The reason that taxpayers have had to prop up AIG to the tune of $173 billion is that AIG is now basically a conduit—it owes money to so many other companies that the cash just pours right through. If AIG doesn't pay its counterparties—the entities on other end of its bad bets on the subprime mortgage market, the counterparties might go belly-up, too. That's why the bailout of AIG is sometimes referred to as a "backdoor bailout" for other companies. The people and companies on the receiving end of the "backdoor bailout" are AIG's counterparties, and so far, the Treasury and the Fed have been keeping their names secret. Now the Project on Government Oversight (POGO) is trying to change that.
On Thursday, Danielle Brian, POGO's executive director, wrote to Treasury Secretary Timothy Geithner and Fed Chairman Ben Bernanke warning that "the government's unprecedented effort to rescue the American International Group (AIG) from collapse has been marred by a lack of disclosure and a troubling appearance of favoritism toward Goldman Sachs, one of AIG's most prominent counterparties." Former Treasury Secretary Henry Paulson was Goldman's CEO. The department's assistant secretary in charge of the bailout, Neil Kashkari, and chief of staff, Mark Patterson, among others, are also former Goldman employees. "By withholding crucial details about Goldman Sachs and the other counterparties to AIG, you have given the public ample reason to question the integrity of the government's decisions related to the bailout," Brian wrote.
They may have kept the counterparty list at least partially secret so far (the New York Times and the Wall Street Journal have reported partial lists), but the Fed and the Treasury won't be able to hide the truth much longer, Michael Smallberg, an investigator with POGO, told Mother Jones on Friday. "With members of Congress from both sides of the aisle asking for the list, they'll only be able to avoid these questions for a limited amount of time," Smallberg said. He emphasized that since partial lists of counterparties had already been leaked, releasing a full list would correct the current, limited record.
One of the government's reasons for not releasing the names is its claim that counterparties were promised confidentiality as part of the deals they struck with post-bailout AIG. But Smallberg doesn't buy that argument. With a politically-fraught issue like the AIG bailout, "It was an unrealistic and unreasonable expectation that this would remain confidential," he says. And while there has been speculation that the larger economy might be harmed if a full list was released (because some companies may be revealed to be weaker and more dependent on AIG than was previously known), Smallberg says he "finds it hard to believe that release of the names is going to have a catastrophic effect on financial markets." The bottom line, Smallberg says, is that while the Fed was set up as a somewhat independent institution, its growing entanglement with the federal government and growing use of the taxpayers' money means "it's no longer acceptable for them to operate with the same level of opacity." Time for Ben Bernanke to wake up and smell the transparency.