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The White Paper explaining why AIG had to pay the retention bonuses contains the following:
Departures also have regulatory ramifications. As an example, the resignation of the senior managers of AIGFP’s Banque AIG subsidiary would allow the Commission Bancaire, the French banking regulator, to appoint its own designee to step in and manage Banque AIG. Such an appointment would constitute an event of default under Banque AIG’s derivative and structured transactions, including the regulatory capital CDS book ($234 billion notional amount as of December 31, 2008), and potentially cost tens of billions of dollars in unwind costs.
Guess who’s resigning. The WSJ reports that two of Banque AIG’s top managers have resigned. I think we can assume that this isn’t an accident. Do you think they got big bonuses? Reuters reports that some of the top recipients were, according to Andrew Cuomo, “outside the jurisdiction”. Nicely timed, Banque AIG guys, fits right in with whiny Jake DeSantis.
But, just maybe, these Banque AIG guys heard the Gendarmes coming. It turns out the whole Banque AIG deal was only possible because of slippery tactics to evade regulation. The London Independent tells us that AIGFP was not regulated by England’s Financial Services Authority, not the most strict regulator, but better than the Office of Thrift Supervision. The parent, AIG, was “regulated” by the OTS, because it owned a small federal savings bank. That allowed it to form Banque AIG with the approval of the French Commission Bancaire. That enabled AIG to open a branch of Banque AIG in London, because of a rule in the European Union that if one regulator approves a company, the other countries have to accept it. The London branch ran up the enormous losses that brought AIG down.
AIG’s auditors reported in the 2007 AIG 10-K that a "material weakness in internal control over financial reporting related to the AIGFP super senior credit default swap portfolio valuation process and oversight thereof existed" at December 31, 2007. This report was filed at the same time as the Retention Plan went into effect.
What did the runaway executives know about all this, I wonder.
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Hopefully, as this all unravels, there will be indictments for those that perpetrated this historic debacle.
Bonjour les pups. Definitely indictments. The story hasn’t hit the French press here in Paris yet, but should be out tonight or tomorrow morning. There isn’t much patience with bonuses here either. Sarkozy has been forced into making populist utterances, and some of his right-wing coalition have even gone so far as to suggest they be taxed to obliteration to preserve social solidarity, which is something they take seriously here.
Ain’t going to happen. More American’s are in jail than ever before but not the fat cats. Fat cats rule the world. Credit Card Debtors’ prison will soon be a new growth industry.
What AIG wants to retain is the ability to keep its top people out of jail, not to retain its “top talent”, an increasingly oxymoronic phrase except as one of admiration used by today’s Al Capones.
wow. now this explanation is starting to make some sense.
could executives, who only participated in completely clean transactions (possibly a stretch, but bear with me if you will), resign and help trigger this “default event?”
in other words, could the bonuses be bribes not only to the participants in the shady / possibly illegal deal but also to those who are not but are in a position to help bring the house of cards down?
Interesting, the 1st ever online presidential town hall meeting and no coverage here. What a missed opportunity to critique every word Obama says.
Should we rename French fries into Freedom fries again?
-G
My question is would the French really want to be a part of this mess. Suppose for example that we the US government spin AIGFP off as its own company segregating it from the parent and the rest of AIG. Would the French want to come in and deal with the $305 billion in AIGFP CDSs (this figure includes the $234 billion regulatory relief CDS portfolio.) Again the regulatory CDSs basically allowed European banks to keep lower reserves than required by regulation. AIGFP guaranteed to make up shortfalls and this allowed those banks to take those reserves and go out and gamble with them.
Knut, did you happen to see EW’s post on this?
Who knows?
where do these ex-execs go after they leave? Places with or without extradition treaties? ;-P
Hugh, AIG parent guaranteed the obligations of AIGFP.
presumably guarantees of obligations are subject to material adverse change and effect provisions.. it’ll be interesting to see what these are.
AIG, it seems, has for years sought ways of avoiding the reach of regulators. So, the gambit to set up shop in London somehow shields them from regulators in France? The oversight agency in London is apparently quite underfunded and inept. Just the sort of chaps the City approves.
New post upstairs…
Wasn’t the AIGFP branch located in London to escape certain US laws and requirements? I’m sure I have read this somewhere. This seems relevant to us paying out all the losses- Admittedly the parent company was “regulated” by the US, but if subsidiaries are allowed to follow lower Euro standards, seems like they should be on the hook too.
Cue Queen’s Another One Bites The Dust – Joe the Plumber campaigns against EFCA
Not sure this would be an impediment to spinning AIGFP off. Halliburton spun KBR off. I don’t think anyone going after KBR can go after Halliburton anymore. I think that was the point of doing the spinoff in the first place.
I wouldn’t bank on that possibility. The information about the guarantee was in the 10-K, but I didn’t look to see if that was deemed to be a material contract. If it was, it would have to be filed.
I’m not sure if they were shielded from French supervision, but they were shielded from British supervision. Of course, we have no information about French supervision.
BWAHAHAHA – Karma’s a bitch ain’t it. Unfortunately it seems the rain falls on guilty and innocent alike. We’re all going over this fall.
I think it was all a scheme to add layers between AIGFP and its regulators. The choice of the OTS but then moving the heart of the operation offshore and then adding on that extra layer by going to London through Paris. Think of it as a regulatory hedge. AIGFP plays off the Brits off against us and the French against the Brits, all to the end of insulating AIGFP from any regulation.
That seems right to me.
Thanks for another insightful post, masaccio.
Wow, this plot is getting so thick it’s like being in an overgrown jungle filled with venomous snakes, poisonous spiders, and some very dark-hearted, smart people.
Masaccio, I can’t begin to fathom what all this mean, but when you add on offshore banking in the Guerneys, the Caymans, and other former British protectorate islands, its as if the pirates came back from the dead to loot the world all over again.
good
This is really odd – you have to wonder if there was some collusion between the people at AIG who wrote the swaps and the purchasers of these instruments. Most insurance products are written to make collecting difficult. These CDS contracts seem to have been written so that almost anything would constitute a default, forcing a payout of the contract. These contracts certainly need investigating.