The Real Outrage: AIG Bailout Funds went to Deutsche Bank

The other night Jay Leno cracked some jokes about AIG during his comedy routine, including this remark:

"Now it turns out they gave $35 billion -- not million -- $35 billion of our money to bail out European banks. See, this is how a global economy works. Our hard earned tax dollars are used to bail out German banks for making bad investments "

But the joke is on the American taxpayers, since they indirectly funneled $11.8 billion to Deutsche Bank while the bank was exacerbating the global financial meltdown through its activities in the US and Germany. It turns out that $billions are being held by Deutsche Bank in escrow on behalf of its hedge fund clients who purchased Credit Default Swaps (CDS) from Deutsche Bank, betting on the collapse of the US mortgage market:

Here's how the scheme worked: Hedge funds bet on mortgage defaults rising by buying financial instruments called credit default swaps from investment banks, such as Goldman Sachs (GS) and Deutsche Bank. This is a form of insurance that pays out in the event of a debt default. It is unknown which hedge funds made these bets with specific banks, but it is known that these wagers were profitable for the hedge funds. The actual dollar profits and whose paying whom still needs to be exposed.

The banks then wanted to protect themselves so they set up a complex set of financial instruments that were insured by AIG and other insurers. AIG was the biggest player in this gamble. The banks formed offshore companies known as collateralized debt obligations or CDOs. By doing this the banks neutralized hedge fund exposures, by buying swaps on the securities their clients were betting against.

According to the Journal, from mid-September through the end of last year, AIG and the U.S. taxpayer paid $5.4 billion to Deutsche and $8.1 billion to Goldman Sachs when assets dropped in value. Some of this money could end up in the hands of hedge funds.

While Americans are bailing out Deutsche Bank, the bank has been foreclosing on tens of thousands of residential properties across the US, forcing Americans to live in their cars.  In Florida, Deutsche Bank's illegal foreclosure activities have attracted the attention of investigators. In its home market, Deutsche Bank wreaked havoc by selling off its toxic assets to state-owned institutions, which had to be bailed-out by German taxpayers.  Now its cross-border tax-leasing schemes have damaged municipalities across Germany.

Despite the US taxpayer bailout funds and the ill-gotten profits from foreclosures and tax schemes, Deutsche Bank is seen by analysts as being severely undercapitalized. This could trigger another - you guessed it - taxpayer-funded bailout, since the bank is perceived as "too big to fail".

This week Americans are up in arms about the $170 million in bonus payments to AIG executives.  But that amount is "peanuts" compared to the sums paid to Deutsche Bank.

Comments

[hattie]

It always amazes me how much money can be made off poor people. It's a sure thing that poor people won't be able to pay their debts! Thanks for researching this and your clear exposition of the situation. These financial people always pretend that their machinations are too hard for laypeople to understand. Not true, as you show. What criminals.