AIG Bailout: Initial Cynicism Justified Now More than Ever

The saga at AIG just gets more and more pathetic; the government is repeating the same pattern [Sep 16, 2008: Federal Reserve Considering Loan Package to AIG]. When they swoop in to rescue, they claim losses will be limited, it's a long-term "investment" and "heck, we may even make money in the end". They said we'd be limited to $200 billion in commitments "worst case" with FranFredron - and already Freddie (FRE) has come to the trough twice and Fannie (FNM) is on its way.... now we go on with AIG [Nov 9, 2008: AIG Needing More of Your Grandkids Money]. My initial cynicism towards the "cost" of the AIG bailout has been more than justified - it started as $85 billion, and before Tuesday had grown to $150 billion.

As is typical with government the initial number floated is only a fraction of the final cost. Based on how involved AIG is with the credit default swap market I don't even think $85 billion... err, $123 billion... err $150 billion will be sufficient.

.....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.

The sick thing is the original bailout, as reported by Bloomberg, was basically a payoff to Goldman Sachs (GS) and Morgan Stanley (MS) - i.e. a direct transfer of taxpayer dollars to those firms (via a conduit called AIG). You really should read this one if you are a newer reader: Oct 17: Your Tax Money Paid to Investment Banks and Hedge Funds via AIG. Oh but we're not done yet - the absurdity of this all is much like Citi (C), we are going to get common shares! (yee haw!) in return for our money! Joyous! Shares in what would be a stock worth $0 in return for taking on the risk of propping up said entity. A wonderful deal.

• American Insurance Group, the insurance giant that is 80-percent owned by the US government, is in discussions with the government to secure additional funds so it can keep operating after next Monday, when it will report the largest loss in U.S. corporate history, CNBC has learned. Sources close to the company said the loss will be near $60 billion due to writedowns on a variety of assets including commercial real estate.

• That massive loss is likely to spur downgrades in its insurance and credit ratings that will force AIG to raise collateral that it doesn't have. In addition, if AIG's book value falls below a certain level, as it seems certain to do, it will trigger default in certain of its debt instruments, say people familiar with the situation.

• All of this adds up to a huge headache for the Federal Reserve and Treasury, which have already provided over $150 billion of assistance to AIG.
• Talks between the government and AIG are focused on how the company can swap some of the debt held by the government for equity in AIG. (this is just absurd - the equity is worthless, just plain worthless). The problem is that the government's ownership stake cannot exceed its current 79.9 percent, leaving officials to try and find a creative way to transfer value to the US in exchange for AIG reducing its debt so that it can then borrow more from the government to meet its collateral calls.

Not only is this absurd but we are doing the same with Freddie and Fannie; but it's not in the public light anymore - the losses are going to be massive there. And we'll be doing the same for Citigroup and all those Countrywide loans and Merrill Lynch toxic assets sitting inside Bank of America (BAC). Not to mention the Bear Stearns adventure ($29B) that the Federal Reserve manages. It's plain amazing that the concept of trading money for worthless shares is even contemplated. It's a zombie! I said so in November, and it's a zombie squared (or cubed!) now. What a sham (again if you have time to read one article, read the October 17th piece about how the original infusion was basically Hank Paulson paying off the investment banks for counterparty risks - these dirty deeds are everywhere but not spoken about - "too complicated")

[Nov 11: AIG Executives Caught Again]

[Oct 8: AIG Executives Party it Up Post-Bailout]

Disclosure: No position

Comments

[Crocodilian:]

We need a new term for AIG at this point. "Bailout" implies that there's something that might float, if you "bailed" enough water. This doesn't apply to AIG.

AIG appears to be an (historically) attractive insurance business, to which a ruinously (criminally?) bad set of bets were attached.

The "bad bet book" dwarfs the insurance company, to the extent that the insurance company doesn't really matter; of all the cases for a "bad bank" solution, AIG is among the most compelling.

Feb 25 11:14 AM

[ecliptix543:]

Absolutely brilliant. Why create a bad bank when we already have the largest and worst one in world history at our doorstep?!?!?


On Feb 25 11:14 AM Crocodilian wrote:

> We need a new term for AIG at this point. "Bailout" implies that
> there's something that might float, if you "bailed" enough water.
> This doesn't apply to AIG.
>
> AIG appears to be an (historically) attractive insurance business,
> to which a ruinously (criminally?) bad set of bets were attached.
>
>
> The "bad bet book" dwarfs the insurance company, to the extent that
> the insurance company doesn't really matter; of all the cases for
> a "bad bank" solution, AIG is among the most compelling.
>
>
>

Feb 25 11:35 AM

[Crocodilian:]

On Feb 25 11:35 AM ecliptix543 wrote:

> Absolutely brilliant. Why create a bad bank when we already have
> the largest and worst one in world history at our doorstep?!?!?<br/&g...

My point was that the AIG derivative book, and the AIG Insurance company don't belong together. AIG Insurance company is profitable, can have a future, and its operationally, legally, and functionally distinct from the derivatives book (AIG Financial Products)

The "Bad Bank" model, as it applies to AIG, means separating the derivatives from the insurance business.

Something very much like this will happen if, as rumored, they file for bankruptcy.

Feb 25 11:45 AM

[James Wilson:]

Stimulius NOT NEEEDED !!!!!! NEW JAILS NEEDED !!!!!!!!

New Estimates that over 50 % of all Subprime Loan paper work does not even exist !
And there are no Computer Tapes with images of the loans either!

Subprime Lenders never tansfered the Loan Imagies to tape !!!!!!!
Subprime Lenders destoryed the paper work and covered up their crimes.
FBI warned the Bush Whitehouse in 2004 that Regualtors were not doing their jobs in making sure the tapes werre made and stored correctly. The FBI was told to cease.

Feb 25 11:58 AM

[FORMERclient:]

AIG has to be the worst case of extremely poor management. After already receiving $150 BILLION it has the nerve to even consider asking for more government (I me OUR TAXPAYER) money to allow AIG to waste more money and more time until it finally has no choice but to file bankruptcy. I say effective today, the goverment takes over AIG and begins an immediate sale od all of AIG's assets. The longer they wait the worse thing will get and the lower the price we will get for the assets. If AIG had sold assets when the 1st got the bail out money they might of gotten $0.50 on the dollar or so but NO they felt they needed more. Now we will be lucky to get %0.20 per dollar for the assets that are becoming more and more worthless every passing day. Why wait, it is not going to get any better so why throw more money at a company that is in such a mess. Sell it NOW before it becomes worthless!!!!!

Feb 25 11:58 AM

[Crocodilian:]

On Feb 25 11:58 AM FORMERclient wrote:
> Sell it
> NOW before it becomes worthless!!!!!

It actually _is_ worthless. I'm not sure why the stock trades for anything (44 cents, giving a market cap of $1 billion) , but the government explicitly owns %80, and are going to have to come up with tens of billions to keep it from going bankrupt.

There is no one who will buy the company-- Liddy has been trying to sell bits of the company since the fall, most recently, there were no takers for their Asian insurance unit-- see the WSJ story
" Any Takers for AIG's Asian Arm?
Auction of a Crown Jewel Generates Scant Interest; More Fed Headaches" (WSJ: 2/25/09)

Feb 25 12:19 PM

[Gre:]

After all the incremental investments in AIG over the past months I thought we taxpayers owned 300% of AIG. Or is my math wrong?

I figure we own 100% of the assets and 200% of the liabilities. So that's how I get 300%.

Seriously, I am just numb over this mess.

Feb 25 01:11 PM

[endoftheworld:]

This government can pride itself on the greatest ever re-distribution of wealth - from those that win and earn to those that risk & lose. This exemplifies the curious foundation for American society - capitalism when things are good, socialism when things are bad. And people wonder why we're hypocrites.

Feb 25 02:24 PM

[Poor me:]

AIG Insurance company. I think they will come out on top. Why? Maybe I'm way off, but I think Obama has plans for them of some sort. Maybe they will back up the entire mortgage plan, or maybe they will have something to do with the National Health plan they are pushing right now. Maybe I've been watch to many movies. I just don't trust any of them anymore. Conspiracy theory.

Feb 26 02:28 AM

[Crocodilian:]

On Feb 25 02:24 PM endoftheworld wrote:

> This government can pride itself on the greatest ever re-distribution
> of wealth - from those that win and earn to those that risk &amp;
> lose. This exemplifies the curious foundation for American society
> - capitalism when things are good, socialism when things are bad.
> And people wonder why we're hypocrites.

You might ask the question: Who is the Government bailing out when it "bails out AIG"?

They are clearly NOT bailing out AIG itself -- AIG shareholders will end up with zero.

The people who are being bailed out are AIG's counterparties on the derivatives contracts they wrote. So if, say, John Paulson bought a CDO on some toxic MBS security, underwritten by AIG-- and that MBS has collapsed . . . its payday for John Paulson.

Would be really interesting to know who who took the other side of the derivatives book that AIG wrote: they're getting 100 cents on the dollar of what AIG wrote, paid for by you and me.

Mar 02 07:55 AM