AIG's Bailout Billions Benefit U.K. Banks

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.

Barclays, which took over much of Lehman Brothers' operations last year, is connected to AIG in more than one way. Barclays Global Investors held 98.7 million shares of AIG common stock at the end of the year. Its investment in AIG is reportedly lower now, but it is still actively buying the insurer's stock. It is also said to be considering taking part in the U.K. troubled asset plan as pressure on the banking world continues to build without any relief in sight. U.S. banks, to their credit, haven't invested heavily in AIG stock.

HSBC, on the other hand, took no money from the U.K. government. It reported pretax profit of $9.1 billion last year. It's under pressure as employee bonus payments of $45 million were made when the bank announced it was asking stock holders to inject $17 billion in a rights issue.

Complicating the picture is that the underwriters of the rights issue include Goldman Sachs ( GS), another beneficiary of AIG money; JPMorgan ( JPM); and the U.K. government, trading as the Royal Bank of Scotland.

TheStreet.com Ratings issues financial strength ratings for 4,000 life, health, annuity, and property/casualty insurers that are available at no charge on the Insurers & HMOs Screener. In addition, the Financial Strength Ratings on each of the nation's 8,600 banks and savings and loans are available on the Banks & Thrifts Screener.

Gavin Magor joined TheStreet.com Ratings in 2008, and is the senior analyst responsible for assigning financial strength ratings to health insurers and supporting other health care-related consumer products, including Medicare supplement insurance, long-term care insurance and elder care information. He conducts industry analysis in these areas. He has more than 20 years' international experience in credit risk management, commercial lending and analysis, working in the U.K., Sweden, Mexico, Brazil and the U.S. He holds a master's degree in business administration from The Open University in the U.K.

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