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AIG's Bailout Billions Benefit U.K. Banks

Stocks in this article: AIG RBS BCS

U.K. banking giants Royal Bank of Scotland (RBS), Barclays (BCS) and HSBC (HBC) are beneficiaries of billions of dollars of U.S. taxpayer bailout money provided to prop up American International Group (AIG).

AIG, trying to boost profits, took enormous risks by writing credit default swaps on multi-sector collateralized debt obligations with financial-services companies, especially in Europe. But as the asset values declined, the U.S. insurer was forced to post collateral and pay out on defaults.

As claims for collateral swelled, the Federal Reserve purchased about $35 billion of risky underlying debt obligations, including mortgage-backed securities mainly from foreign banks. The Fed allowed those institutions to keep the collateral that AIG posted and essentially tore up the credit default contracts. AIG has reported that $47 billion was used for collateral postings and debt payments. More U.K. banks were beneficiaries than those in any other country because of the countries' close financial ties, but no individual amounts have been released, according to different sources reported by the Wall Street Journal and Fortune. Four of the 15 banks cited by Fortune are based in the U.K. Four others are U.S.-based.

The British government injected $52 billion into the U.K. banking system late last year, with Royal Bank of Scotland receiving $28 billion. That rescue failed, prompting the government to convert $7 billion of preferred shares into common stock after a record-breaking $57 billion loss.

The U.K. introduced a guarantee plan for troubled assets owned by banks in which a loss buffer would put the U.K. Treasury on the hook for excess asset losses and allow desperately needed cash to be freed up for lending.

Royal Bank of Scotland is also owner of the well-capitalized Citizens Financial Group in Rhode Island. Citizens' Tier 1 leverage capital ratio was 6.96% and the total risk-based capital ratio was 11.22% as of Dec. 31. But it would be unlikely to qualify for funding from the Troubled Asset Relief Program, if needed, because of foreign ownership.

Barclays, which reported pretax profit of $8.5 billion in 2008, and subsidiary Barclays Global Investors reportedly both received AIG money. Unlike Royal Bank of Scotland, Barclays was offered, but turned down, $9 billion in bailout money from the U.K. government, choosing instead to raise private capital from the Middle East.

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