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AIG Bailout Outrage Hits Home

By Kevin Robinson in News on Mar 18, 2009 3:45PM

Photo by Pay Paul
While the president insisted that his treasury secretary will use every "legal avenue" to prevent AIG from paying out on performance bonuses after receiving $173 billion in bailout money from Washington, more news about how the insurance giant spent those funds emerged. As AIG has begun to release the list of payments it's made since receiving federal bailout funds. According to a report from the Sun-Times, AIG paid Chicago-based hedge fund Citadel $200 million.

Hedge funds like Citadel invest large sums of money in a broad range of investments including stock, debt, currency and commodities. They often try to hedge their bets by also investing in other, ostensibly more secure investments, such as bonds and securities. Citadel was invested in mortgage-backed securities, the heart of the financial crisis, and as those mortgages soured, AIG quickly became indebted to counterparties, like Citadel, to those investments, leaving AIG on the hook for billions of dollars.

While paying on insurance policies bought seems less repugnant than paying bonuses to employees that may have committed financial fraud, AIG is under enormous public pressure to disclose the parties that it paid, given that those payments came from public funding.

What will happen with AIG and it's beneficiaries remains to be seen.

[For a great explanation of how credit default swaps and mortgage-backed securities helped cripple the American economy, check out This American Life Episode 355: The Giant Pool of Money]