The Bailout of Greece – AIG & Credit Default Swaps – Are US Taxpayers On The Hook Again?

Please, tell me it isn’t so!

First, in case you missed it, the country of Greece is dead butt broke ….. flat busted.  The BBC has announced that Greece will receive an initial bailout of $146 billion US dollars from various parties, , while the Euro Zone sets up a $1 trillion US dollar bailout fund. , .

Reminds me of AIG – really – an intial bailout – with a huge amount of “follow-on” cash a few weeks later. 

The initial cost to US Taxpayers is being estimated at something between $56 billion and $170 billion dollars. The estimates are based on the fact that the IMF or International Monetary Fund, will contribute $284 billion to start and may commit up to $1 trillion dollars.

At present the United States Taxpayer provides $54 billion annually in IMF funds.  The US pays, at a minimum, 17% of the IMF’s debts. 17% of $1 trillion is $170 billion.

Wait, this isn’t the worst of it.

The American Taxpayer maybe assuming the entire national debt of Greece.

Sounds crazy doesn’t it? I hope to heck it is crazy and not true. America simply can’t afford it!

AIG and the Greek Bailout

Enter AIG, the former international insurance giant currently owned by the American Taxpayer, thanks to the US Government and the US Government’s bailout programs.

AIG, American Internation Group, the international insurance giant was “nationalized” in September 2008 and given an initial infusion of $85 billion in taxpayer cash.

Additional taxpayer cash was provided to AIG and at present the total amount “fronted to AIG” is at least $135 billion taxpapaer dollars.                                               

The amount “fronted” to AIG may be in excess of $180 million, it is hard to tell because the US taxpayer has not had a recent accounting of how much additional cash has been funnelled to AIG.

AIG used much of the money to pay off French & German banks who had invested in “toxic mortgage securities” or related securities sold by AIG called “Credit Default Swaps” or CDS.

In the initial payoff, French and German banks received $36 billion in US taxpayer funds, paid through AIG by the Obama Administration. The payout to the French and German banks took place in March 2009 during the first 3 months of the Obama Administration under the direction of Obama Treasury Secretary Geithner. 

Almost $60 billion dollars of the initial US Taxpayer payout to AIG went to foreign banks.

You might remember that Neil Barofsky, the Special Inspector General for the $700 billion financial bailout, reported to Congress that the Obama Administration had mismanaged the intial payouts, resulting in billions more than necessary being paid out to foreign and US banks and brokerages.

The whole issue of paying out US Taxpayer dollars in satisfaction of AIG’s debt was so “mucked up” that current Treasury Secretary Geithner first refused to disclose who got what and when, in the deals. Inspector General Barofsky faulted Secretary Geitner and the Federal Reserve for refusing at first to reveal which banks had received the billions of American taxpayer dollars supposedly intended to save AIG. Geithner and the Fed released the banks’ names and the amount of their payoffs only after the American Public demanded greater transparency and the US Congress responded to that demand.        

Is AIG at it again?

The international press has reported on how President Obama is pushing for a bailout of Greece’s new Socialist Government.

For years the Socialists in Greece’s Government have fudged the numbers concerning the Greek National Debt. “To keep within the monetary guidelines of the European Union, the government of Greece has been found to have consistently and deliberately misreported, in other words falsified, the country’s official economic statistics.[17][18] In the beginning of 2010, it was discovered that Greece had paid Goldman Sachs and other banks hundreds of millions of dollars in fees (CDS fees or “premiums”)  arranging transactions that hid the actual level of Greek borrowing.[19] The purpose of these deals …. was to enable them to spend beyond their means, while hiding the actual deficit from the EU overseers.[20].

“Speculation in the CDS market began after 4 October 2009, as the Greek Socialists celebrated their election victory. Two weeks later the newly-elected government informed its Euro-partners that the deficit for 2009 was going to lie at 12.7 percent of economic performance (GDP).”  “The new estimate for the budget deficit called onto the stage the first hedge funds, reports a London CDS-dealer working for a large American bank.

Speculation in the CDS market? 

Now the Eurpoean Press is reporting that AIG is selling CDS or Credit Default Swaps once again. Only this time, AIG is “insuring” Greece’s debt with the instruments not “toxic mortgage securities”.

In any case, the CDS-wager has gone up because more and more true-believers in the Greek State have come to feel the need to insure their holdings. This rapidly-rising demand for insurance has been set off by the escalation of the debt crisis. But it is past Greek governments that have to answer in the first place for the exhausted budget situation. The higher demand for insolvency protection that has driven up the CDS price follows from the evidently poorer estimation of Greek credit-worthiness.”

Greek banks as insurers
On the other hand, whoever expected Greece’s rescue by Europartner countries would have had to position himself on the CDS market as an insurer, that is, as a seller of payment protection. The take in premiums from insurance protection sold provides increased revenue. But it’s on the seller-side that the weak points of the CDS market become evident. It’s still unclear who has sold insurance protection for Greece. In one study analysts from the major French bank BNP Paribas referred to market-rumors that Greek banks had insured a large sum by CDS. If this is correct, then the payment protection they have provided is worth nothing. Greek banks hold State debt of over 40 billion euros. This corresponds roughly to the entire amount of equity in the Greek credit market. A bankruptcy of the State would lead to a collapse of the banking system.”

“London investment bankers name AIG as a further CDS-seller. That company had to be nationalized during the financial crisis due to its having written insolvency insurance on American mortgages. This debt-load would have led to the collapse of the world’s biggest insurer. Prior to the financial crisis AIG is said to have widely held State credit-risk. If yet-larger insurance positions on Greece exist, then the American government would have a strong interest in preventing that country’s insolvency.”

Read the full article in Germany’s Frankfurter Allgemeine Zeitung GmbH, the German equivalent of the Wall Street Journal. The original article, in German, can be read here:

The english translation here: 

What might this mean to the US taxpayer? Well that will depend on several things.

First, Greece’s total National Debt is a bit of a mystery. The Politicans in Greece have been fudging the numbers for so long, that it is hard to accurately estimate the total debt and without knowing the total debt, it is nearly impossible to estimate how much may have been “insured” by purchasing CDS and how much of the CDS business may have passed through AIG. 

Surprisingly similar to the “financial collapse” isn’t it? 

A Greek Debt bubble, insured through AIG with CDS.

What is clear is this, if AIG is selling CDS to “insure” the Greek National Debt, the American people have not been told exactly why this is being done, nor have we been told how much we are on the hook for and who is making a buck off the deal. Two of the “usual suspects” are on the sceen, AIG & Goldman Sachs, two large and powerful players in the international financial scene and Democratic to their cores.   You can bet on one thing, the average Jack or Jill Taxpayer isn’t going to make a dime on these dealings.    

Meanwhile the Greeks Socialists and Anarchists are rioting in the streets over proposed and desperately needed budget cuts and the US is agreeing to bailout Greek workers while US workers run out of unemployment benefits.

Contact Your Congressperson today and insist that they investigate these reports. The US Taxpayer should not be “on the hook” for the Socialist Greek Government’s mismanagement of the Greek economy. Lets put our house in order before we try to prop up foreign Socialists Governments and their failed welfare states. 

Lets practice saying “NO” to California by saying “NO” to Greece first!

See the March 2009 post on AIG’s collapse:

2 Responses

  1. Very good Info. thanks…townhall blogger..ROB-RAGE

  2. Reasonable article but it rather misses the main point. The Greek Debt crisis is largely manufactured. Greece has been carrying a real debt of at or around 100% of GDP for decades.

    The problem has reared its head now as a direct result of the de-regulation of the markets and the ability to sell CDS independently of the underlying Bond (in this case). Speculation in CDS drove the interest rate on Greek government bonds up. The separation of Bond and related CDS makes speculation on CDS (in large enough quantities) a self-fulfilling prophesy. The CDS that are a bet on defaulting actual ensure the default happens.

    As you say in the article no-one knows the value of CDS issued by AIG on Greek government debt – it could in theory be greater than the debt itself.

    To Clarify – the US government is therefore, not on the hook for the Greek debt – but for the bets taken by AIG on the debt. That it might prove cheaper to settle off Greece’s debt that cover AIG’s position is hardly the fault of the Greeks.

    McAuleysWorld: A bit of semantics I’d suggest, “The US government is therefore, not on the hook for the Greek debt – but for the bets taken by AIG on the debt.”, which means that the US government maybe on the hook for some unknown portion of the Greek debt and as the Government’s money is money that is eventually taken from the U.S. taxpayer, the U.S. taxpayer is on the hook.

    I understand your other points but will offer two additional observations: A). You minimize the danger of spending to 100% of GDP and the Greeks, by all accounts spent beyond that and that fact is directly and immediately “the fault of the Greeks”. B). The “disconnect between the CDS and the underlying “instrument”, whether it be a “Bond” or in the instance in the US financial/mortgage crash, the “securitized mortgages/credit card/auto loans” has always existed. The CDS market never required direct involvment of the “debtor” and has always involved what is referred to as “naked credit default swaps”. Since the invention of the CDS in the early 1990’s, CDS have never been “regulated” as a financial devise, insurance contract or commodity. “Deregulation” is a false “bogeyman” here. The majority of the CDS market has always revolved around “naked” transactions. CDS were not really invented to provide “insurance” protection desired by the purchaser, but were instead created to provide an additional opportunity for “speculators” to play in a new market. The “bailout” of Greece, like the bailout of AIG, Freddie Mac & Fannie Mae, was politically motivated. The currently suggested “financial reform & regulation” does absolutely nothing to change the relevant rules. Fannie, Freddie, AIG and CDS will go untouched under the suggested changes.

    The “naked trading” in CDS really isn’t very different than the naked trading of “stocks” and much of the gains in the DJIA over the last 3 decades had little to do with PE ratios but was the result of the inflation of stock prices directly related to market speculation. Thus we have seen the inflation of stock prices from 10X PE ratios in the 1980’s to 20X, 30X and even 40X PE just prior to the financial collapse.

    GRAPHING THE GROWTH FROM 10X in 1980 to over 40X in 2000.

    Your point concerning the potential that the total value of Greek Debt CDS exceeding the actual Greek Debt is a very interesting one. US taxpayers are still waiting for an accounting on the actual underlying value of the “toxic securities” backed by AIG’s CDS. Will the American taxpayer ever know if AIG “insured” the same “naked” security once or 10 times over? Something that would be prohibited under U.S. Federal Law if the CDS were a true insurance contract!

    In closing, my main point (you may have your point – but you falsely assume your point is my point) – is that if AIG, a US Government owned entitty is selling CDS on the Greek National debt and Greece defaults (your comments would suggest the collapse is inevitable as a “self fullfilling prophecy” – because the “default” is cheaper than paying the underlying bonds) then the US taxpayer will be “on the hook”.

    Just how many American and Greek politicians will “cash in” on a default through their investments in the “never regulated” CDS market? Who knows? Jack and Jill Taxpayer will probably never know, however, they will get stuck with the bill.

    Again, the beginning of the problem lies with the Greek Government’s reckless spending – the end of the problem maybe American Taxpayers holding the bill.

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