AIG, Alive Once Again, Is Now Swimming With Sharks

NEW YORK (TheStreet) -- The economy still is a big, fat stinker, with the job numbers for April showing continued pain in the heartland, with employers creating jobs at half the pace of last year.

Thank you, Wall Street, for creating the financial crisis that just won't stop hurting people.

Actually we don't have to thank the Street. Treasury Secretary Timothy Geithner is doing a simply terrific job in that department.

Is this man a master of irony or what? At the same time that the latest bad economic news comes out, Geithner shows that it's business as usual in the Wall Street-Washington Axis, as he doles out fees to every major Wall Street bank that played a role in the financial crisis.

It's a distinguished list of familiar names, among them the leading players in the run-up to the crisis and its aftermath: Goldman Sachs, Bank of America-Merrill Lynch, Citigroup, JPMorgan, Morgan Stanley, UBS, Wells Fargo, Barclays, Credit Suisse and Deutsche Bank. All you need to toss in are the defunct Lehman Brothers and Bear Stearns, and you can have a Financial Crisis Alumni Association right there.

What I've just listed are the main underwriters ("joint bookrunners" in Street parlance) of the latest public offering of American International Group stock, $5 billion of it, held by the Treasury Department, thanks to the 2008 bailout that rescued AIG from its derivatives addiction -- and with it, all of AIG's counterparties, notably Goldman Sachs.

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I guess we're supposed to let out a cheer that Treasury is slowly unwinding its ownership stake in AIG, which is now down to 63%. But the cheering may die down if you take a look at the final prospectus supplement for the deal, which was filed with regulators on Monday. All of the banks I mentioned, and others, are getting paid to sell this offering to the public.

Now, I hasten to say that it's not a lot of money by Wall Street standards. The total underwriting discount for the shares being sold to the public comes to a mere $11.25 million, or 0.114375 per share, which in turn is divided up a bunch of ways. Each of the main underwriters gets 14,366,617 shares, so $1,643,181.80 for each of them, while the small fry among the underwriters get only 655,737 shares apiece, which translates into a mere $75,000 each.

The prospectus reminds us that "Merrill Lynch, Pierce, Fenner & Smith Incorporated and Citigroup Global Markets Inc. also acted as financial advisors to us in connection with the Recapitalization." (I wonder what that "advice" consisted of. "Call Tim Geithner"? ) The fees they received are not disclosed, but are described as "significant."

To compound the irony, AIG points out that it "has been conducting a comprehensive review of its dealings with the counterparties with which it did securities and related business before and during the recent financial crisis to determine if those counterparties harmed AIG by their conduct. These counterparties include a large number of financial institutions, including many of the underwriters and various of their affiliates."

AIG also says that it "has formally commenced litigation against one of the joint book-runners with respect to related matters." That's a reference to Bank of America and its Merrill Lynch and Countrywide Financial subsidiaries, which AIG sued last year for allegedly misrepresenting the quality of mortgage bonds AIG bought.

I guess just because you think a bank participated in a scheme to screw you out of $10 billion, as the suit contends, is no reason to deprive them of underwriting business or hiring them at "significant" fees to offer "advice." Isn't it wonderful how AIG isn't vindictive? I mean, I won't go back to a bakery if it sold me a crushed apple pie. These guys are saints.

Even so, and maybe I'm being overly uncharitable, but I think the question has to be raised. AIG must surely be faintly aware of the fact that it is owned by the American people. That being the case, why are the Wall Street banks that were instrumental in the financial crisis getting a single dime out of this stock offering?

It may not be a lot of money, but the symbolism stinks. Now, I'm not so naïve as to suggest that AIG gives a hoot about the symbolism involved. I mean, they're giving fees to people they're suing for $10 billion, for heaven's sake. But if they don't, I would expect that the Treasury Department would. Instead, the message that the long-suffering, job-bereft public is getting out of this is that Tim Geithner is tone deaf when it comes to the American people. As if we didn't already know that.

There were alternatives to hiring Wall Street's 2008 predators to manage this offering. For one thing, AIG could have given the underwriting fees to banks that were, perhaps, slightly less grotesquely involved in the crisis. Seriously now, Goldman Sachs -- the bank that was the biggest single beneficiary of the AIG bailout? Or Citigroup and Merrill, whose derivatives and subprime intoxication made them two of the principle threats to the stability of the financial system?

There is no law that requires the fattest (and most culpable) banks from lapping up every bit of cream that spills on the floor. Even if the Treasury didn't want to get creative and use a Dutch auction, as it did for some preferred stock it held in banks, it could have avoided the spectacle that we're now seeing by simply using different underwriters.

Now, I'm sure the Treasury would say that it chose the path that would get the highest share price, etc., etc. I presume that the "advice" that Merrill and Citi gave AIG was that hiring them and the other bankers was the best way to go. Let's say, just for the sake of argument, that their unbiased opinion was correct. Speaking as a taxpayer-shareholder, my reaction is "to hell with that" -- if it means adding a cent to the wealth of the banks who got us into this mess.

Gary Weiss's latest book is AYN RAND NATION: The Hidden Struggle for America's Soul, published by St. Martin's Press.

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