AIG Bailout Redux: The Perils of Open-Ended Liability

This should come as no surprise given that supposed insurer AIG has drawn down more than $80 billion of its $122 billion facility, but the company is apparently in talks with the U.S. government to be bailed out of its bailout. It wants to convert a goodly amount of its existing government loan to equity, thus cutting its interest payments, which are currently set at 850 basis points over LIBOR.

Good for AIG, I suppose, but it points to how open-ended the two-sided AIG liability remains. It is serving as a kind of orifice via which the global credit default swap system pushes out its collateral calls, and it is forcing the U.S. government (read: you and me) into levering up on the other side.

As long as asset prices keep falling, increasing the amount of collateral required in AIG's "policies", these calls will keep coming, making AIG's liabilities – and therefore ours – frighteningly open-ended. The situation is, of course, made worse by AIG's inability to sell any of its functioning assets into a marketplace where buyers are having trouble getting credit.

Comments

[Moon Kil Woong:]

Let them go belly up. They recently have been found to just be arbitrating the government loans to pay themselves. They effectively ad 0 to the economy asides from whatever their executives spend on luxuries.

2008 Nov 08 04:52 AM

[Idiot buster:]

Idotic idea to let AIG go belly up. Millions of individuals (American Citizens) are insured for life and other things. Who is going to cover them after AIG goes belly up...

On Nov 08 04:52 AM constructe wrote:

> Let them go belly up. They recently have been found to just be arbitrating
> the government loans to pay themselves. They effectively ad 0 to
> the economy asides from whatever their executives spend on luxuries.

2008 Nov 08 07:19 AM

[Idiot buster:]

????

2008 Nov 08 07:20 AM

[this4now:]

You miss the whole point here. Where was the oversight and regulation we pay billions for? We have agencies and congressmen who spend billions to assure us our financial systems and process are sound and make sense. Where are they now and how do they justify this? The trust of the country wwas placed in their hands and what did they do with it? Now the least they can do is try to protect the many that keep them well paid and in office.

2008 Nov 08 08:28 AM

[I weep for ...:]

Constructe:
You are a moron.

2008 Nov 08 08:29 AM

[GITCharlotte:]

What happened with Sabane Oxley? We need to put a few more CEO's in jail for fraud, etc.

2008 Nov 08 08:41 AM

[Leon DiJust...:]

AIG is only the tip of the iceberg. Both the executives of publicly traded companies AND legislators need to be held accountable. Otherwise, we have no reason to place ANY confidence in either.

Currently, the American public is kept in the dark regarding much of the legislation. Every issue needs to be made and voted on publicly and be individually issue specific. Not a 'part-this' and 'part-that' creation from the Isle of Dr. Moreau.

Moreover, when ANY public corporation collapses, there should be ABSOLUTELY no severance paid to exiting executives (Stephen HIlbert, the former CEO of Conseco was paid $47.1 Million severance after the company filed Chapter 11).

In many cases the executives themselves should be heald liable.

Likewise with legislators. EVERYTHING they do should be a matter of public record which is easily accessilble to everyone. Catering to special interests and lobby groups is tantamount to complete malfeasance.

If those of us in the general constituency operated our businesses and performed our occupational performance as or legislators do, not only would our businesses and workplaces shut down, they would convict us for larceny and hold us liable for damages.

I greatly suspect the demise of Elliot Spitzer was brought about primarily because of human failings which were exploited by the very parties he was attacking. Why else would 'NO CHARGES' be filed AFTER Spitzer plead GUILTY? Logic tells us that this is merely 'an exchange of hides'.
His for theirs. I am sure Spitzer has enough dirt on these thugs to bring a bunch of them down.

I say, not only would justice best be served by letting AIG go the way of Bear Sterns, but the execs should go directly to jail and their assets seized to remunerate those they skinned.

In addition, as I've observed the bankruptcy processing in these cases, it appears that the BK attorneys take grandly for themselves and leave little, if any, of the company assets to go to the creditors and shareholders. This is still another issue that seriously needs to be addressed.

On Nov 08 04:52 AM constructe wrote:

> Let them go belly up. They recently have been found to just be arbitrating
> the government loans to pay themselves. They effectively ad 0 to
> the economy asides from whatever their executives spend on luxuries.

2008 Nov 08 10:14 AM

[Jim O'Sullivan:]

AIG was, and I hope will remain, a great insurer, with enormous reserves, and army of underwriters and claims professionals who are second to none in their ability to operate in the difficult and risky world of assuming the risks of people and business with efficiency, integrity and professionalism. AIG has been taken down, not by its army of outstanding workers, but by a small group of thieves in two little offices in Connecticut and London who had nothing to do with AIG's core operations. AIG's leadership was wrong to trust them, but we can say that only with the wisdom of hindsight.
Disclaimer: I am an AIG employee, so I hereby confess my bias. But I know what I'm talking about. And I'm tired of seeing our decades of hard work trashed by people who don't.

2008 Nov 08 10:44 AM

[CJ-49:]

They were quietly 'set aside' so that W's friends could make some extra cash on the side. Unfortunately and in his own words 'they got drunk' leaving us with the painful and unnecessary hangover. For Joe the Plumber's sake put the jerk in jail.

On Nov 08 08:28 AM This4now wrote:

> You miss the whole point here. Where was the oversight and regulation
> we pay billions for? We have agencies and congressmen who spend billions
> to assure us our financial systems and process are sound and make
> sense. Where are they now and how do they justify this? The trust
> of the country wwas placed in their hands and what did they do with
> it? Now the least they can do is try to protect the many that keep
> them well paid and in office.

2008 Nov 08 11:53 AM

[Tom Armistead:]

AIG's mistake was agreeing to post collateral based on the market price of what they insured. AIG's book is mostly 2004 and 2005 Vintage sub-prime and actual losses when defined as principal and interest will most likely be manageable. MBi and ABK, who also wrote insurance in CDS form but are not required to post collateral, have experienced much less liquidity pressure even though the risks they insured had much more 2006 and 2007 vintage subprime.

Another mistake, making collateral requirements dependent on maintaining their ratings from S&P and Moody's.

I don't see the Federal involvement as an open ended liability - it is, as originally reported - a bridge loan, and needs to stay in effect until credit markets are restored to sanity. There was no need to add usurious interest rates and the confiscation of shareholder property to the equation.

I agree with Jim O'Sullivan, AIG's property and casualty operations are very well-repected in the industry and it is a real shame if their value is trashed by the stupidity of a small group of financial products employees: especially when the difficulties are caused by panicked credit market conditions that will eventually return to normal.

2008 Nov 08 02:10 PM

[BerkeleyBob:]

Isn't part of the problem that AIG engaged in CDS transactions which either were or were not re-insurance. What AIG's conduct resembled in this regard was similar to Enron's traders. I doubt the transactions were that complex so they could not be understood by mere mortals but were deliberately obfuscated, aided and abetted by the rating agencies. I have some sympathy for the plain vanilla insurance line employees in claims and underwriting who no doubt are ethical and competent. Recall that the fraudulent reinsurance transactions of a few years ago by AIG were intended to "dress up" their books and reduce reserve requirements.

2008 Nov 08 04:54 PM

[Moon Kil Woong:]

If AIG goes belly up they go into bankruptcy. The CEO and all poor performing execs get axed. Bankruptcy does not make Annuities etc. go to 0. Please read the bankruptcy codes. The reason the companies want to avoid bankruptcy is to protect their ass not to insure their customers are safe. Likewise, AIG is effectively acting bankrupt anyway. Business is not as usual there. The execs are engaging in stuffing as much cash as they can into their pockets and covering short term liability only.

I have a few friends that work for AIG. They also think it needs to go bankrupt. Right now they are all in limbo. The best they can hope for is to be sold off. Bankruptcy is a natural cycle of capitalism to purge the unworthy.

AIG fits in that category. Next year they will either ask for more $ or go bankrupt. How much of your $ do you want to spend on them?

2008 Nov 09 08:46 PM

[Timmothy Posey:]

If AIG goes up in smoke, then so does the $140b or so in the existing "bridge" loan from the Fed. Not to mention the endless ripple effect of possible TRILLIONS in unsettled CDS derivatives floating around the world.

2008 Nov 09 10:39 PM

[Moon Kil Woong:]

At this rate failure may not be an if but a when. Yes... does the US really want to end up eating the trillions in other hidden AIG garbage Goldman sold them. Paulson wants you to because he was CEO of Goldman when they sold them to AIG. Can you say "conflict of interest".

2008 Nov 11 01:27 PM

[monday1929:]

I've been calling AIG a "conduit" to funnel money to the insolvent JPM,
But "orifice" is a MUCH better description.

2008 Nov 12 09:15 AM

[Moon Kil Woong:]

Bankruptcy puts it into reorganization. It does not make every contract they have 0. It creates a credit event where contracts get settled and debtors line up to determine the amount and when they will get paid if at all. Currently, the execs at AIG are determining who to pay off as they hemmerage $. I am not so sure we should be trusting regarding who they pay off with taxpayers money. Obviously Goldman and JP Morgan. Hopefully execs can get a job there afterwards and Paulson is from Goldman. So don't piss them off. As for the rest... good luck. The US doesn't have enough money to pay a fraction of the $40-60 trillion CDS contracts or AIG's book.

Someone will loose eventually. So the shell game goes on just like Japan who refused to recognize their bank's bad loans. They basically kiled their economy for 20+ years. Right now Paulson seems to be on the let the US suffer decades as long as Goldman lives.

2008 Nov 16 07:08 AM

[monday1929:]

GREAT points, well made.


On Nov 08 10:14 AM Leon DiJusticia wrote:

> AIG is only the tip of the iceberg. Both the executives of publicly
> traded companies AND legislators need to be held accountable. Otherwise,
> we have no reason to place ANY confidence in either.
>
> Currently, the American public is kept in the dark regarding much
> of the legislation. Every issue needs to be made and voted on publicly
> and be individually issue specific. Not a 'part-this' and 'part-that'
> creation from the Isle of Dr. Moreau.
>
> Moreover, when ANY public corporation collapses, there should be
> ABSOLUTELY no severance paid to exiting executives (Stephen HIlbert,
> the former CEO of Conseco was paid $47.1 Million severance after
> the company filed Chapter 11).
>
> In many cases the executives themselves should be heald liable.<br/>
>
> Likewise with legislators. EVERYTHING they do should be a matter
> of public record which is easily accessilble to everyone. Catering
> to special interests and lobby groups is tantamount to complete malfeasance.
>
>
> If those of us in the general constituency operated our businesses
> and performed our occupational performance as or legislators do,
> not only would our businesses and workplaces shut down, they would
> convict us for larceny and hold us liable for damages.
>
> I greatly suspect the demise of Elliot Spitzer was brought about
> primarily because of human failings which were exploited by the very
> parties he was attacking. Why else would 'NO CHARGES' be filed AFTER
> Spitzer plead GUILTY? Logic tells us that this is merely 'an exchange
> of hides'.
> His for theirs. I am sure Spitzer has enough dirt on these thugs
> to bring a bunch of them down.
>
> I say, not only would justice best be served by letting AIG go the
> way of Bear Sterns, but the execs should go directly to jail and
> their assets seized to remunerate those they skinned.
>
> In addition, as I've observed the bankruptcy processing in these
> cases, it appears that the BK attorneys take grandly for themselves
> and leave little, if any, of the company assets to go to the creditors
> and shareholders. This is still another issue that seriously needs
> to be addressed.
>
> On Nov 08 04:52 AM constructe wrote:

Mar 08 07:17 PM