Hot Breaking News! New York AG subpoenas AIG on CDS contracts UPDATED

According to reader Steve,  this breaking news is hot – so here’s the story (h/t  Steve).

American International Group Inc (NYSE:AIG – News), which has received $180 billion in U.S. taxpayer money, was subpoenaed on Thursday by New York’s top legal officer for information on its credit default swaps contracts, sources familiar with the matter said.

Details were being sought on the contracts going back seven months, including those that have been wound down by AIG’s Financial Products unit and those that have not, involving billions of dollars, one of the sources said.

A spokesman for AIG declined to comment.

The request stems from New York Attorney General Andrew Cuomo’s investigation into $165 million paid to employees at the unit in retention bonuses this month.

On Thursday, Cuomo did not comment on the subpoena, but he said in a statement that “CDS contracts were at the heart of AIG’s meltdown.

“The question is whether the contracts are being wound down properly and efficiently or whether they have become a vehicle for funneling billions in taxpayers dollars to capitalize banks all over the world.”

Goldman Sachs (NYSE:GS – News) and major European banks, including Deutsche Bank (XETRA:DBKGN.DE – News), France’s Societe Generale (Paris:SOGN.PA – News) and the UK’s Barclays (LSE:BARC.L – News), were major beneficiaries of more than $90 billion of money paid out by AIG in the first three-and-a-half months after its bailout by the U.S. government last September.

AIG has said it needed to keep certain employees to help unwind complex derivatives partly blamed for its troubles. Fifteen of the top 20 bonus earners have paid back their bonuses, Cuomo said on March 23.

AIG said on Thursday two top managers in Paris have resigned but will remain in place to oversee an “orderly transition,” reducing the risk of default on derivatives contracts.

Cuomo’s office has been looking into various aspects of the financial industry meltdown since last September, including whether the credit default swaps (CDS) market was manipulated by short sellers spreading false rumors.

At the time AIG did provide the attorney general’s office with documents on CDS, another source familiar with the matter said.

The sources requested anonymity because they were not authorized to speak publicly on the issue.

The CDS market is largely unregulated and opaque, comprised of privately negotiated contracts among fund managers and broker-dealers. They may be used for emerging market bonds, mortgage backed securities, corporate bonds and local government bonds.

Another hot news tip from Steve (h/t) Congress wants new AIG bailout probe.

The derivatives traders that hit the jackpot with last fall’s AIG bailout are getting more attention from the government.

More than two dozen Democrats in Congress called on Thursday for an investigation of the decision to pay in full the holders of credit default swaps written by AIG (AIG, Fortune 500).

The group of 27 legislators, led by AIG critic Rep. Elijah Cummings of Maryland, sent a letter to Neil Barofsky, the special inspector general for the Troubled Assets Relief Program, demanding the investigation.

The legislators say they want to know why AIG’s trading partners – a group that includes some of the biggest and most sophisticated financial institutions in the world – were made whole for risky, unregulated trades with scarce taxpayer funds.

“We would like to know if assessments were made of the health and total exposure risks of counterparties, such as Goldman Sachs (which, for example, claimed it had no material exposure to AIG), Barclays (BCS), Deutsche Bank and others,” the letter reads. “If such assessments were made, by whom were they made and what were the criteria guiding the assessments?”

Meanwhile, New York Attorney General Andrew Cuomo will subpoena the insurer for information about credit default swaps, the Wall Street Journal reported, as he continues his investigation of the money-losing company’s decision to pay out millions of dollars in retention bonuses.

The moves come less than two weeks after AIG tried to defuse questions about who benefited from last fall’s federal rescue, by naming the banks and municipalities that received federal funds.

Among the top recipients of the funds were two big Wall Street firms, Goldman and the Merrill Lynch brokerage now owned by Bank of America (BAC, Fortune 500), and a number of large European institutions including Germany’s Deutsche Bank (DB) and France’s Societe Generale.

AIG was pulled back from the brink of bankruptcy last September thanks to an $85 billion emergency loan from the Federal Reserve Bank of New York. With the tab for that rescue having more than doubled since then, and legislators across the nation wondering how well the money was spent, questions about the AIG rescue have been multiplying.

Among the issues being raised by lawmakers is why the counterparties on AIG’s swaps received full payment for positions that were worth considerably less in the market.

“Was any attempt made to renegotiate and close out these contracts with ‘haircuts’?” the Cummings letter asks. “If not, why not? What was the benefit of the decision to pay 100% of face value to the American taxpayers who provided the bailout funds and how did it support the goal of ensuring the stability of the economic system?” (all emphasis added)