That Sinking Feeling

Image courtesy of flickr/David Wild

Image courtesy of flickr/David Wild

AIG is back to the trough for another $30 billion. We already gave them $150 billion.

AIG — supposedly a firm in the insurance business — got into trouble taking an astounding $450B unhedged bet in the Credit Default Swap (CDS) markets. They insured the holders of mortgages and other asset backed securities.

I have no idea how you can consider yourself an insurance company and take the largest unhedged bet in the history of business.

Folklore suggests that the original $150B deal was made quickly over the telephone with former Treasury Secretary Paulson. A default by AIG would sent many firms instantly into bankruptcy — including UBS and Goldman Sachs (need I say more?). These banks were technically hedged – but their hedges assumed no counterparty risk (i.e. their hedges would only work if AIG was solvent). FYI, a hedge with counterparty risk is not a real hedge. So these banks share some blame too. In addition, our regulators were asleep at the wheel. Essentially, there was no oversight – even though the taxpayer is covering the downside.

At the time, the deal seemed like a good one. The taxpayer (in contrast to a number of other deals) got equity worth 79.9% of the firm. We had the upside!

However, we now know that there was no attempt to value the firm. If the most basic valuation was done, it would be evident that the firm had a huge negative net worth – probably -$250B!

Valuation? –You gotta be kidding. Knowing the value of what you are buying? — Not required! This is the legacy of our government’s actions during the financial crisis.

For each working American, we have written a check to AIG for $1,200 because of the reckless bets they took.

On March 1, AIG announced their fourth quarter performance — a loss of $61.7 billion or $22.95 per share (where the shares are worth only $0.55). Have you heard of the expression “throwing good money at bad”?

And now, — more of the same. Another $30B on March 1, 2009. There is also a key statement in the release:

As significantly, the restructuring components of the government’s assistance begin to separate the major non-core businesses of AIG, as well as strengthen the company’s finances. The long-term solution for the company, its customers, the U.S. taxpayer, and the financial system is the orderly restructuring and refocusing of the firm. This will take time and possibly further government support, if markets do not stabilize and improve.

Read the full release.

There is (a little bit of) good news and (alot of) bad news here.

First, the good news. The government has realized they must unwind this entity. “Restructuing” is code for “unwind”.

Now the bad news. More government support will be necessary.

No surprise. AIG will be back to the trough again and the government will puke more hard-earned taxpayer money that essentially rewards the reckless and incompetent actions of AIG.

No wonder markets are trading down. Ironically, confidence is increasing – but in the wrong way. We are becoming more confident that more of our money will be wasted.

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One Response to That Sinking Feeling

  1. billy-bob says:


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