pursue the billions paid to AIG's trading partners. Under growing scrutiny from Congress, AIG on Sunday finally identified those trading partners that indirectly benefited the most from its bailout.
Among the largest recipients, Goldman Sachs received $12.9 billion; Merrill Lynch got $6.8 billion. AIG also funneled billions into foreign banks, including $11.8 billion to Germany's Deutsche Bank and $8.5 billion to Britain's Barclays PLC.
Asked if he'd favor trying to see if those AIG contracts could be broken so the government could recover some of those payouts, Rep. Barney Frank, chairman of the House Financial Services Committee, stopped short of endorsing the idea. But he said "that's something that has to be examined."
"I would want to know the consequences of not paying those debts," Frank, D-Mass., told The Associated Press.
Other critics want the government to go further. They say AIG's trading partners should be forced to take less than 100 percent of the value of their derivatives contracts with AIG. They noted that the protection AIG offered — in the form of complex products called credit-default swaps — was unregulated and that AIG's trading partners knew the risks and should have to assume some losses.
"If you're in Las Vegas, and you leave the casino to go play craps with a bunch of people on an alley way, you shouldn't be able to go to the state and ask for your money back," said Barry Ritholtz, a financial analyst and author of "Bailout Nation: How Corrupt Money Shook Wall Street."
No bailout recipient has burned through more taxpayer money than AIG, which is now about 80 percent owned by the government. A 90-year-old insurer, it was listed as recently as last year as the world's 18th largest publicly traded company. Back then, AIG's stock traded for about $40 a share. Today, you can buy one share for just under a buck.
The government has made four separate attempts to save the company, including a $30 billion cash injection two weeks ago. The latest lifeline came as AIG reported a $62 billion fourth-quarter loss, the worst three-month performance in U.S. corporate history.
AIG's dire reality has raised doubts about the government's claim that it will recoup much of its investment in the company.
But wait! There's more! You aren't finished paying:
With few legal options available, the White House may be forced to add millions of dollars in bonus payments to the outstanding debt owed by American International Group.
Earlier Monday, President Barack Obama expressed his outrage over AIG's payment of $165 million in bonuses, and ordered Treasury Secretary Tim Geithner to take all legal measures to block them.
However, sources tell CNBC, that there are few legal options available to the White House.
A U.S. Treasury official said that the Treasury will modify a planned $30 billion capital infusion for AIG to try to recoup hundreds of millions of dollars in controversial bonuses paid by the insurer.
The Treasury is finalizing the terms of its latest rescue package for AIG, announced on March 2, and will attach new provisions to it, the official said. The company was due to pay $165 billion in employee retention bonuses by Sunday to employees of AIG Financial Products, the unit that made bad bets on toxic mortgages and credit default swaps.
The official, who spoke to Reuters on condition of anonymity, said the Treasury was considering several repayment arrangements aimed at giving the money back to taxpayers.
Meanwhile, this may be the tipping point that gets the townspeople out with pitchforks and torches:
A tidal wave of public outrage over bonus payments swamped American International Group yesterday. Hired guards stood watch outside the suburban Connecticut offices of AIG Financial Products, the division whose exotic derivatives brought the insurance giant to the brink of collapse last year. Inside, death threats and angry letters flooded e-mail inboxes. Irate callers lit up the phone lines. Senior managers submitted their resignations. Some employees didn't show up at all.
[snip]
"It's a mob effect," one senior executive said. "It's putting people's lives in danger."
Politicians and the public spent yesterday demanding that AIG rescind payouts that they said rewarded recklessness and greed at a company being bailed out with $170 billion in taxpayer funds. But company officials contend that the uproar is scaring away the very employees who understand AIG Financial Products' complex trades and who are trying to dismantle the division before it further endangers the world's economy.
"It's going to blow up," said a senior Financial Products manager, who spoke on condition of anonymity because he was not authorized to speak for the company. "I have a horrible, horrible, horrible feeling that this is going to end badly."
I do too. And I feel just as badly for the secretaries and the clerks and the people like my former co-worker's son-in-law, who works for AIG as an accountant and just bought a house less than a year ago, as I did for the secretaries and clerks and janitors at Lehman Bros., who shared in little of the company's bonanza and similarly found themselves out on the street. But the plight of these lower-level workers in no way mitigates the need that we as a nation have to see this kind of looting of the national Treasury stopped and these blackmailers put out of business and jailed.
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