DON'T BE FOOLED

BANZAI7 NEWS-- AIG announced Tuesday that it completed a deal wiping out $25 billion of its debt to taxpayers by selling stakes in two subsidiaries to the Federal Reserve Bank of New York.

The troubled insurer gave the New York Fed preferred shares of two of its international life insurance companies, including $16 billion of American International Assurance Co. and $9 billion of American Life Insurance Co. The deal was originally announced in March.

The deal brings the New York-based insurer's debt to the New York Fed down to $17 billion. AIG also still owes the U.S. Treasury $44.8 billion from a separate Troubled Asset Relief Program (TARP) loan, so the insurer still owes taxpayers just under $62 billion.

Here is the bottom line, the Fed has exchanged its interest as a "creditor" of AIG the holding company into "preferred shares" of two subsidiaries that AIG was unable to sell earlier this year. Debt for equity swap is a polite way of saying "screwing your creditors." But in the real world creditors in a foreclosure get the whole house, creditors in an insolvency get all the equity. In the AIG bailout world of moron hazard creditors just "get a piece of the action." More savy deal making by the Bernanke brainhouse.