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Deep Throat would be proud: everyone is following the money. At AIG, with some $150bn in government support, there is plenty to chase. While politicians scramble to block bonuses, the insurer has laid out $105bn in counterparty payments.

Critics argue that the banks with which AIG struck derivatives deals are benefiting from government largesse. They are. But AIG’s bail-out was specifically designed that way.

Leave aside $12.1bn in PR-friendly payments to municipalities. Skirt past the $43.7bn to counterparties that pledged collateral when borrowing securities. AIG invested that collateral so poorly it had a shortfall when the time came to return it. (Had AIG gone under, these counterparties would have been left with their borrowed securities – not disastrous.)

Focus instead on $22.4bn posted as collateral by AIG on credit default swaps written on collateralised debt obligations, and $27.1bn used to buy up CDOs for a Federal Reserve-funded vehicle set up in November. These are two sides of the same bail-out. AIG handed collateral to banks as the value of their CDOs fell. When the Fed came knocking, the banks sold at that reduced value but kept their collateral, ending up whole. Defaults in the underlying CDOs remain low. But the government in effect opted to pay CDS counterparties as if all the debt had defaulted.

The government could have simply funded collateral calls. But, instead, it drew a line under those contracts. CDOs of $12bn now remain outside the Fed’s vehicle, from a peak of $80bn, so collateral payments will be much reduced. For Goldman Sachs, say, which hedged its exposure to AIG through CDS with other insurers, AIG’s default would have really hurt if those third parties also defaulted. Having bet that AIG’s default would prove systemic, the government accelerated the clear-up operation by buying out the banks. At least it is being honest about it.

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