Is AIG the Fall Guy For Goldman Sachs?

In a famous scene from a Pink Panther movie, Inspector Clouseau arrests a street vendor in front of a bank but ignores a robbery taking place inside. Quite reminiscent of the noise coming out of Congress over the $165 million in bonuses going to American International Group's credit default swaps unit. The hoopla is obscuring an even nastier nest of snakes: the billions that were funneled through the insurer to prop up the investment banks.

But you can't lay this one at AIG's doorstep. Instead it forces you to consider that the conspiracy theories of former AIG Chief Executive Maurice (Hank) Greenberg may be right: The pathway between Goldman Sachs and top government executives has been a one-way street.

Here's the story. When AIG was in danger of collapse this past September, it got a $60 billion bailout from the Federal Reserve -- much of which went to its trading partners. Until yesterday, when the bailout had grown to at least $170 billion, AIG refused to reveal who those trading partners were.

Thanks to public outrage, we know now. It's no surprise that Goldman Sachs tops the list with nearly $13 billion, Bank of America and its Merrill Lynch unit got $12 billion and many foreign banks raked in nearly as much.

Just how much anyone got is obscured by the arcane bookkeeping. As Felix Salmon points out at portfolio.com, after banks insured their assets against default, AIG essentially used Maiden Lane III, a company set up by AIG, to take those assets onto its own books, thereby allowing it to cancel out those insurance contracts and helping its counterparties like Goldman even more.

So what would have happened if we the taxpayers hadn't paid AIG? The company could have defaulted and wouldn't have paid the banks. One could argue that the whole system would have collapsed. And among the pillars that would have toppled, or at least tottered, was Goldman Sachs. After all, didn't investment bank Lehman Brothers collapse just months earlier?
But among those making the strongest arguments for the bailout was then-Treasury Secretary Henry Paulson, who just happened to be a former head of Goldman Sachs. And who else was in the room? A Goldman spokesman confirms that top executives at his firm attended at least one meeting to discuss a bailout of AIG. And coincidentally, a former Goldman CEO also holds a top post at the Federal Reserve.

No wonder Hank Greenberg is furious. As the largest individual shareholder of his former company, he's lost so much money that he's dropped off the Forbes 500 list and become a mere millionaire. Months ago, I noted here at BNET Finance that Greenberg thought the Goldman connection should be investigated. After all, why chase the traders at AIG who made millions when you can go after the investment bankers who made billions? Unless, of course, you are Inspector Clouseau.