Let AIG Go Bankrupt, Not America 27 comments
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Jim Rogers appeared almost warm and fuzzy on CNBC Asia last night. OK, not really. Here are a few of his quotes from the accompanying 4 minute video:
"Suppose AIG goes bankrupt, it is better that AIG goes bankrupt and we have a horrible two or three years than that the whole US goes bankrupt," Rogers said. "AIG has trillions of dollars of obligations, let them fail, let the courts sort it out and start over. Otherwise we'll never start over."
Bailing out the banks is going to increase the debt spiral and finally cause the destruction of the world's biggest economy, Rogers said.
"I think it's astonishing, they're ruining the US economy, they're ruining the US government, they're ruining the US central bank and they're ruining the US dollar," he said.
"You are watching something in front of our eyes, very historically, which is basically the destruction of New York as a financial center and the destruction of America as the world's most powerful country."
Japan's economic "lost decade" was caused by trying to bail out the banks, and the West risks running out of money if it doesn't let the bad banks fail now, Rogers warned.
Systemic risk is going to be the same in 10 months, 5 years or 10 years if the fundamental problem is not solved, he added.
"The idea that you have too much debt, too much borrowing and too much consumption and you're going to solve that problem with more debt, more consumption and more borrowing? These people are nuts."
Wall Street and the City of London are going to be "disastrous" for years, like in the 1950s and 1960s, and in 30 years, finance will "dry up and wither away" as we are entering a "long period of hard times," he said.
"Power is shifting now from the money shifters, the guys who trade paper and money, to people who produce real goods. What you should do is become a farmer, or start a farming network," Rogers said.
Inside we have a 2nd Rogers clip also from this morning where Jimmy discusses his continued bullish views on commodities in more detail.
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dealbook.blogs.nytimes...
www.nytimes.com/2009/0...
Clearly the process to unwind this company needs a patient, thoughtful hand that can clearly analyse risk before taking substantive action—risk that should have been prevented in the first place.
If only the Fed and treasury had 10% of the intellectual capital of Rogers.
www.nytimes.com/2009/0...
Not knowing is not acceptable. At this stage of a deepening crisis, no one is arguing that the government should let A.I.G. collapse into a disorderly bankruptcy. It is too interconnected. During the housing bubble, it used unregulated derivatives to insure mortgage securities that turned out to be toxic — without putting aside reserves in case it had to pay up. If it now went under, there could be a chain of catastrophic defaults among banks that hold the securities and related investments.
The A.I.G. bailouts fail the basic test of transparency: Who ends up with the money? Major financial institutions are not innocent victims of A.I.G.’s demise. They are sophisticated investors, and they should have known the risks being taken — and who profited mightily from the relationship before it all came crashing down.
Whoever the recipients are, they should be investigated for their roles in the crash and, to the extent possible, be made to pay for the bailouts.
The serial A.I.G. bailouts are especially problematic for their connection to the Wall Street bank Goldman Sachs. At the time of the first A.I.G. rescue last fall, it was reported by Gretchen Morgenson in The Times that Goldman was A.I.G.’s largest trading partner, with some $20 billion of business tied into the insurer. Goldman has said that its exposure to risk from A.I.G. was offset, or hedged, by other investments.
What is certain is that Goldman has lots of friends in high places — yet one more reason why this bailout has to be as transparent as possible. Lloyd Blankfein, Goldman’s chief executive, was the only Wall Street executive at a September meeting at the New York Federal Reserve to discuss the initial A.I.G. bailout. Also involved in the discussion was the then head of the New York Fed, Timothy Geithner, who is now President Obama’s Treasury secretary.
Who’s Really Being Propped Up in the A.I.G. Bailout?
Great Read.
Propping Up a House of Cards
One of the biggest worries, besides the considerable collateral damage to the banking system, is a risk that most people aren’t talking about, perhaps because it’s too scary. This one is probably easier to understand than any kind of financial chicanery: the dangers lurking below A.I.G.’s seemingly stable, highly regulated life insurance business. In the United States, A.I.G. has more than 375 million policies with a face value of $19 trillion.
If policyholders lost faith in A.I.G. and rushed to cash in their policies all at once, the entire insurance industry could falter.
“A ‘run on the bank’ in the life and retirement business would have sweeping impacts across the economy in the U.S.,” according to the A.I.G. document. “In countries around the world with higher savings rates than in the U.S., the failure of insurance companies would be a catastrophe.”
Look at mess from LEH demise and magnitude by a few thousand times to get a scenario of AIG demise.
Become farmers - back to the dark ages. Forget about currency, international trade, etc. - just barter with your neighbor!
This statement is not true. Nearly all derivatives have time limits. The longer the government can keep AIG going, the more derivatives unwind on their own. I hate AIG with a vengeance and think its executives should go to jail. AIG's shareholders are certainly wiped out. But most of AIG's business units are still operating, still making a profit, and can still be sold. My expectation is that is precisely what the government intends to do with AIG once they've got a handle on the systemic risk posed by the derivatives portfolio. At some point the systemic risk will be mitigated enough that they can go into receivership without creating a cascade of failures.
Citi is in a similar situation with their derivatives portfolio.
BofA is at risk, but BofA is a different beast. BofA has considerable cash flow and better risk-mitigation on its derivatives portfolio. It still, if I read their 10-K right, has 50 billion in liabilities and significant systemic risk from derivative assets.
Wells, JPM, and USB are in much better shape. Of the three I have only examined Wells' 10-K filing in depth. The derivatives portfolio Wells inherited from Wachovia is 1/8th the size of BofA's. Whereas AIG has almost 300 billion in derivatives risk, and BofA has 50+, Wells has only 11 billion in derivative liabilities, and Wells has 30 billion in derivative assets (using post-netting results, which for Wells are actually numbers I trust). The systemic risk to the asset side of Wells' derivatives portfolio (the 30 billion in assets) is not insurmountable for a bank that will have a nearly tax-free run-rate of 60 billion+ this year, and that assumes a 100% failure of all of its counter-parties.
Systemic risk for BofA's and Citi's much larger derivatives portfolios is a more significant issue.
I'm a bit surprised that none of the authors in these articles seem to have bothered to actually read the financial filings of the top-10 banks. Instead of speculating on the risk, try reading the financials so you can put actual numbers to it. Things become a lot more clear.
-Matt
I think everyone should just come clean. So far all problems have been solved by placing one level of debt on top of another. Eventually its got to happen now so lets get on with it and print money NAKED without any treasury, gold, silver, toxic assets, or any backing. REBOOT.
I think it is horifically wrong but if we are going to continue to do more of the same lets just skip to the end please and get on with it. Stop pretending. Its time to either get serious and live within our means. By that I mean using bankrupcy to ruin the irresponsible and allowing creative destruction to take place. Whatever assets remain they must be put into new hands. Governments on on levels (Fed, State, local) must balance their budgets, etc... If we as a country aren't going to go down the long and narrow road then just get on with it and print the money.
On Mar 04 01:43 AM The Daily Bail wrote:
> www.nytimes.com/2009/0...
>
>
> One of the biggest worries, besides the considerable collateral damage
> to the banking system, is a risk that most people aren’t talking
> about, perhaps because it’s too scary. This one is probably easier
> to understand than any kind of financial chicanery: the dangers lurking
> below A.I.G.’s seemingly stable, highly regulated life insurance
> business. In the United States, A.I.G. has more than 375 million
> policies with a face value of $19 trillion.
>
> If policyholders lost faith in A.I.G. and rushed to cash in their
> policies all at once, the entire insurance industry could falter.
>
>
> “A ‘run on the bank’ in the life and retirement business would have
> sweeping impacts across the economy in the U.S.,” according to the
> A.I.G. document. “In countries around the world with higher savings
> rates than in the U.S., the failure of insurance companies would
> be a catastrophe.”
Even options are pretty silly really. I mean there is a trade off on everything. Why buy a stock if you are simply going to write a call option. If you feel that you need to right a call option then probably you shouldn't have purchased the underlying stock in the first place.
If can actually understand the use of futures and options to hedge gas if you are an airline or something like that. I can even see doing the same if you are a large agricultural operation or a mining operation. I can see the use of these instruments in order to smooth out earnings. But they really aren't necessary if you are well capitalized. In the end using the instruments (while probably necessary for a leveraged operation) ultimately reduce your long term avg earnings. So I can see the use for some of this stuff. But if your a bank and you've just made a loan simply sell it or hold it. Why do you need a derivative......
It basically like Jim Cramer on Steroids. On day one he buys AIG. Then he gets scared so sells some shares short. Then writes a covered call......you get the idea. He ends up with all this stuff on his balance sheet but is quadriple hedged and can't make money either way. Counterparty risk exist however.
I get that derivatives have a time component but NONE of us or even the GOVT (I mean really none of them even read what the bills they vote on) has any idea how deep this hole is.
The question that seems to be debated these day basically amounts to HOW FAST DO WE RIP OFF THE BANDAID. Jim Roger thinks the body will die if we take too long. I agree. Others argue if we rip it off too fast then civilization fall into chaos. I personally think calm will help but we ultimately need the government to start dismanteling these companies quickly and responsibally. I'm afraid we have a government that is more concerned about how to take advantage of the situation and grow their monopoly all the while keeping leaching the tax payers to do so.
Did you not listen to Rogers? The government is full of luddites. You need to trust your leaders less and begin to realize they do NOT have our best interests at heart.
Here are 2 links to related stories I wrote this morning on AIG and Joseph Cassano.
The first link includes the 2 best and shortest video clips from B-52 bernanke's testimony yesterday before the Senate Budget Committee.
dailybail.com/home/200...
This 2nd link is a warm, fuzzy piece on Joseph Cassano. He is the person responsible for destroying AIG and taxpayer morale.
I titled it: Joseph J. Cassano Is An Irresponsible Asswipe Who Deserves To Spend The Rest Of His Days In Federal Prison
dailybail.com/home/200...
Both are short and quick and will make you feel better if you hate AIG.
For the rest of you who believe we have done well by saving AIG, you have no reason to see the articles. Just keep whistling by the graveyard.
It's funny one SNL, not so funny in real life.
But seriously folks, is there any plan to NOT keep throwing money at AIG, or do we just keep it up for the next 10 years? And what are the consequences if we don't?
For AIG, it does not matter anymore as the government owns 79.9% of it, and all the talk from day 1 was of breaking it up eventually. For the banks still relevant because their market cap is used to determine their solvency. Drive that down with disclosure and suddenly more banks become less solvent, prompting private capital flight from those banks, forcing more government lending and FDIC intrusion. There is no easy answer here except to suspend all financials from the stock markets. It's a brutal, no-win situation. While I admire Jim Rogers candour, he's a bit of a one-note guy, all commodities and bankruptcy advice. A bankruptcy of the world's largest insurer that bet its policy cash on derivatives is new territory that is so explosive a different approach is needed. An insurability collapse would crush the housing and commercial properties markets even further as insurance is often conditional to a sale. Again, more hidden risk.
I am pretty certain there is a major FBI investigation into AIG, but you will not hear about it for quite some time. Gathering whistleblower evidence as is likely here will require patience and negotiation.
The upside for the AIG story is that insurance is a highly regulated, profitable industry. The AIG portfolio has the potential to generate returns in the tens of billions of $$ per year. The taxpayer owns an asset that can pay for itself, eventually.
AIG = taxpayer buy and hold.
if i spilled a barrel of oil on the coast, which then caused tens of thousands to clean up, do you think i will get the same nice treatment that was given these AIG execs? losing 60 BILLION dollars is the same as 10 exxon valdez spills -- but then again, exxon valdez execs mostly got away with that mess too.
On Mar 04 09:37 AM the_lazy_observer wrote:
> and how come we don't see anybody going to jail due to this mess?
> these greedy guys who caused the collapse of AIG should be put to
> jail for the expense they incurred from the taxpayers.
> if i spilled a barrel of oil on the coast, which then caused tens
> of thousands to clean up, do you think i will get the same nice treatment
> that was given these AIG execs? losing 60 BILLION dollars is the
> same as 10 exxon valdez spills -- but then again, exxon valdez execs
> mostly got away with that mess too.
I have no issue with timely unwinding.
I have issue with my money and the generations to come paying for it.
I guess it is easier to keep pretending and hope it turns out OK rather than investigation and punishment.
If investigations ever manifest I would bet that K-Street lobbyists and most representatives will be implicated.
Time Will Tell.
On Mar 03 11:49 PM Aristophanes wrote:
> Bankruptcy courts cannot help the AIG mess. The moment a Chapter
> 11 comes from AIG is the moment about 50% of banks in the West go
> into a severe liquidity and insolvency problem due to the counterparty
> risk. The CDS contractual obligations held by AIG are that big. If
> the federal government forces contractual abrogation the scope of
> the failure will be staggering. Almost all Western lending will stop.
> There will be nowhere near enough solvent banks with enough capital
> to lend. The courts and the FDIC would be overwhelmed with the problems.
>
>
> Worse, if AIG fails in this market neither the insurance authority
> nor the the company in its current form can handle the liabilities
> of a mass withdrawal of insurance policies (redemptions). There is
> simply not enough cash on the balance sheet as it has been sucked
> out to pay CDS's prior to September 2008, leading to the Federal
> intervention. That complicates the matter very much because policy
> holders have very high claim authority, and that varies by jurisdiction.
> Where I live, they are #1 on the list. There is a massive international
> scope to this as well. How do you deal with that?
>
> You pay off the policy holders, then waves of banks fail as they
> lose their bonds and CDS positions, overwhelming the FDIC and therefore
> depositors. This spooks people (as with the UK's Northern Rock) and
> there is a bank run and more banks fails until the government has
> to print money to guarantee deposits, refinancing the FDIC the nasty
> way. Worse, banks will start calling in loans, even to customers
> with good credit, in the world's largest margin call. Imagine the
> foreclosure problem x10, this time aimed at small and medium-sized
> businesses—every company too small and not well enough connected
> to float a junk bond.
>
> That's the AIG scenario. That cannot be allowed to happen. I'd rather
> walk away from an Ice Age than be hit by a meteor. As much as I like
> Jim Roger's plain language assessments, he's too simple in his analysis.
> A single judge in a Chapter 11 bankruptcy court in Delaware cannot
> handle all those interlocking obligations in a timely manner. Not
> with a company as massive as AIG measured in trillions of $$$. A
> better unwinding process (the S&L model) is needed.
>
> The CDS's have a $ amount that can be tagged to them. That's the
> absolute cost. It's not a "black hole", it's just a very large, but
> measurable hole. In the long run (a very long run) the offsetting
> revenues from the insurance side can pay back the cost. The single
> advantage government has here is time. They can sit on the AIG productive
> assets for a very, very long time, and finance the current shortfalls
> with the lowest cost loans on the planet. That's the current scenario.
> I don't like it, but it is the least bad option.
>
> This is the same with Fannie & Freddie. They will have to permanently
> stay on the books of the Federal Government to earn their way back
> into the black. One estimate put it at 100+ years for them to do
> so.
>
> Rogers is right about Wall St. and London's City. Good. They need
> a comeuppance. While Wall St. was a "wasteland" in the 1950's for
> Jim Rogers, real manufacturing centres like Detroit and Cleveland
> were thriving, employing millions of people in good-paying, proud
> jobs. I worry far more about the guy down the street having his loan
> called in than what happens in the land of financial wizards with
> their toxic derivative fallout alphabet soup of idiocy.
>
> I would also being hearings into professional negligence for many
> of the people who oversaw those contracts and profited from them,
> especially at Goldman Sachs and AIG itself. It's time to "crack nuts"
> and clawback, punish and penalize. Once the screws are turned on
> a few key players, all sorts of mea culpas and malfeasance will
> be uncovered. I love finger pointing and whistles being blown. Great
> theatre. Sometimes, Obama, it's proper and just to "disparage wealth".
>
>
> Let AIG be unwound slowly and methodically identifying and targeting
> the problem contracts and working them out. It's grim, gritty work,
> but it has to be done. This will be a long process. So was the S&L
> unwinding. We got through it, so quit panicking.
"China is too overpopulated, lacks too many natural resources, and is culturally and historically too xenophobic to run the world."
Xenophobia never stopped England from running the world for a while. Being an imperial power is not about virtues, or even about having a better political/economic system. It is about accumulation of wealth and deployment of worldwide power to perpetuate the accumulation....the Chinese certainly understand that.
On Mar 04 01:58 AM MattZN wrote:
> I'm a bit surprised that none of the authors in these articles seem
> to have bothered to actually read the financial filings of the top-10
> banks. Instead of speculating on the risk, try reading the financials
> so you can put actual numbers to it. Things become a lot more clear.
>
>
> -Matt
That's assuming the financials to be accurate. Remember Enron? Have much faith in the ratings agencies still? Corruption has been rampant in the financial world. Not to mention the government. That is what is bringing the system down.
On Mar 03 11:37 PM MarvinMBA wrote:
> You do not have to be a statistical genius or financial guru to realize
> that we are in deep sxxt right now. All of the Economic Models are
> in shambles and can never be used again to predict anything. WE ARE
> IN A DEEP DEPRESSION THAT WILL LAST FOR YEARS. ITS GOING TO BE IMPOSSIBLE
> FOR UNCLE TO BAIL US OUT OF THIS MESS..THERE IS NOT ENOUGH MONEY
> AROUND OR CONCEIVABLY PRINTABLE OR BORROWABLE TO COVER ALL THE LOSSES
> IN THE TOXIC PAPER.
> Any wiff of inflation will drive the system bananas. Stay cool and
> collected and hold onto what few bucks your have because they will
> buy more going forward. Get the Apple Cart painted and be ready to
> go out in the street or door to door...were going back to the 30's...MarvinMBA
>