March 18th, 2009 5:33 pm | by NIGEL JAQUISS News | Posted In: CLEAN UP, Sports, Business, Business

Duck Bucks: What AIG Was Doing With Oregon's Money


Over the weekend, American International Group the mammoth, beleaguered financial services company that has inhaled $170 billion of taxpayer money in the biggest bailout (to-date) of the financial collapse, released the names of the trading parties whom it had in turn given that money.

One of the recipients (as first reported locally by blogger Jack Bogdanski) was the State of Oregon, which got $270 million from AIG.

So what was that money for?

James Sinks, a spokesman for State Treasurer Ben Westlund, tells WWire that the payment was for a guaranteed investment contract (also called a GIC) the state entered into with AIG in 2008 after selling bonds to fund construction of the University of Oregon's new basketball arena.

Here's Sinks' explanation:
AIG won the GIC through a competitive bid for the U of O arena bond proceeds last summer when they were still a highly rated company. Once AIG's true financial situation was revealed in Sept 2008 and they were downgraded by the rating agencies, we were allowed under the investment agreement to get our funds returned.

GIC's are a pretty common, low-risk vehicle that allow bond issuers to park the proceeds of a bond sale in a safe place until the money is needed. In this case, for example, the state sold bonds for the U of O but would not need to begin paying the construction firm and other contractors for several months.

Where AIG went wrong—one of many places as it turns out—is when it guaranteed counterparts such as the U of O a return of say 5 percent, to pick a number. It then used the money the U of O purchased the GIC with to purchase higher-yielding securities back by assets such as sub-prime mortgages.

AIG might hope to earn 7 percent from the asset-backed securities. If all went according to plan, AIG pocket the 2 percentage point difference between what it agreed to pay U of O and the 7 percent yield on the asset-backed securities.

AIG engaged in billions of dollars of such arrangements, only to see the trade go horribly wrong when the asset-backed securities plummeted in value, rather than yielding the expected return.

But Sinks says Duck fans have nothing to fear.

"[The] funds were returned sometime in October, and the funds are now invested here at Treasury," Sinks says.

The new arena is scheduled to open for the 2011-12 season.

(photo courtesy University of Oregon)
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