By Andrew Willis in the Globe & Mail Streetwise blog:
The bailout of AIG was always predicated on fears that dominos - in the form of banks and insurers - would fall if the world's largest insurer were to renege on its contracts.
What's never been completely clear was just who these dominos might be - AIG treated its client list as confidential, and never disclosed who were the biggest counterparties on products such as credit default swaps. Over the weekend, names started to emerge, and it shouldn't be a big surprise to see a Canadian bank on the list.
Fortune magazine named Bank of Montreal as one of 15 counterparties to AIG that have collected on derivative contracts with the insurer. BMO is in good company: Most of the world's significant financial institutions are on this list, and have collected on contracts with AIG. Firms involved include Goldman Sachs, Merrill Lynch and the big European banks. Again, no surprises.
Fortune, channelling angry U.S. Senators, tried to make villians out of AIG counterparties, as its coverage says: “While the government has maintained that saving AIG was necessary to prevent an even wider catastrophe, senators contend the move has also bailed out counterparties who took unwise risks.”
The U.S. politicians are making a logical leap here that's hard to follow. Companies did business in good faith with AIG, assuming that the insurer was competently run, and assured by triple-A credit ratings and decades of favourable experience.
We've now found out AIG didn't deserve this faith, and taxpayers are paying a fearsome price to rescue the insurer. That's a lousy outcome. Blowing up all of AIG's clients by refusing to honour derivative contracts would make the fallout from AIG's meltdown even worse.In a moves that's co-incidental, BMO bought AIG's Canadian insurance unit in January for $375-million (U.S.)