US largesse for foreign banks

There is outrage in the US over bonus payments at insurer AIG, a company that has received billions in tax payer money. AIG paid nearly $165 mn in bonuses and New York's attorney general has launched an investigation into these.

But the more significant revelation is about how bail-out funds went into the coffers of foreign banks that happened to be counter-parties to derivatives and other contracts with AIG. Total payments to foreign banks were a staggering $50 bn. More than 20 foreign banks were beneficiaries. FT reports:

The biggest winners were French banks, with Société Générale receiving $11.9bn and BNP Paribas $4.9bn. Deutsche Bank of Germany received $11.8bn and Barclays of the UK $8.5bn....UBS, the Swiss bank, received $5bn from US taxpayers via AIG – dwarfing the $780m it agreed to pay the US government last month after admitting to helping US clients avoid taxes.

Goldman Sachs received nearly $13 bn. The pay outs to foreign banks were unavoidable because it would have been difficult to honour commitments to local parties and not to foreign ones. Besides, the impact on global banks of not honouring commitments would have been significant and would have inflicted huge costs on the world economy. This highlights an important regulatory issue: monitoring of cross-border transactions of domestic entities that are considered too big to fail.