Blawgletter has pondered the fraudulence of credit default swaps

We've noted Congress's culpability in 2000, when it un-hinged the speculative CDS market from any prophylactic regulation, and in 2005, when it exempted CDS instruments from bankruptcy law protections.

Now we weigh in on Congressional outrage over American International Group's payment of around $450 million in bonuses to people in an AIG business unit that lost over $40 billion last year.  Also its bulging-vein apoplexy about AIG's forking over billions — redeploying U.S. taxpayer funds — to counterparties that bought CDS-style insurance from the financial titan.

We wonder how any company can make like a slot machine for outside gamblers (who bought CDS insurance for events in which they had no financial risk) and for the very AIG employees whose bets on CDSs cost the company tens of billions. 

More important, we marvel that an insolvent enterprise could favor any particular creditor at the expense of others, particularly including U.S. taxpayers.  For AIG has survived the last six months solely because the feds have pumped in $160 billion to save it from collapse.

In the normal case, creditors that take money from an insolvent debtor risk having to pay the cash back under fraudulent transfer laws and under bankruptcy law provisions regarding "preferences".  But with AIG we seem to have shot right through the looking glass.  The government, which now owns 80 percent of AIG's "equity", has magically made it solvent, we suppose.