Although the news about AIG bonuses yesterday was disturbing, it was not nearly as disturbing as some of the other news that came out at the same time.
Up until a few days ago, the names of the institutions that AIG had paid with bailout money were kept secret, but when we found out who they were, there was one category that stood out starkly: municipalities in California.
I decided to do some research on how much money belonging to cities and municipalities AIG is holding. What I found out was frightening.
Municipalities all over the country have evidently handed over money to AIG from their municipal bonds. This means that cities across America are at risk of losing billions of dollars, and risk going bankrupt if AIG does!
AIG states on its website that it directly manages $72 Billion of these assets that belong to cities across America.
At the end of the day, these assets are actually made up of schools, hospitals and libraries in towns everywhere. It is almost for certain that we’re talking about much more than $72 Billion being at risk, which is a staggering number to begin with.
In addition to handing over immense amounts of cash to AIG, cities have been making extremely risky financial bets through Credit Default Swaps, which is evidenced by the payments to municipalities in California, as I mentioned in the beginning.
AIG owes a lot of people money for these swaps and is like a bookmaker who can’t pay the people who all bet money on the winning horse that nobody thought was going to win. The difference here is that all those people who are supposed to be paid money by AIG have decided to keep quiet about it, presumably so as to not create a panic.
With respect to all the cash that was handed over, everyone may not know what the so-called “municipal bond market” is, or how that relates to AIG, but it works something like this:
- individuals or corporations give money to, for instance, the city of Los Angeles for the construction of a school
- Los Angeles promises to pay a 5% return on the money 10 years in the future. That is “the municipal bond”
- Los Angeles hands over the money to AIG, in order for AIG to make that 5% for the bond holders. The section of AIG that does this is called the “Fixed Income” unit
You may realize where I’m going with this: AIG hasn’t exactly been the best or wisest investor over the last few years. AIG is now a black hole of losses, and it almost doesn’t matter how much taxpayer money you put into the company, most people who are owed money by AIG will not be paid.
For now, AIG is on life support with taxpayer money and with the temporary illusion peddled by Washington and Wall Street that everything is going to be just fine. It won’t.
There is a strong possibility that problems with municipal bonds will add a whole new dimension to the crisis, and that cities across America will have to choose between closing schools or paying bond holders when AIG eventually files for bankruptcy.
I have argued before that the main difference between the United States and other industrialized countries is that the U.S. does not safeguard a standard of living for its citizens, and that basic services are, like everything else in this country, a gamble for everyone. If the gambles at 70 Pine Street in New York (the AIG building) don’t work out, kids in California may not go to school.
Moreover, I advise that the winner-takes-all voting system should be destroyed