They sold guarantees on the purchase of toxic waste, i.e. securitized liar loans. They called it insurance. And for that service, they charged a lot of fees up front. This generated enormous profits, up front, which allowed them to pay enormous bonuses -- bonuses that were, by the way, also facilitated by accounting fraud. And so it was that AIG and all their higher-level employees got very, very rich. Problem was, they had guaranteed hundreds of billions of dollars worth of this toxic waste -- all these packaged and securitized liars' loans.
As has already been described, these toxic-waste liars' loans are going to mean enormous losses, as housing values and wages continue to fall, and foreclosures continue to mount. So the problem for AIG is that they are legally obligated to pay their guarantees on these enormous losses. As a result they were about to go bankrupt -- except that to-big-to-fail corporations in America can't be allowed to do that. Therefore, taxpayers had to come to their rescue.
And so it was that under Secretary Geithner, and under Secretary Paulson before him, our government took $5 billion dollars in U.S. taxpayer money, and sent it to a huge Swiss Bank called UBS, which had purchased a lot of this toxic waste and demanded that AIG pay off on its insurance promise to compensate buyers of these junk securities if they went bad, i.e. lost value. Perversely, we did this at the same time when that bank was defrauding American taxpayers and our government was in the process of bringing a criminal case against them! We eventually got them to pay a $780 million fine, but wait, we just gave them $5 billion. So, the taxpayers of America paid the fine of a Swiss Bank. And why are we bailing out somebody who is defrauding us?
For more on AIG's insurance obligations and payouts (using taxpayer money) to banks like UBS, go to: http://www.dailykos.com/story/2009/3/5/11129/31152/953/704855
So why are the bankers who created this mess still calling the shots?
And why did Obama fire the president of GM but avoid firing the heads of all these banks?
There are two reasons. One, the regulators are much closer to the bankers than to the executives at GM. The regulators are, after all, from the banking industry. Naturally they have a lot of sympathy with their former colleagues.
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