It’s not just banks that are receiving money from the bailout of AIG. Two well-known hedge funds received hundreds of millions of dollars from AIG.
Ken Griffin’s Citadel Investment group and Paloma Partner’s were securities lending counterparties of AIG’s. They lent securities to AIG, which it then lent out to others to be shorted. This business was famously catastrophic for AIG, causing a firestorm of losses for the company. (See our explanations here and our two cows version is here.)
That would ordinarily be a disaster for counterparties, who would have been left empty-handed. Market processes are excellent factors for punishing reckless lenders to financially irresponsible companies. But that process has been thwarted by the bailout.
Citadel and Paloma Securities received $200 million of taxpayer dollars each between September 18 and December 31, according to the list of AIG counterparties released yesterday.