Latest Financial Crisis Conspiracy Theory – AIG Bailout Is All A Front, Maaan!

Back in January we had a look at some of the silliest conspiracy theories about why the financial crisis happened. There was the one about pop music with regular beats causing it, the one about testosterone causing it, and the one about not saying “Merry Christmas” any more causing it. In the past two years we’ve been presented with the Goldman Sachs conspiracy (though this one comes in a number of forms), “Currency Wars” and the Anglo-Irish ‘Golden Circle’, and that’s just the tip of the conspiracy iceberg.  

Now we can add the bailout of AIG to that list.  

A recent article by the blogger Tyler Durden (think Brad Pitt) from Zero Hedge concerning the unwinding of AIG’s contracts is receiving a lot of attention – even USA Today commented on it. ZH claims the recent announcements by major banks like Bank of America, JP Morgan Chase and Citigroup that they were profitable during the first quarter of this year is a sham, and that the only reason the banks were able to turn a profit was because of some egregiously low pricing from AIG’s financial products arm.  

ZH received a letter from an insider at AIG claiming that the company is unwinding “whole portfolios” rather than single deals. For the major banks, this allowed them to pick up a massive number of AIG’s assets for pennies on the dollar. It also allowed them to run to the media with profits in hand. The stock market reacted accordingly and went on a mini bull-run.  

The rational explanation is that what we’re seeing is a fire sale. AIG is doing whatever it can to wipe assets off its balance sheets in a semi-orderly fashion. In fact, that was the reason the government decided to bailout AIG rather than Lehman Brothers. The conventional wisdom was that AIG couldn’t be allowed to fail, as it was simply too big and too diverse. The government agreed to step in and help AIG pursue an orderly sale of its assets; this, it said, would mitigate the damage to the financial system. Taxpayers – considering they understood very little on credit default swaps and collateralized debt obligations – accepted the government’s explanation and said ‘get on with it’.  

Enter the conspiracy theorists. If the government is willing to allow AIG to perform a fire sale on its assets, why then did it allow the insurance giant to use taxpayer money to pay full value to its counterparties? Shouldn’t these counterparties have suffered some sort of loss, considering they also played a major role in the financial circus that brought AIG to its knees? Why, now, are many of these very same counterparties allowed privileged access to AIG’s vault?  

The conspiracy theorists say it’s all part of some larger plot – as any good conspiracy theory does. They point out that the ties between Washington and Wall Street run deep (cue the Goldman Sachs conspiracy). The government knew perfectly well what would happen with the money it dumped into the AIG garbage disposal – it would be spat out onto the balance sheets of the major banks. The conspiracy theorists say the furor over the bonuses being handed out to AIG executives is simply a ‘straw-man’ distraction to the truly massive bonuses that were awarded to the Wall Street firms. Keep the population focused on the $150 million or so given to AIG executives, so they won’t notice the $100 billion handed out to major banks. Eliot Spitzer lays it out. 

The undercurrent to the ZH article is that AIG has become nothing more than a funnel for the government to dump taxpayer money into the pockets of greedy Wall Street executives. And because the details of what’s actually going on between the government, AIG, and Wall Street are so murky, articles like the one by ZH are gaining traction. Furthermore, as Simon Johnson, the former chief economist at the IMF, points out in an article in the Atlantic, it’s starting to appear that the banks are the ones actually dictating the terms to the government. This simply adds to the belief that the recent cash injection through AIG to the nation’s major banks looks more like a gambler paying off his loan shark than a way to avoid a financial meltdown.   

Conspiracy theories thrive on ambiguity, contradictions and, most importantly, tight-lipped government agencies. Area 51 is probably the most potent example of this, and the notorious secrecy surrounding Dick Cheney and company laid the foundations of the 9/11 conspiracy theory catalogue. The current economic crisis is no different. The complexity of the financial instruments involved in the subprime meltdown and intricacies of the modern financial system certainly aren’t helping, but the government’s inability to make clear exactly what’s happening is, without question, adding fuel to the conspiratorial fire.

Posted by Brady Yauch in Hot Money | April 8, 2009 11:59AM |