Famous pretend insurance company AIG, responding to popular demand, has released a list of its major structured-finance counterparties — that is, those banks, municipalities and the like that stood to lose the most if AIG had gone under without massive government support last year. New York State was nowhere near the top of the list, nor were other big New York borrowers like the city, the Port Authority, or the MTA.
States were vulnerable to AIG’s failure because they had signed oxymoronic “guaranteed investment contracts” with the company.
That is, after issuing bonds, states would park the money with AIG, which would “guarantee” a certain return on that investment. Had the feds allowed AIG to go financially bankrupt, states would have been creditors to AIG’s estate for any money owed under such contracts.
California and Virginia had the most to lose, with more than $1 billion each in direct exposure to AIG under the contracts. Hawaii was next, with more than three quarters of a billion at risk.
The Empire State came in at just $210 million. Compare this exposure to that of Goldman Sachs, which stood to lose nearly $13 billion.
It’s good that New York did not risk billions with AIG. Still, though, $210 million is not nothing.
The experience should remind the state that the hefty fees paid to banks and advisers for mysterious financial structures, whether it’s for a “guaranteed return” on a muni-bond issue or a first-loss protection on a public-private partnership venture, aren’t worth it.
Even if structured-finance deals don’t blow up, as AIG’s did, nobody in either the public sector or the private sector seems to understand enough about this stuff to know if his client is getting good value for a taxpayer dollar spent or pledged.
Editor’s note: Roger Caiazza is an adjunct fellow at the Empire Center. He has a long and deep private industry background in environmental regulatory analysis and compliance. His frequently updated personal blog on New York State environmental poli Read More
Editor's note: Roger Caiazza is an adjunct fellow at the Empire Center. He has a long and deep private industry background in environmental regulatory analysis and compliance. His frequently updated personal blog on New York Read More
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