The Dirty Secret of the A.I.G Bailout

All this public outrage about the $160M of bonuses is a nice entertainment, so people can get emotional and angry about something concrete. This is OK to the extent that it will put some extra pressure on the government and politicians to deal with the banks and AIG in a more responsible and aggressive way. However, this is peanuts, and a diversion from the much bigger problem here; which is about the way the $160B is (and additional $30B is to be) spent by the A.I.G under the watch of this and the previous Treasury (think, Paulson).

It is not secret that much of the taxpayer billions was spent on unwinding bunch of CDS contracts that AIG had with Goldman S. and other Wall St players. It is also known that the total CDS "insurance" liability is about $60-80Trillion, which is about 30X times the size of the underlying mortgage market. What this means is that many of these CDS contracts that A.I.G might be unwinding behind the closed door using the taxpayer money could be, for all we know, a speculative contracts in which the CDS counter party is demanding the payment on an asset it insured but *never owned*. This would be illegal in normal insurance business - think of allowing hundreds of people to take a life insurance on a single persons life - but is legal in the unregulated CDS world (such contracts are called "naked CDS").

That is: the taxpayer's billions may be covering contractual gambling wins of the counter parties, such as Goldman S., not the real losses. If so this would be example of the largest transfer of wealth in the history of the world - from the Main St to the Wall St.

The fact that Treasury did not explicitly annul such "naked" CDS contracts even to this day, and certainly not before pouring billions into A.I.G. "bailout", seems to be the clear case of economic malpractice and may even be the criminal malpractice if serious investigation of the circumstances under which the initial bailout of the A.I.G. CDS counter parties were undertaken. This is much more important question and something the media should concentrate on. The $160M of bonuses is peanuts and surely an outrage, but it should not be a distraction from the real DIRTY SECRET behind the A.I.G. bailout.