BY: NCVIKING

As politicians assassinate people about the unjustified bonuses crook executives are taking that everyone knew about, the public may be distracted on a much bigger story. AIG disclosed on Sunday that of the $175 billion dollars given to it by the Feds, $100 billion left the company to other banks, financial institutions and municipalities. The company was essentially used as a conduit for bailout money. $20 billion has even gone out of the country to European banks and $13 billion to Goldman Sachs, who had previously insisted it needed no bailout money.

Here’s what Goldman Sachs said back in September:

NEW YORK (Reuters) – Goldman Sachs Group Inc rejected as “seriously misleading” a published report on Sunday that said the Wall Street bank had as much as $20 billion of exposure to the troubled insurance giant American International Group Inc.

The New York Times had said Goldman was AIG’s largest trading partner, citing six people close to the insurer. It also said a collapse of AIG threatened to leave a hole of as much as $20 billion in Goldman, citing several of the people.

The report contrasted with a Sept 16 comment by David Viniar, Goldman’s chief financial officer, on a conference call with analysts that Goldman’s exposure to AIG was immaterial.

Obviously it did have a great amount of exposure to AIG, but got away with pretending everything was fine. Now Goldman Sachs could say it “didn’t take bailout money” but still get the scratch it needed thanks to the AIG money conduit. This is not criminal (as defined), but a deceptive form of money laundering. The Wall Street Journal puts it bluntly:

The U.S. government is now in the business of distributing foreign aid to offshore financiers, laundered through a once-great American company.

The Washington Times interviewed an analyst who gives an explaination of what transpired:

Jim Rickards, a very knowledgeable financial expert who currently works at Omnis Inc., explained that there is a straightforward economic reason for all this money flowing through AIG to other institutions, but added that this is a huge political problem for the government.

AIG, Rickards said in an e-mail, “had trades with counterparties (Goldman, Deutsche Bank and many others) which, over time, produced paper profits for the counterparties and paper losses for AIG as market prices moved against AIG. In that situation, it is customary (and contractually required) for the losing side (AIG) to pay the winning side (Goldman, others) the amount of the paper profits in cash.”

“This protects the counterparty against the possibility that AIG might not be around to perform when the trade is finally closed out at maturity. The name for this is a ‘margin call’ with margin being the name for AIG’s paper losses which have to be made good,” Rickards said. “So, when the U.S. gave AIG money, the money went right out the door to meet margin calls.”

“AIG was not much more that a conduit for government money which really went to the counterparties. So, in effect, the U.S. was not just bailing out AIG, it was bailing out the counterparties. Many were foreign banks which is part of the outrage,” he said.

So why is this a story? Past Treasury Secretaries Robert Rubin and Hank Paulson were one time employees of Goldman Sachs, who lied about their financial status. Hank Paulson and others likely knew it. And current Treasury Secretary Timothy Geithner arranged the initial bailout of AIG while being advised by only one member of the financial industry, you guessed it: Lloyd Blankfein, chief executive of Goldman. Here is a New York Times editorial from back in December about it:

The revised version of the story sidesteps questions about whether the bailout of A.I.G. — arranged by Mr. Geithner — was influenced by the specific needs of some of the insurer’s counterparties, like Goldman Sachs.

The Times’s Gretchen Morgenson reported that Lloyd Blankfein, the chief executive of Goldman, was the only Wall Street executive at a meeting at the New York Federal Reserve on Sept. 15 to discuss the A.I.G. bailout. A Goldman spokesman said Mr. Blankfein was not there to represent his firm’s interests, but rather that Goldman “engaged” the issue because of the implications to the entire system.

Adding to the opacity, the Fed recently decided to keep confidential one of two reports that it made to Congress on the A.I.G. bailout. If the Fed had not insisted on confidentiality, that report would have been made public.

Mr. Geithner should be asked at his confirmation hearing to explain which firms were threatened by an A.I.G. collapse, in what amounts and how those entanglements justify an ongoing bailout. Mr. Geithner must also explain how such entanglements came to be the norm on his watch. His answers will help shed light on whether he is sufficiently distant from Wall Street to reform a system that has proved catastrophically unstable.

To spin this web even bigger, the ones wagging their fingers with bonus outrage, thus creating the smoke screen, are the very politicians who benefited from big AIG donations. President Obama received $103,000 in AIG campaign contributions and Chris Dodd (D) who is leading the charge was the largest recipient getting $281,400. Let’s also not forget that Republican John McCain was also the fourth largest recipient of AIG contributions. (From Michelle) Fox Business reporter Rich Edson pointed out that during the Senate porkulus negotiations last month, Dodd successfully inserted a teeny, tiny amendment that provided for an “’exception for contractually obligated bonuses agreed on before Feb. 11, 2009,’ which exempts the very AIG bonuses Dodd and others are seeking to tax.” How convenient.

I guess in this case the old adage may ring true –
Where There’s Smoke (screen in this case), There’s Always Fire.

UPDATE

Now Michelle Malkin is rightfully calling this “bonus bru ha ha” what we were calling it several days ago: a smokescreen. Could she be a fan of The Great Illuminator?

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