As much as $37 billion in federal bailout loans made to American International Group Inc. has gone to investment banks that include Goldman Sachs Group Inc., the firm U.S. Treasury Secretary Henry Paulson used to run.
Without the government money that Paulson endorsed, AIG, the country's biggest insurer by assets, might have filed for bankruptcy, and Goldman, Merrill Lynch & Co., Morgan Stanley, Deutsche Bank AG and other firms could have become some of its biggest creditors.
The payments show how bailouts engineered by Paulson and Federal Reserve Chairman Ben Bernanke are beginning to shift money to Wall Street firms involved in subprime mortgage trading. As Congress was voting down a broader $700 billion bailout, the credit line AIG has tapped is one indication of how it might work.
Paulson's successor at Goldman, Lloyd Blankfein, was the only CEO at a meeting Sept. 15 at the New York Federal Reserve Bank at which the troubles at AIG were discussed, although representatives of other firms were present, a Fed spokesman said. The same day, after its credit rating was downgraded, AIG needed to pay collateral calls from Wall Street firms and others because the value of its holdings had declined, Standard & Poor's said in a report that evening. So the next day, AIG began borrowing money - $14 billion - from the Fed and continued borrowing for three more days, receiving loans totaling $37 billion, it disclosed in a financial filing on Sept. 26.
The money is changing hands because AIG provided $441 billion in backing for Wall Street trades involving creditdefault swaps, or transactions in which one party agrees to pay another to accept the risk of default. Those bets are packaged into larger securities called synthetic collateralized debt obligations (CDOs). AIG's business was to insure the top-rated, safest part of those CDOs, also known as supersenior, from default.
An AIG bankruptcy would have forced these counterparties to stand in line with other creditors and wait for perhaps years to be paid through the courts.
The Fed's loans to AIG were followed by Paulson's and Bernanke's proposal of the $700 billion package to buy mortgage assets. Although Paulson originally demanded the authority to buy any asset without judicial or administrative oversight, Congress has pledged to rein in the Treasury secretary's power.