Ben Bernanke is fed up and he’s not going to take it any more.
In a rare interview on CBS’s “60 Minutes” news program – the first such TV appearance by a sitting Fed chief in 22 years – the world’s most powerful central banker excoriated the serial bailout-seeker, American International Group, for flunking the integrity test.
“Let me just first say that – of all the events and all of the things we’ve done in the last 18 months, the single one that makes me the angriest, that gives me the most angst, is the intervention with AIG… I slammed the phone more than a few times on discussing AIG.”
The most costly government rescue since the subprime crisis began is fast becoming one of the most infuriating for millions of Americans, from Ben Bernanke right on down.
The whopping price tag of the AIG bailout aside ($170 billion), there's the thorny question of where all the money went.
The answer, revealed at the weekend, is not to everyone's liking; especially if you happen to be an American taxpayer.
It turns out that a significant chunk of the initial $85 billion lifeline extended to AIG last September (the first of four such loan packages) ended up on this side of the Atlantic, in European banks.
AIG divulged on Sunday that from September to December 2008 it parceled out more than $75 billion in contractual obligations to a litany of banks in the US and abroad, as well as to municipalities in the US states of California, Hawaii, Virginia and Ohio.
The payments to US banking behemoths such as Goldman Sachs, Merrill Lynch and Citigroup are hardly likely to arouse much sympathy among ordinary citizens. But at least, you might argue, it’s a case of US taxpayer money going to US companies.
The same cannot be said of the European banks. From the vantage of Main Street, USA, the billions shifted into these banks’ accounts amounts to a US federal bailout, courtesy of the American taxpayers who now own 80% of AIG.
The transatlantic tributaries of AIG’s operations have carried bailout cash to some of the biggest names in European banking: Société Générale (almost 12 billion dollars); Deutsche Bank (11.8 billion); BNP Paribas (4.9 billion); and Barclays (7 billion).
A sizeable portion of the cash was paid out under a contractual arrangement known as credit default swaps. That is just fancy financial jargon for a kind of insurance contract that banks and companies buy in order to buffer themselves against potential losses from soured assets – in this case, primarily mortgage-backed securities.
AIG only released the names of the beneficiaries after putting up lots of resistance; but in the end, pressure from Main Street, and Congress, tipped the balance.
In AIG’s defence, it had no choice but to honour these ‘CDS’ contracts. Banks were only looking to cover their own backs after the collapse in housing prices and rising defaults turned mortgage-backed securities into “toxic” assets.
The only recourse?
But the real problem is that AIG committed itself over its head. It allegedly lacked the cash to honor its swap obligations. The government bailout money became its only recourse.
Compounding AIG’s image problem is a parallel controversy involving $165 million in bonuses that AIG says it is contractually obligated to pay out. The company’s vowed, however, to downsize its bonuses for the coming year and tie future rewards more closely to performance.
But much of this will strike the ordinary Joe as just so much legal rigmarole that ignores the painful realities of a recession that’s hurting millions.
Ben Bernanke’s anger over the AIG fiasco is probably an honest expression of “working-man’s indignation” from a man who once waited tables to help pay his way through Harvard University.
“The era of this high living, this is over now,” Bernanke said.
We live in hope.