AIG Fracas Won't Drive Stock From Here

Wednesday's hearing to dig into AIG's decision to pay CDS counterparties in full during the crisis provided some juicy quotes but the stock isn't likely to be affected by the fallout.
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Updated for latest share price, further details on hearings.



) -- In the ongoing saga over

American International Group's

(AIG) - Get Report

full payment of counterparties, there appears to be little that will affect shareholders, even if Wednesday's Congressional hearing is providing some juicy fodder for Wall Street-Beltway gossip.

In recent trading, AIG shares were down less than 1% to $24.20. Earlier in the session, the stock rose as high as $25.19, a gain of more than 3%.

AIG paid out over $60 billion to

more than a dozen banks

across the globe to resolve credit default swaps, a type of insurance against losses on mortgage debt. Among the biggest beneficiaries was

Goldman Sachs

(GS) - Get Report

, which received around $14 billion.

Since AIG made public its counterparty list, some titillating revelations have emerged about regulators' soft-handed approach.

The New York Fed -- which was in charge of the AIG bailout, and then led by Treasury Secretary Tim Geithner -- advised AIG not to reveal the information. It also agreed to pay the counterparties at essentially par value, or 100 cents on the dollar, apparently making little effort to negotiate a better price. The Securities and Exchange Commission has allowed AIG to keep some counterparty information obscured from filings until 2018.

What has emerged since the scandal broke is that counterparties, unsurprisingly, did not want to accept haircuts on their CDS holdings. (An internal memo from


(BLK) - Get Report

, which advised on the negotiations, said the French bank

Societe Generale

"has been unwilling to sell...below par value" and Goldman might accept only "a small concession.")

In prepared testimony, some key regulatory players say they had little choice but to concede. Playing hardball would have been "an abuse of our authority," as the New York Fed's top lawyer, Thomas Baxter, put it.

Others played dumb: "I did not ratify those decisions; and I do not know who made those decisions," said Stephen Friedman, who was New York Fed Chairman at the time of the AIG bailout. He claims, somewhat unbelievably, that the board has little to do with the day-to-day operations of the Fed.

Geithner is also among the gaggle of high-profile players who appeared before the House Oversight Committee to defend themselves against accusations of impropriety. Geithner can't possibly say he wasn't involved in the negotiations, though documents conveniently turned up showing he wasn't the one who promised to keep counterparty details secret.

"In the end, the prices paid for the securities were their fair market value," he asserted on Wednesday.

Former Treasury Secretary Henry Paulson, is taking a break from a promotional book tour to defend regulators' actions at the hearing as well. He talked a lot about what would have happened if AIG had failed, which doesn't have much to do directly with the issue at hand, since AIG was already being bailed out when deciding counterparty payments.

"I have limited knowledge on the topic of immediate interest to the Committee," Paulson acknowledged.

The bailout program's regulatory watchdog, SIGTARP, seemed to try and head off the controversy by issuing a

report in November

detailing the reasons why regulators couldn't negotiate better terms. But much of the reasoning is based on a false premise, that regulators had only three options: Pay counterparties in full, threaten them, or let AIG fail. While they were in a difficult spot, their hands were not tied quite so tightly.

The reality remains that the government had a much stronger negotiating position than counterparties. If the Fed -- which wasn't even AIG's primary regulator -- had allowed the insurer to fail, the banks would have gotten zero cents on the dollar, never mind 100 cents.

The argument Geithner, Baxter and others are using to defend their actions is a false one. The Fed didn't have to threaten the banks with regulatory action to negotiate. It simply had to say no. On the slight chance that Goldman,

Bank of America's

(BAC) - Get Report

Merrill Lynch,

Deutsche Bank

(DB) - Get Report





(C) - Get Report

and others would have taken AIG to court over the issue, they were unlikely to get much sympathy.

Furthermore, banks have been strong-armed into much more severe concessions for the sake of the financial system or taxpayers or simple populist rage, with little argument -- TARP, for instance, or mortgage modifications or compensation overhauls. It's difficult to see why the AIG counterparty situation is so starkly different.

As the brouhaha reached a fever pitch recently, banks have defended themselves, too, by saying they were within their contractual rights to receive 100 cents on the dollar. It's an accurate statement, but one that doesn't acknowledge that contracts didn't outline what would happen if AIG were being propped up with federal support in the midst of an unprecedented crisis. Some French bankers also made the more dubious assertion that they'd be held criminally liable for accepting a haircut.

Whatever the bankers' defense, it has little to do with the Fed's negotiating stance. Fed President Ben Bernanke's impending confirmation hearings have been thrown into disarray in part because of the handling of the AIG bailout. He, too, sticks by regulators' decisions, but at least two Fed governors expressed concern that the full payments were "a gift" to trading partners, according to

The New York Times


As though the counterparty debacle isn't enough gossip fodder, Friedman will be another attendee with a scandalous backstory. Friedman, a former Goldman CEO, has come under fire for remaining a director while in his regulatory position. In fact, he purchased Goldman stock on Dec. 17, 2008 and Jan. 22, 2009, after the Fed had decided to pay AIG counterparties in full -- something it seems he would have known before it was disclosed to ordinary investors. He disputes that claim and any accusations of impropriety in his testimony.

In addition to Geithner, Paulson and Baxter, other attendees were Neil Barofsky, who heads SIGTARP and Elias Habayeb, a former CFO of AIG's financial services division.

Yet all of their testimony will be a reflection from the rear-view mirror. There's little chance of a clawback on the CDS payments, and little chance that AIG will now be punished for negotiations that were put in the hands of its regulatory wards.

Goldman's stock was down 11% so far this year as of Tuesday's close, and AIG's was down 19%. But the decline has little to do with counterparties, and much to do with broader uncertainty about regulation, the economy and the rocky road ahead for both firms.


Written by Lauren Tara LaCapra in New York