Last week we reported that the House Financial Services committee’s ranking member, Rep. Spencer Bachus (R-AL) is asking chairman Barney Frank and the Treasury department to look into the cases of smaller U.S. banks that are allegedly being stiffed on their loans to an AIG subsidiary while its major CDS counterparties are paid off in full.
In a story that may shed some light on his complaint, the Wall Street Journal reports today on the cases of two businesses who partnered with AIG on real estate development projects and are now fighting to get AIG to contribute its share of cash to pay project expenses:
Affiliates of one real-estate firm, which teamed with AIG in a $2 billion purchase of a low-income apartment portfolio in 2007, have sued AIG for missed and delayed payments. Affiliates of the developer, Mitchell L. Morgan Management Inc., claimed in their lawsuit that they were told by AIG’s top real-estate executive that “the current Federal Reserve funding arrangement with AIG does not provide for funding of AIG Global’s commitments to its joint venture partners.”AIG also ceased payments to a partnership with an Alabama shopping-center developer, leaving the developer’s bank lenders with potential losses, according to people familiar with the situation. Some 15 banks could end up with souring loans at a time when commercial-property losses already are increasing….
In Alabama, in recent months, AIG opted to halt certain payments it had made in the past as part of a 16-year partnership with Birmingham developer Alex Baker, according to people familiar with the situation. The partnership, AIG Baker, has developed 20 million square feet of shopping centers, some of which have struggled recently.
According to these people, AIG’s exit created uncertainty about whether payments would continue to be made on bank loans used to buy property. Some 15 banks loaned about $600 million for property purchases. AIG has offered a settlement. A person close to the banks said the lenders were unlikely to accept.
As of last week, Bachus and his staff weren’t naming names. They were simply suggesting that banks in their district and thereabouts were getting the short end of the stick. So it’s not completely clear whether those were the specific banks Bachus was referring to.
But it’s certainly suggestive: An AIG subsidiary in Alabama suddenly unable to pay off its loans to banks (some of which are presumably also in Alabama) because AIG itself is ceasing payment on its debts. If you were a bank executive getting a short haircut on loans you made to a business like AIG Baker while Goldman and other big banks were made whole, would you complain to your Congressman?
Brian Beutler
Brian Beutler is TPM's senior congressional reporter. Since 2009, he's led coverage of health care reform, Wall Street reform, taxes, the GOP budget, the government shutdown fight, and the debt limit fight. He can be reached at brian@talkingpointsmemo.com.
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