The Hollow Men of the AIG Debacle

At this very moment, throughout this great land of ours, ordinary people dwelling far away from the chaotic nonsense known as Wall Street are probably wondering how so much money could be wasted by so few people — people who, in fact, live in another country. And when the very same people appear to be rewarded for putting all of us in deep schmutz, the folks who pay all the invoices in the country have a right to ask why. And they do. How such self-described masters of the CDS universe went from Latin lovers to limp losers in one fell swoop is truly amazing.

Understandably, it is now practically impossible for American parents to make a case to their children that crime does not pay, and that they should work to earn a decent living. On the contrary, the obvious lesson from the AIG debacle is that crime really does pay, at least the sort of metaphysical crime that leads to recessions, depressions and revolutions. Anyone with a pulse, a lawyer and an MBA can now become the millionaire next door, and one day, who knows — maybe a cabinet officer. Iraq had no weapons of mass destruction, but AIG did all right, or should we call them weapons of mass confusion. Mr. Liddy says his hands were tied. Indeed they were tied, most likely around the tubular organ with which he presumably thinks.

It would be counter-productive to point a finger at the recipients of this undeserved largess, for that would amount to accusing bank-robbers of robbing banks. Such people were just doing their job. For my part, I want to forgive them, for they knew not what they were doing. If structured securities were bought three years ago, they had to have been priced at the time. Therefore, what we now face is not a valuation crisis, but a memory crisis. In essence, the Fed is suffering from an acute and incurable case of Alzheimer’s disease. This is not hysteria, but simply an attempt to defend the interests of the much maligned American people without passion or prejudice. I believe my client has a case.

We heard from Chairman Bernanke that AIG was too big to fail, but that Lehman was not. We are supposed to believe that a bankruptcy of this monumental house of cards would have destabilized the financial system, when in fact it would have destabilized Goldman Sachs and Soc Gen, just to name two of the irresponsible children that Ben would not spank. It is true, though, that Soc Gen did need around $6 billion to make up for Jerome Kerviel’s purported fraud. With systems like that, who needs risk? Somehow, the American people swallowed this hogwash whole, perhaps because most of them would rather not smell the stinking truth before Sunday dinner. As Clint Eastwood once said “Dyin’ ain’t much of a livin’, boy!”

AIG is internationally renowned, not for the sophistication of its underwriting or risk management techniques, but rather for the ease with which it reneges on bona fide contracts. AIG’s credibility in contract violation is slightly lower than the KKK’s in human rights violation. This current episode is just one more reason why AIG should have gone bankrupt. The entire apparatus of the bankruptcy code, something that has worked for centuries in all parts of the globe, has been undermined by those wet dreams labeled “credit” default swaps. Is there another kind? ISDA rules were manipulated in plain view of everyone to allow firms like AIG to profit by playing this game with zero capital and even less oversight. Finally, in a supreme act of chutzpah, the company tells us that a motley collection of financial Clousots were “the best and the brightest.” Frankly, I’m not afraid this is false. I’m afraid this is true.

Although on an absolute scale, the amount involved (10 bps) in the bonus pool, would not make a dent in the bailout package, its symbolism is far greater and threatens to snowball into a media circus capable of derailing the President’s otherwise reasonable attempts at cleaning up this mess. Much more troubling, however, is the betrayal of the people’s will and the usurpation of power that this double-cross signifies, not to mention that none of this cash would have to be paid if AIG had been treated as any of us mortals would have been in the same situation.

In the endless days of its endless nightmare, AIG is staring into the abyss and must come face to face with its own Götterdämmerung. More than anyone else in finance, it has learned that a lie is more powerful than truth, more lasting than love, more precious than cash.

Regrettably, this is the way AIG will soon end, not with a bonus, but a whimper!

— Sylvain Raynes