AIG Needs More of Your Grandkids' Money

As is typical with government, the initial number floated is only a fraction of the final cost. Based on how involveAIG (AIG) is with the credit default swap market, I don't even think $85 billion... err, $123 billion... err $150 billion will be sufficient. Now on the plus side the first $85 billion did a great service in helping to bailout Government Sachs (GS) and Morgan Stanley (MS). [Oct 17: Your Tax Money Paid to Investment Banks and Hedge Funds via AIG] I wouldn't even normally post this stuff since it is almost daily we hear of  new and different mini-bailouts, but the case of AIG is getting to be so egregious I want it in front of readers eyeballs.

Why this sham of an "ongoing concern" is allowed to live,and suck off our money is a joke; we're going to take a loss on this deal so just take it over fully, sell it off piece by piece and hope that what we sell off pays off 20 cents on the dollar for the liabilities we are on the hook for. Throwing bad money after good is useless - we're subsidizing a zombie.

This also showcases the government's meddling and the case of unintended consequences. Mark my words - when Obama's team does a home owner bailout, the unintended fallout will be immense - unless there is some historic level of sense and "loopholes" closed, you are going to see an avalanche of people who are now paying their mortgages begin to "default" to take advantage of whatever plan comes out of Washington in 2009 to "help stressed homeowners" - we'll check back at that time. Why should they be good little soldiers and pay their debts on a consistent basis when those in the bad behavior category get all the perks? Watch for it...

• The Bush administration was overhauling its rescue of American International Group on Sunday night, according to people involved in the transaction, amid signs that its initial credit line of more than $100 billion and the interest that came with it were putting too much strain on the ailing insurance giant.
• The Treasury Department and the Federal Reserve were near a deal to invest another $40 billion into the insurance giant, these people said. The new cash, which would be part of a huge restructuring of A.I.G.’s debt, comes after the government made an $85 billion emergency line of credit available in September to keep it from toppling and another $38 billion line when it became clear that the original amount was not enough. The money would come from the $700 billion that Congress authorized the Treasury to use to shore up financial companies.
• When the restructured deal is complete, taxpayers will have invested and lent a total of $150 billion to A.I.G., the most the government has ever directed to a single private enterprise.
• The government’s original emergency line of credit, while saving A.I.G. from bankruptcy for a time, now appears to have accelerated the company’s problems. The government’s original short-term loan came with an expensive interest rate — about 14 percent — which forced the company into a fire-sale of its assets and reduced its ability to pay back the loan, putting the company’s future in jeopardy.
• The new deal would make the government a long-term investor in the future of A.I.G., something that Treasury Secretary Henry M. Paulson Jr. had previously said he hoped to avoid. As part of the restructuring, the government would lower the loan amount to $60 billion from $85 billion, but lengthen the duration of the payment schedule to five years from two years and also lower the interest rate. (wow, it's not turning into quite the "great deal for the American taxpayer" it originally was sold as - but again the key thing is Uncle Hank bailed out Goldman and Morgan - that's the important thing)
• The government is also planning to spend an additional $30 billion to help A.I.G. buy “collateralized debt obligations” that it had agreed to insure and put them into a new entity, effectively removing them from A.I.G.’s balance sheet. (ah, here are the dirty little secrets - I was wondering where they were hiding - so now, you - the American taxpayer - are the proud owner of CDOs that are toxic waste. Let me guess, if I hold it long enough I'll make a lot of money - yep; heard that one before. Oh goodie, on top of it a new entity to house the crud - can we call it CRUD Incorporated? I mean as taxpayers we get to name our new entities right?)
• A.I.G. would contribute $5 billion to the new entity, which would buy $70 billion of C.D.O.’s at 50 cents on the dollar. (aha, I love when a plan comes together - we buy something worth 20 cents on the dollar for 50 cents on the dollar and then tell the American taxpayer if we are good soldiers and hold it for a LONG time when the market comes back to normal we'll be able to sell it for 70 cents on the dollar - we're all winners here! What a steal for us! Here is my prediction - the vast majority of this will expire worthless circa 2011-2012 and just burn into the ether not followed by anyone but some GAO bureaucrat)
• Finally, the government would invest another $20 billion to help A.I.G. buy residential mortgage-backed securities and similarly place them into another entity. (oooh! aahh! Can we call this one the Mortgage CRUD Incorporated? Or how about the Reverse Robin Hood Incorporated? More appropriate perhaps??)
• The goal of both programs is to create separate entities to buy and hold A.I.G.’s most toxic assets and is aimed at shoring up the company’s balance sheet so it can continue operating and keep it from rushing to sell assets at depressed prices. (and we'll wind down these 2 separate entities until there is nothing left but a black hole formerly known as US taxpayer dollars - err, I mean these super duper entities will hold said toxic waste for 5 years and then we'll sell for a profit and send the money back to our grandkids! Yep)

Sickening.

[Sep 16: Federal Reserve Considering Loan Package to AIG]

Comments

[1worldcurrency:]

Every Day I wake up shocked that Paulson has not been forced to resign.

2008 Nov 10 08:22 AM

[herbert hoover:]

Paulson, Bernacke and both houses of Congress should all be forced to resign. Who needs them? Let AIG run the country. Apparently, they own the Treasury and the Fed. When can I get my personal bailout?

2008 Nov 10 09:11 AM

[je:]

They are bailing these guys out to keep their corrupt activities from being reviewed by the courts in bankruptcy hearings. Paulson and that entire bunch should be wearing stripes. JPM, GS, C, BAC all need tobe disolved and the past and present leadership jailed. Instead they keep shoveling smaller banks in to the belly of these beasts.

They are stealing us blind and malking a fortune on this market liquidation killing investors and pension plans and they do it with a glad heart as if they deserve all they can steal.

2008 Nov 10 10:47 AM

[je:]

www.bloomberg.com/apps...

Check out this article. These guys are afraid of nothing.

2008 Nov 10 10:53 AM

[who:]

well, with only 3 months to keep their jobs time is running out to help their friends and get a cushy position when they leave.

the first attempt failed and only prolonged the issues, now with the USA picking up the tap and essentially nationalizing AIG, it can't fail.

2008 Nov 10 11:23 AM

[mindyourfre...:]

Amazing. Too big to fail, huh? So just keep throwing money at them at with the hope that it will keep this sinking ship afloat just long enough for the taxpayers to eventually own their problem. Let AIG fail and put that money into something viable. This entire televised fiasco should come with a XXX rating. "Corporations Gone Wild".

2008 Nov 10 12:18 PM

[patr:]

I think that it is outrageous that Paulson and his group of misfits are giving AIG more money after they take their lavious parties while we are paying ---They made their mess with GREED and now want the average tax payer to allow them to continue their ROBBING US--- AND THEY AREN'T EVEN USING A GUN.

LEAVE THE INTEREST RATE AT 14%^ MAKE THEM PAY BACK EVERY PENNY WE THE PEOPLE ARE LOANING THEM------THIS IS NOT A GIFT---AND DO NOT GIVE THEM ONE CENT MORE-----ANY CONGRESSMAN WHO ALLOWS THIS TRAVESTY SHOULD ALSO LOOSE THEIR POSITION .

2008 Nov 10 12:51 PM

[WAKEUP:]

AIG is a failed criminal enterprise. Stop propping up the walls of their ruined fortress, and let it crash to the ground. Other insurance companies and various financial entities are going to have to take over the administration of AIG's products, anyway. Let's get on with it, NOW. Start by imprisoning Maurice "Hank" Greenberg for 100% of what's left of his wretched life. He is the original architect of all that's wrong with AIG, and he deserves severe punishment for his crimes. Don't let him get away with it just because he's old. And don't be fooled by his ridiculous assertions that he is broke, or anywhere close to broke. That miserable old thief has money stashed in more than 100 countries, not counting the United States.

2008 Nov 10 02:48 PM

[raising4dau...:]

"ANY CONGRESSMAN WHO ALLOWS THIS TRAVESTY SHOULD ALSO LOOSE THEIR POSITION ."

We did a good job of taking out the Republican trash last week. Suggest we give Obama-mania a try for 2 years and then take the Democrat trash in Congress out to the curb too.

2008 Nov 10 10:41 PM

[Novice6:]

Thanks for the great article. The government knows that criminal prosecution is not possible for the rats that destroyed AIG. That is, proving criminal activity in a court of law is either impossible or not cost effective because of the number of defendants that would be tried. The US government will continue to bail out firms where this is the case. The problem is that the rats are still in the buildings; "continuing to do business".

2008 Nov 11 06:26 AM

[monday1929:]

Resign? He should be jailed.


On Nov 10 08:22 AM squashnut wrote:

> Every Day I wake up shocked that Paulson has not been forced to resign.

2008 Nov 12 09:00 AM