AIG massive payments to banks stoke bailout rage

By John O'Callaghan and Lilla Zuill

WASHINGTON/NEW YORK (Reuters) - Goldman Sachs Group Inc and a parade of European banks were the major beneficiaries of $93 billion in payments from AIG -- more than half of the U.S. taxpayer money spent to rescue the massive insurer.

The revelation on Sunday by American International Group Inc was another potential public relations nightmare, coming on the same weekend that the Obama administration expressed outrage over AIG's plan to pay massive bonuses to the people in the very division that destroyed the company by issuing billions of dollars in derivatives insuring risky assets.

The size of the payments also illustrates how seriously a potential collapse of AIG was viewed by the regulatory authorities. U.S. Federal Reserve Chairman Ben Bernanke said in an interview with CBS news magazine "60 Minutes" that the failure of AIG would have brought down the financial system.

AIG, an embattled insurance giant that has received federal bailouts totaling $173 billion and is now paying $165 million in employee bonuses, is at the heart of a global financial crisis that President Barack Obama is trying to address with plans for trillions of dollars in spending.

As part of those efforts, Obama will announce steps on Monday to make it easier for small business owners to borrow money, officials said.

But the revelations that billions of U.S. taxpayer dollars were funneled through AIG to Goldman Sachs -- one of Wall Street's most politically connected firms -- and to European banks including Deutsche Bank, France's Societe Generale and the UK's Barclays could stoke further outrage at the entire U.S. bank bailout.

FINANCIAL SYSTEM AT STAKE?

The fact that billions of dollars given to prop up giant insurer AIG were then transferred to European banks and Wall Street investment houses could raise new doubts about whether the rescue was really economically necessary.

"It doesn't to me seem fair that the American taxpayer has got to bear the 100 percent of the downside," said Campbell Harvey, a finance professor at Duke University.

"A hedge is not a hedge if you did not factor in the counterparty risk. And the U.S. taxpayer should not be obligated to make people whole for hedges that were not properly executed."

Goldman Sachs, formerly led by Henry Paulson who was treasury secretary at the time of the original AIG bailout, said, as it has in the past, that its AIG positions were "collateralized and hedged."

Deutsche Bank and Barclays declined to comment. Societe Generale was not available for comment.

As it seeks to ease the credit crunch that was the original target of the Troubled Assets Relief Program (TARP), the Treasury will also offer more details this week about the workings of proposed public-private partnerships to take toxic assets off banks' books, including a timeframe, a senior department official said on Saturday.

"No taxpayer in these arrangements is going to lose money until the investor who put up the money has lost 100 percent," said Chief White House economic adviser Lawrence Summers.

Treasury officials have said the fund, or funds, would be a vehicle to provide as much as $1 trillion in financing for buying bad assets -- particularly mortgages gone bad as a result of the U.S. housing bust. The Federal Reserve and Federal Deposit Insurance Corp would participate.