To Understand AIG, Follow the Money

By Jim Hoagland
Sunday, March 15, 2009

Larry Summers is as eager a verbal combatant as I know in a town filled with the species. So when the president's in-house economic adviser flees from a direct question put to him by a fellow economist, you have a measure of how dangerous that question is. And of how dangerous this nation's financial crisis has become.

Summers, appearing at the Brookings Institution on Friday, was asked who was actually getting the tons of taxpayer dollars being shoveled into the husk of AIG, the now-shriveled insurance giant. Summers swatted the question away with a rare refusal to explain, spin or even answer.

His caution was a red flag for me because of a different question I have been putting to the random Obama Cabinet secretary or senior official I trip across during this president's baptism by financial fire: Do you sense that the American people are angry about the economic collapse they are enduring, with no end in sight?

A two-step answer almost always comes back: No. Concerned, but not angry. Pause. Not yet.

Choose your image: a ticking time bomb, a pile of kerosene-drenched kindling, an entire people balancing on a precipice. This is how the American public is being portrayed in some private discussions at the top of this understaffed administration. But those cliches may not do justice to the gathering forces of social explosion as unemployment leaps, the stock market buckles and the greed of investment bankers dominates family dinner discussions.

The good news is that the Obama camp thinks it still has time to head off the threat of a significant radicalization of the American body politic. The administration's approach boils down to making the United States a functional social democracy without using that label. You can read the details of stronger safety nets, universal health care, reduced income disparity and, yes, higher taxes in President Obama's budget and stimulus plan. Or if you prefer fluid prose to line items, check out the influential report by Ruy Teixeira, "New Progressive America," recently posted on the Center for American Progress Web site.

Obama won't call this social democracy, of course. Republicans are already exaggerating his spending programs as "socialism," a favorite GOP bogeyman. Why give them more ammunition? Sadly, both sides cloud a needed debate about the nature of and need for an American social democracy -- a far-from-preposterous goal for the 21st century.

But a tipping point for American anger is visible on the horizon, and it may arrive long before President Obama's inoculative, transformational agenda is in place. If the public heeds the Watergate-era advice to Woodward and Bernstein -- "Follow the money" -- the answer to the question about AIG that Summers refused to give may soon be in full view, and rising anger and destructive actions may outrace reform built on persuasion.

The trail of money starts with the $173 billion that the Treasury has spent to bail out AIG. An undetermined but huge chunk of that seems to have been channeled straight into European and other foreign banks to keep them afloat, with no end in sight to that process, and no explanation to Americans. On Friday the Wall Street Journal identified Frankfurt-based Deutsche Bank as one major recipient of the redirected Treasury payments. There are many others, as well as Wall Street firms led by Goldman Sachs.

The international dimension of the Great Meltdown has been clear since then-Treasury Secretary Henry Paulson let it be known that an urgent telephone call from French Finance Minister Christine Lagarde helped force his decision not to let AIG follow Lehman Brothers into bankruptcy in September. Lagarde reportedly warned that AIG's collapse would endanger the world banking system, beginning with the French banks that had bought the toxic credit-default swaps AIG peddled through its hyperactive London marketing arm.

This much is known from AIG's own pre-bailout quarterly reporting, as pointed out by Henny Sender in the Financial Times on March 7: Of the $446 billion in credit insurance that AIG sold, $307 billion of these securities were bought by European banks.

Why? The best guess I hear is that the banks were not buying insurance at all -- they seem never to have diligently asked if AIG could pay off, which it manifestly could not. They were in effect buying a piece of the firm's AAA rating, which enabled the Europeans to inflate artificially their required credit reserves and lend out ever more of their capital for bigger profits -- until the crash came. Or as financial blogger John Carney has put it, the customers were in on the scam.

If that is not the case, the administration needs to make public the facts that refute it. If these reports and suspicions are founded, the administration needs to explain what happened and get in front of what could become destabilizing public anger. International in nature, this crisis can be resolved only by international cooperation. Outbursts of protectionism and anti-foreign fury will add to the uncreative destruction of this crisis.

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