Nicholas Jones
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The U.S. has been dishing out the bailout funds at a truly stunning pace. It wasn’t too long ago that Fannie Mae and Freddie Mac received those first capital infusions. Since then, so much money has been dolled out that it’s difficult to follow who got what money, and who the next recipient of government funds is going to be.
I want to take a look back into some of the specifics of the bailout, and where there at today.
Being that I mentioned Fannie and Freddie already, let’s start there. The GSE bailout package gives the U.S. government the option to provide cash in exchange for preferred shares. The “limit” on the investment was supposedly set at $200 billion but, as mentioned previously, there was no real limit. That was the “estimated” amount figured into the equation.
We at Oxbury Research have been open about our beliefs regarding this transparent ponzi scheme since the beginning. As just mentioned, we’ve denounced their so called limits, and stated on several occasions that the funding needed would exceed the funds estimated for use.
Yesterday we got our first look into what kind of mess we are looking at with Fannie and Freddie. Fannie Mae reported earnings yesterday and they weren’t pretty. The GSE reported a record net loss of $29 billion. Now if Freddie has similar numbers, we are looking at in excess of a quarter of that $200 billion already gone to fairy land.
The problem is that the housing market, and the paper that backs it, has yet to his hit bottom. With the massive layoffs and rising unemployment, we must consider the prime mortgages that are now going to go into default. We have to look beyond the obvious affects of the subprime housing market and take a deeper look into the ripple effects that this credit crisis and economic downturn will have.
It won’t be long until the $200 billion mark is met and then exceeded. I’m sure when Joe Sixpack realizes that $200 billion was only an estimate, he’ll feel that he had a fast one pulled on him. I imagine that Joe won’t be too happy about that.
Price Check on Isle AIG
AIG is living proof that the figures put to these bailouts were derived on Fantasy Island, and the only people who believe them happen to be residents of this particular isolated land mass.
It didn’t take long for regulators to dump their initial claims of a $123 billion bridge loans, and replace it was a package consisting of $218 billion. But what’s $95 billion these days?
$40 billion of that will come from the $700 billion put towards the Treasury Asset Relief Program (TARP), but more on that shortly. This will allow AIG to receive a lower interest rate than the rates set for the bulk of the initial loan, but I promise you the train doesn’t stop there. This story is another to be continued…
The Real Bailout
From Bloomberg:
Nov. 10 (Bloomberg) -- The Federal Reserve is refusing to identify the recipients of almost $2 trillion of emergency loans from American taxpayers or the troubled assets the central bank is accepting as collateral.
Fed Chairman Ben S. Bernanke and Treasury Secretary Henry Paulson said in September they would comply with congressional demands for transparency in a $700 billion bailout of the banking system. Two months later, as the Fed lends far more than that in separate rescue programs that didn't require approval by Congress, Americans have no idea where their money is going or what securities the banks are pledging in return.
This money comes from a wide range of lending facilities used by the Fed. Of the 11 lending facilities used, 8 were created within the last 15 months. Some of these facilities include the TARP, Primary Dealer Credit Facility (PDCF), and the Term Lending Securities Facility (TSLF).
What exactly are these lending facilities? They are like a parking lot for bad assets. The troubled entity can go to these facilities and exchange their toxic assets for short term lending. The banks and institutions that have access to these facilities essentially have access to short term funds at a much lower interest than the market would set otherwise. They also have the ability to roll over these short term loans for, well, for as long as they need.
Since the changes (specifics of these changes can be found in previous articles) in the standards these facilities use, especially the TSLF, Fed lending has increased 140%. This happened in just 7 weeks.
Just like the growth in Fed lending, the costs of this bailout are amounting quickly, and I’m only referring to the nominal costs. The effects this creation of money and credit will on our economy will be spectacular indeed.
I was only able to touch on some of the issues surrounding the credit crisis bailout. There have been significant developments regarding our predictions for bailouts of Detroit, muni debt markets, credit card debt, and auto loan debt. There are still several credit land mines that have yet to be stepped on. I will be covering these more extensively in upcoming articles.
Disclosure: no positions
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This article has 16 comments:
I would be careful about your comments. Make false statements about insurance companies is illegal in most states and you may face fines or worse! I would retract them ASAP!
On Nov 11 07:32 PM sailingwindward wrote:
> Hurry and dump your A.I.G. insurance policy and/or stock, it will
> be worthless by years end, word on the street is that A.I.G is filing
> for bankruptcy in December 2008 the money being pumped in now is
> to help the bigwigs get their money out, and the taxpayer is going
> to be #1 on bankruptcy list.
On Nov 11 09:56 PM AIG IS A GREAT AMERICAN COMPANY. wrote:
> Salingwindward:
>
> I would be careful about your comments. Make false statements about
> insurance companies is illegal in most states and you may face fines
> or worse! I would retract them ASAP!
On Nov 11 11:56 PM sailingwindward wrote:
> This is not from rumor or hearsay, AIG attorneys have been working
> on this for months now, and the target date is December 2008, AIG
> is going to file for bankruptcy, that's a hard reality, and people
> who have an interest should be aware of this and not just the elite
> who are slowly getting money out on the taxpayers back.
I would recommend that you consult with an attorney. It is illegal to make false statements regarding the solvency of an insurance company in most states. Since you are using the internet to make these statements you are definitely violating the statutes in New York where AIG is domiciled.
These statements, advertisements, implications or innuendos about the solvency or condition of other companies may be a violation of:
Neb.Rev.Stat. §44-1525(1)(d) concerning misleading or misrepresenting the financial condition of any insurer;
Neb.Rev.Stat. §44-1525(2) concerning untrue, deceptive or misleading advertisements or statements; and
Neb.Rev.Stat. §44-1525(3) concerning derogatory, false or maliciously critical statements about the financial condition of an insurance company.
Increased replacement activity attempting to capitalize on public hysteria over the financial condition of insurers is particularly suspect and will be scrutinized by the Department of Insurance.
On Nov 11 09:56 PM AIG IS A GREAT AMERICAN COMPANY. wrote:
> Salingwindward:
>
> I would be careful about your comments. Make false statements about
> insurance companies is illegal in most states and you may face fines
> or worse! I would retract them ASAP!
On Nov 12 09:38 AM AIG IS A GREAT AMERICAN COMPANY. wrote:
> Heck: It is even illegal in Nebraska:
>
> These statements, advertisements, implications or innuendos about
> the solvency or condition of other companies may be a violation of:
>
>
>
> Neb.Rev.Stat. §44-1525(1)(d) concerning misleading or misrepresenting
> the financial condition of any insurer;
> Neb.Rev.Stat. §44-1525(2) concerning untrue, deceptive or misleading
> advertisements or statements; and
> Neb.Rev.Stat. §44-1525(3) concerning derogatory, false or maliciously
> critical statements about the financial condition of an insurance
> company.
> Increased replacement activity attempting to capitalize on public
> hysteria over the financial condition of insurers is particularly
> suspect and will be scrutinized by the Department of Insurance.
>
What is your name?
I'm sure without looking too hard AIG has broken many laws in many states.
I on the other hand am stating facts, AIG is like a bad gambler who is so far in debt with the bookies that he borrows money from his family (in AIGs case family is the government) but the gambler instead of paying his bookies off, he goes out gambles and loses the rest of the money, with no ability to pay, the bookies kill him, in AIGs case they just go bankrupt, end of story.
Now tell me where any of this is not true.
I'm sure without looking too hard AIG has broken many laws in many states.
I on the other hand am stating facts, AIG is like a bad gambler who is so far in debt with the bookies that he borrows money from his family (in AIGs case family is the government) but the gambler instead of paying his bookies off, he goes out gambles and loses the rest of the money, with no ability to pay, the bookies kill him, in AIGs case they just go bankrupt, end of story.
Now tell me where any of this is not true.
On Nov 12 01:20 PM monday1929 wrote:
> Then the officers of this company who swore what great shape they
> were in days before begging for a hundred Billion of taxpayer money
> should hire some more lawyers.
>
>
> On Nov 12 09:38 AM AIG IS A GREAT AMERICAN COMPANY. wrote:
You are here: Home : CFO Blog
INSURANCE
Knee-jerk Populism Part II
Posted by Tim Reason | CFO.com | Europe
November 12, 2008 2:00 PM ET
After writing a blog post at work yesterday about the AIG junket that wasn't , I was fascinated, and horrified, to go home and watch all the actual TV coverage.
This total non-story made it onto just about every news outlet you can imagine, including segments throughout the day on CNN. The height of ridiculousness was that AIG CEO Ed Liddy was forced to go on Larry King Live — as the first guest — to defend this ordinary conference against charges of being an executive boondoggle. (CNN realized midway through the day what a joke this story was and began inserting some balance into its reports, but couldn't stop pumping it in advance of the Larry King show.)
The absolute nadir was the original, breathlessly reported exclusive undercover investigative report by the Phoenix ABC affiliate. If you thought it was impossible to make something as excruciatingly boring as a 3-day insurance conference sound like an orgy at the Playboy Mansion, well, just click the video.
(Way to go, ABC15 reporter Josh Bernstein. Stay tuned for his story six months from now on why the bottom suddenly fell out of the Phoenix conference business.)
Or simply click on the slideshow to see the AIG executives "sitting poolside, drinking coffee, while other people attending the conference were in meetings." Coffee? Good grief! What a debauched bunch these insurance executives are. And how odd that they don't attend training sessions describing products that they designed!
Despite the fact that these guys were meeting in suits and ties at a table, surrounded by briefcases overflowing with work folders, other media outlets quickly began reporting that they were "lounging by the pool." Speaking from personal experience, having a meeting in the pool area of a conference hotel with your work colleagues in a dark business suit and tie in the hot sun is closer to a waterboarding than a boondoggle on the spectrum of creature comforts. The only reason anyone does this at all is that they're desperate for fresh air after days of inside meetings.
As AIG has admitted, it has behaved abominably in the past. Issuing billions in credit default swaps? That's terrible risk management. AIG executives hunting quail in the English countryside? That's a boondoggle. Putting on conference for financial planners that sell your product? That's good marketing.
The inability of the media, the government, and the public to distinguish between corporate excess and ordinary business is the result of the very same financial illiteracy that got us into this mess in the first place.
Most media outlets took great glee in reporting that this supposed "executive day spa" took place at the same time AIG's original bailout was revised. But most failed to note why it was revised: the terms were so onerous that they put AIG at risk of failing anyway. That's hardly good for taxpayers.
And pouncing on this company every time it attempts to conduct normal business anywhere other than an IHOP (as one CNN anchor suggested) is also a great way to make sure the bailout fails and we taxpayers never see that money again.
On Nov 13 12:35 AM sailingwindward wrote:
> It sounds to me like the people at AIG have misrepresented and mislead
> the public regarding it's financial condition (Neb.Rev.Stat. §44-1525(1)(d))
> They have also made untrue, deceptive and misleading statements (
> Neb.Rev.Stat. §44-1525(2))
> I'm sure without looking too hard AIG has broken many laws in many
> states.
> I on the other hand am stating facts, AIG is like a bad gambler who
> is so far in debt with the bookies that he borrows money from his
> family (in AIGs case family is the government) but the gambler instead
> of paying his bookies off, he goes out gambles and loses the rest
> of the money, with no ability to pay, the bookies kill him, in AIGs
> case they just go bankrupt, end of story.
> Now tell me where any of this is not true.
On Nov 13 01:47 PM AIG IS A GREAT AMERICAN COMPANY. wrote:
> Why would AIG go bankrupt? All of the CDOs they insured will be
> due in 2010, they stopped writing in 2005. Therefore, come 2010,
> they will be off the risk that has caused them to put up collateral
> and that debt will now be an asset on the balance sheet. AIG just
> needs a bridge, liquidity to put up the collateral until that time.
> They didn't have the cash on hand because due to the failure of LEHMAN
> they needed to put up billions of dollars overnight. You talk about
> AIG like ENRON. All they did was insure a product through a small
> division. They made a bad bet, took too big of a risk. They weren't
> cooking the books, etc... They were forced to accept a different
> accoutning model and it ended up costing them dearly. One or two
> people high up made that mistake apparently. However, the government
> will have the last laugh, they stand to profit in a huge way in two
> years when these CDOs are actaully worth much more than they are
> now. You have no idea what you are talking about or laws yet you
> continue to speak. You are what is wrong with this country, just
> like politicians and the media.
>
>
> On Nov 13 12:35 AM sailingwindward wrote:
On Nov 13 07:36 PM sailingwindward wrote:
> It is evident that you disagree with my information and have your
> own OPINION (your entitled to your own opinion, but not your own
> facts), only time will tell which one of us was right or knew what
> they where talking about, in your comments about AIG making a bad
> bet and taking too big of a risk only proves my point that AIG is
> like a compulsive gambler, who owes way too much to the bookies and
> will get killed when he fails to pay (bankruptcy), people need to
> get their money as far away from AIG as they can before they fall,
> just like Enron did.