Here’s another $25 billion giveaway to AIG.  Notice that AIG gets the upside over $25 billion. Does this ever stop?  Bloomberg reports.
American International Group Inc., the insurer bailed out by the U.S. government, agreed to hand over stakes in two overseas units to the Federal Reserve Bank of New York to reduce its central-bank debt [...]

As understandable as the Congressional response to the AIG bonuses was, the reality is that this does create a number of disturbing precedents. We have a stupid Congress mindlessly lashing out to compensate for its own complicity in political corruption (Congress has long been a major recipient of Wall Street largesse, including AIG) [...]

Marshall Auerback here. I have a few thoughts about AIG and what it means politically and for American banks.

The episode may have already made it much harder to get any support in Congress for bailing out more banks in the future. The Obama administration, and some outside experts, believe the economy will only get worse if big banks start to fail. Which means the worst damage that AIG’s adventures in high finance have caused might be yet to come.

We had a broadly similar type of situation in 1994, and as Lawrence Summers was one of the key actors, it is worth considering the episode in details, as recounted in “The New Republic“

This video from the Charlie Rose show should give one a fairly complete view of most of the relevant finance and political issues surrounding the AIG situation. (hat tip Calculated Risk)

Participants include bank analyst Meredith Whitney and Gretchen Morgenson of the NY Times, and Carol Loomis of Fortune. Why is Hank Greenberg in this panel? It seems incongruous since most of these problems happened while he was the head of AIG. Very strange.

This comes via the website The Agonist (Hat tip Scott).  I have bolded the important bits:
So what are AIG’s arguments for making these bonus payments?

All 450 employees of AIG in London, where the derivatives contracts were booked and managed, signed retention contracts at the request of management in early 2008. This was at a time [...]

The AIG employees who are the subject of so much venom because they have received massive bonuses while their organizatio is being propped up by $170 billion in taxpayer money are not even in the United States. They are in London.

Back on March 6th, I noted that the nationalized insurance company AIG had settled Credit Default Swaps contracts with a number of counterparties at the top of the market. In effect, AIG was offering a hidden subsidy to its counterparties by settling the contracts and exchanging collateral for money at inflated prices.

The large bonuses at AIG have sparked yet another wave of revulsion amongst American taxpeayers. And rightfully so. This company has cost taxpayers $170 billion and counting and yet the bonuses of the same individuals complicit in the losses is still to be paid due to contractual obligation. While Ben Bernanke, Larry Summers and others have expressed their contempt for this state of affairs, I suspect there will be consequences down the line.

Don Kohn’s testimony before the Senate Banking committee was so outrageous that I feel compelled to re-post the first paragraphs of this article from Willem Buiter about the moral hazard it represents. Basically, the U.S. government cancelled a bunch of credit default swap contracts at sweetheart prices with the very financial institutions who got us into this mess. Shambolic, I say.

It is this unbelievable in-the-pocket-of-the-finance-industry mentality that is going to be the ruin f the U.S. banking industry. This type of thing must be condemned in the harshest of terms. The link is below as is an associated link on Jim Bunning giving Kohn a working over.

A massive $61.7 billion loss for AIG – that is the quarterly loss for the insurance giant, a record for the world. That comes to a loss of $465 $465,000 every minute of every day in that quarter. The full-year loss comes in over $100 billion.

Nevertheless, the U.S. Government sees AIG as a systemically-important company due to its involvement in the Credit Default Swaps market. Therefore, it has decided to up the ante and continue providing this company with tens of billions more in liquidity.

As I have indicated in a previous post, bailouts are the worst of all potential policy responses. These are large sums that I believe the American people will not support. Either Americans are an incredibly docile lot or we are about to see a sea change in taxpayers’ attitude.

Read below for the details of the losses and bailout.