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Wall Street to Clean Up in AIG Mess


Banks raking in millions for disaster they created is appalling.

Just when we thought the American International Group (AIG) nightmare had slinked off into the shadows, it's come roaring back for more.

As AIG management labors to spin off divisions, cut costs, and overhaul what was once the world's biggest insurance company, Wall Street banks are lining up to collect huge advisory fees. According to the Wall Street Journal, when the dust settles, the Federal Reserve Bank of New York and AIG could shell out nearly $1 billion in fees to banks and law firms.

That's, however, less than 1% of the taxpayer money put on the line to bail out AIG.

The task of unwinding the complex web of derivatives and shady investments that doomed AIG is, to say the least, no easy task. Teams of bankers, analysts, and attorneys are required to complete the job -- none of whom come cheap. The Journal reports that Morgan Stanley (MS) stands to be the largest benefactor from dismantling AIG, and could reap as much as $250 million in fees. Goldman Sachs (GS), Bank of America (BAC) and JPMorgan (JPM) have also been tapped for various roles, putting them in line for big payouts.

For example, part of AIG's reorganization plan calls for 2 initial public offerings, which will aim to raise $5 billion by offering investors the chance to buy into an Asian life insurance unit and American International Assurance Co. -- a wealth-management and retirement-planning division. Morgan Stanley and Deutsche Bank (DB) could each take home as much as $45 million in fees after being named as lead underwriters for the deals.

At first blush, the very notion of Wall Street banks raking in hundreds of millions of dollars in fees for cleaning up the AIG mess -- one which they were certainly complicit in creating -- is somewhere between nauseating and infuriating. But on the other hand, is there another option?

Sure, the government could demand that Morgan Stanley, Goldman, and the like offer up their services for free, honoring their civic duty to fix the mess they helped create. But right or wrong, the chances of that happening are exactly nil. The problems are complex enough that there are only a handful of people in the financial-services industry with the knowledge and experience to even begin to tackle the problem, so there just aren't many alternatives.

But more important than the icy reality that some of taxpayers' $100 billion "investment" into AIG is going to pay off Wall Street, is how the country handles the news. As many a Minyanville Professor is apt to say, "The reaction to news is more important than the news itself." Indeed.

This spring, when news broke that AIG would be paying billions to Goldman Sachs and other trading partners, there were literally riots in the street. So if the streets are quiet this morning, does that mean the latest payments are less despicable, or that social mood has shifted such that these blatant abuses of taxpayer trust are now commonplace?

And, to take it a step further -- if the latter is true, has the country simply rolled over, content to let Washington and Wall Street rape Main Street in the interest of some amorphous concept of "stability" or "economic recovery"? Truly then, we must ask the question Professor Kevin Depew asked a couple weeks back:

Where is the outrage?

Join Hoofy & Boo as they take you through what happened with AIG, from start to finish:

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No positions in stocks mentioned.

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