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AIG Bailout Details Don't Tell the Full Story

Since then, the government has extended tens of billions of dollars more to the troubled institution. It repeatedly justified those moves by saying that AIG's rescue was not meant to save the insurer, but the complex web of companies that were interlinked through the toxic credit-default swaps AIG issued. Those companies, AIG detailed Sunday, include Wall Street firms like Goldman Sachs (GS), Bank of America's (BAC) Merrill Lynch and Morgan Stanley (MS), as well as foreign banks like Societe Generale, Deutsche Bank (DB) and Barclays (BCS).

But it's not clear how valuation losses were determined, or whether some counterparties got better deals than others. Furthermore, AIG did not disclose its remaining exposure to the toxic CDS securities -- in other words, how much more money will be required to unwind all of the positions?

"The problem is nobody really knows," says Edward J. Grebeck, CEO of debt-market strategy firm Tempus Advisors. "The government is saying, 'Oh my God, it would have been a catastrophe if we had let them fail,' but that only tells one part of the problem. The government is not being very open and forthcoming as to what the remaining exposures are for AIG's financial products group."

While AIG has been trying to "entice" firms to cancel out their CDS positions, the incentives simply aren't there, says David Becher, a finance professor and fellow at the Center for Corporate Governance at Drexel University. Derivatives contracts are often structured so that the insurer can pay a fee to extract itself from the deal, but the cumulative price tag may be too enormous for AIG. With the government providing a steady stream of capital, banks have little incentive to bow out on their own.

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