The Backdoor Bailout Backlash

The bonuses paid to AIG executives from the insurance firm’s bailout fund have become a national outrage, and with good reason. Members of AIG’s financial-products division—the unit that sold more derivatives than the company could insure, bringing it to its knees—were essentially rewarded for their failures with $160 million in “retention” bonuses. When I went to Manhattan’s Financial District on March 20 to talk to people about AIG, the public’s anger and disbelief was palpable. Everyone from financial workers to street preachers seemed fed up. For example, when I jokingly raised a scenario to interview subjects where AIG executives were waterboarded until they returned their bonuses, few people even flinched. “If that’s possible, it would be a good idea,” one man flatly stated.

On March 23, New York Attorney General Andrew Cuomo announced that nine of the top ten AIG bonus recipients had announced plans to return their bonuses. The news may create a sense that scrutiny of the bailout, however late it might have been applied, is forcing some important reforms. But an arguably greater outrage remains shrouded behind the bonus controversy: AIG’s secret funneling of tens of billions in bailout money to its counterparties, including several foreign banks. “People see that the guys that ruined AIG are getting paid more money, and that creates outrage,” investment-research specialist Porter Stansberry told Reuters. “If you want to be outraged, be outraged that the counterparties got paid out full value.”

During testimony before the Senate Banking Committee on March 6, Federal Reserve Vice Chairman Donald Kohn stonewalled senators when they demanded he identify the institutions that reaped money from the bailout of AIG. “I would be very concerned that if we gave out the names, people wouldn’t want to do business with AIG,” Kohn declared. But by March 15, congressional pressure had become so overwhelming that AIG was compelled to release the names of its counterparties. They included French bank Société Générale, which received $11.9 billion; Germany’s Deutsche Bank ($11.8 billion); and the UK’s Barclays, which took $8.5 billion. In effect, US taxpayers were unknowingly tapped for $20 billion in foreign aid to companies that exploited regulatory loopholes.

The largest recipient of AIG bailout money was Goldman Sachs, which received a cool $13 billion. AIG’s whopping transfer to Goldman is curious considering Goldman’s claim that it required no federal assistance because its bets were properly hedged. Further, the firm had already received $10 billion in TARP money and was sitting on $100 billion in cash. So why did it accept $13 billion more? And why was Goldman paid back at 100 cents on the dollar for its risky gambits when investors in General Motors were asked to take a “haircut,” or a drastically reduced rate of compensation for their losses? Could the answer lie in Goldman’s government connections?

On September 15, when then-NY Fed official Timothy Geithner and then-Treasury Secretary Henry Paulson met to mull bailing out AIG, Goldman Sachs CEO Lloyd Blankfein was the only Wall Street executive they consulted. (Despite The New York Times’ reporting of Blankfein’s participation in the meeting, Goldman’s CFO denies discussions took place between Blankfein and Paulson.) Paulson was a former Goldman executive himself; as CEO in 2005 and 2006, he orchestrated many of the firm’s risky endeavors with AIG’s financial-products division. Though details of the meeting remain sparse, its outcome is now clear: With  Goldman’s top gun by his side, Paulson arranged to cover his former company’s losses with federal welfare.

So was AIG just a conduit for Goldman? In the words of Eliot Spitzer, “The AIG bailout has been a way to hide an enormous second round of cash to the same group that had received TARP money already.”

Financial-industry professionals I spoke to on Wall Street were unsurprised by news of Goldman’s backdoor bailout. “At the end of the day, Hank Paulson was there [at the meeting on AIG’s bailout], so obviously he was going to take care of Goldman Sachs and his people there,” one financial consultant remarked. “If there’s one corporate entity that everyone feels gets away clean,” said a trader taking a cigarette break, “it’s Goldman because they have people in all the right places.”

Indeed, Goldman’s penetration of government is so extensive it’s difficult to monitor. Company alumni like Geithner are nationally known, but how many Americans are familiar with Geithner’s chief of staff, Mark Patterson, the former Washington lobbyist for Goldman. Ex-Goldman CEO John Thain’s ruinous tenure at Merrill Lynch—highlighted by his $1.2 million office redecoration—is also well documented, but who remembers Thain’s revelation of his intimate relationship with Geithner? “Sometimes I talk to [Geithner] multiple times a day,” Thain told Portfolio’s Gary Weiss. And how many Americans are familiar with Neel Kashkari, a 35-year-old former Goldman executive installed as the government’s de facto bailout chief (and also apparently a big fan of AC/DC)? For over ten years, the Department of Treasury has been a club for Goldman’s best and brightest.

With public ire over AIG’s bonuses shifting slowly to the backdoor bailout of the company’s counterparties, Goldman is signaling that it may return at least a portion of the federal welfare it has received. According to The New York Times’ Andrew Ross Sorkin, the firm is desperate to “put an end to the whisper campaigns about ties between it and Mr. Paulson (and Timothy F. Geithner, too, for that matter).”

Until then, the uproar may grow. And it will be fueled in part by people like those I met on my trip to the Financial District: stressed-out traders, overworked blue-collar laborers, and the Yale graduate and former Wall Street credit analyst forced into a job as the marketing director of a “very classy” strip club. “It’s pretty fucking demeaning to be having to talk to these people who I used to work around,” he complained to me, “and now I’m trying to sell them a night of entertainment for them and their clients.”

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