How Much Worse Can AIG Get?

Today is a day for dark warnings about what might happen at AIG should the bonuses not get paid:

"It's going to blow up," said a senior Financial Products manager, who spoke on condition of anonymity because he was not authorized to speak for the company. "I have a horrible, horrible, horrible feeling that this is going to end badly."

Um, hasn't it already ended badly for AIGFP? Hasn't the unit already lost hundreds of billions of dollars and effectively bankrupted its parent? How much worse can things get? Well, let's ask Andrew Ross Sorkin:

If you think this economy is a mess now, imagine what it would look like if the business community started to worry that the government would start abrogating contracts left and right...
Here is the second, perhaps more sobering thought: A.I.G. built this bomb, and it may be the only outfit that really knows how to defuse it.
A.I.G. employees concocted complex derivatives that then wormed their way through the global financial system. If they leave -- the buzz on Wall Street is that some have, and more are ready to -- they might simply turn around and trade against A.I.G.'s book. Why not? They know how bad it is. They built it.
So as unpalatable as it seems, taxpayers need to keep some of these brainiacs in their seats, if only to prevent them from turning against the company.

This is overstated. No one is saying that the government should start abrogating its contracts -- which is to say, the contracts entered into by the government. But if a company runs itself into the ground by entering into all manner of bad contracts, and it's then taken over by the government as the only alternative to letting it fail outright, the case for honoring those contracts is much weaker, and the precedent of reworking some of those contracts does not mean that "the government would start abrogating contracts left and right".

As for the bomb metaphor, the bomb has already exploded. It's far too late to defuse it. The job of the highly-paid employees at AIGFP is simply to clean up the mess, post-explosion.

Since they know where the shrapnel has landed, are they well placed to "trade against A.I.G.'s book" should they leave? Yes, probably. But AIG is still an insurance company, and AIGFP is, at heart, an insurance company in run-off. It's hard to trade against such a thing.

Now it's possible that AIGFP still has a large trading book holding lots of positions which need to be unwound in a relatively short period of time. And it's also possible that those positions are so complex that only the people who put them on are really qualified to unwind them. But no one at AIG has really come out and said this. So unless and until I'm told that this is a major problem by someone qualified to make that determination, I'm going to stick with my view that the dangers of not paying these bonuses might not be all that great.

Comments

[sglaney:]

"It's going to blow up," said a senior Financial Products manager, who spoke on condition of anonymity because he was not authorized to speak for the company. "I have a horrible, horrible, horrible feeling that this is going to end badly."

Yes, Mr. senior Financial Products manager, I hope that it does end up badly for you financially...

Mar 17 11:30 AM

[Amouna:]

Utter nonsense...

Now they are the financial wizzards that we need to pay otherwise they blow up the system to a wider degree? LEt them do it, the damage is already there...

By the way, the governement should do something in the likes of "taking their personal assets as collateral" (and those of their families), just in case they dont run off and we get going once and for all!

Just a suggestion of course

Mar 17 12:16 PM

[Mbuna:]

I agree Sorkin has overstated the risk here but furthermore he is like Geithner in that both of them are products of the current financial and corporate structure. They are both blinded by their familiarity and have no view outside of the bubble in which they live. Thus they can only defend that with which they are familiar and comfortable. I say let the bombs fly, let the lesson actually be learned and then move on.

Reich has had the best insight into AIG so far- "they are accountable to no one"- not the taxpayers, not the government, not the market. Big time criminal prosecution is what is needed with AIG. Some examples need to be made, otherwise no one will get the needed message.

Mar 17 12:19 PM

[reality chk:]

How much worse can it get? How about JAIL!! These creative financial genius who think they are superstars took advantage of every opportunity (leagal or otherwise) to make themselves look like heroes and thus demanding their bonus during easy times. However it did not turn out the way they thought it would because their tactics were either ilegal or borderline legal. In anycase they placed the company in harm's way because they never did enough research to properly evaluate the level of risk or they ignored they warning signs. Sure looks like the attitude you would expect from a financial genius, a true predator, "ride this horse while the ridding is good and when the horse is tired and can not go any more shoot it and sell the remains for dog food". These people are the same one who tell everyone "hey you are overpaid, but I deserve more" I call on the Federal government to take over this company of thieves and crooks Nationalize the company and then they all can be government employees working for a real wage like $40k /year

Mar 17 12:22 PM

[Roger Knights:]

Bonfire of the Inanities--bring it on!

Mar 17 12:29 PM

[Stimpy:]

(posted elsewhere)

YOU PEOPLE STILL DON'T GET IT.

All these mega banks (AIG and Goldman included) are the Matrix.

THEY are the true reality of "financial civilization" as we know it.

They are not even separate Companies anymore, in the absolute sense.

They CREATE the LIBOR forwards and the currency forwards, without which there would be little if any trade, National or International.

They will be protected (by the G20) at any and all cost. Just get used to it.

Stopping AIG bonuses would create a potential default event (departure of key personell) --something the Gov has ALREADY spent 130B to prevent. You think another 160 M matters?

Taxes are a cute idea, but where does that stop?

Art sometimes imitates life boys and girls, so DON'T take the blue pill unles you want to wake up puking saline with wires in the back of your head.

Go back sleep,

STIMPY

Mar 17 01:49 PM

[Larrysyr:]

Wall Street blew up. The big banks stopped lending. So what?

It happened last fall, it can happen again.

We need financial infrastructure, but we don't need particular financial companies.

If no one can fathom the CDS contracts, then the suffering counterparties can all meet in court. The employees can meet there also. The rest of us can go on with our lives.

EVERY statement out of an FP employee's mouth has to be fact-checked against the likelihood it's simply self-serving nonsense.

AIG does not "create" money. They simply move it around. If they stop, someone else will pick up the slack. Maybe even the Fed. Or not. It really doesn't matter, from a macro perspective. CDS losses = CDS gains. From a macro perspective, the identity of the losers and winners should be immaterial.

Mar 17 03:56 PM

[John Slater:]

The real danger is in letting not just AIG, but the partially nationalized banks continue to take new trading positions in insanely complex and dangerous derivatives markets. As I said in a post to my Tough Times blog last night (mergers.com/toughtimes.../):

"It is naïve indeed to think that the political and media demagogues will be any more forgiving of a government controlled bank that pays a star derivatives trader a salary of $20 million, than they are to see her earn that as a bonus. Yet that’s what top traders earn in what is likely the most complex market ever invented by the mind of man. If we’re not willing to pay these stars what it takes to attract them to the government owned banks, then they will most certainly be working for the competition and the competition will win."

If action isn't taken soon, we will wake up to see trading losses on the current administration's watch that far exceed anything experienced so far.

Mar 18 01:09 PM

[samwise:]

The guy running the place appeared to say as much. In other words, we're trying to make the taxpayers investment pay off as best he can. Was interesting to listen to him list with specficity the death threats, though!

Mar 18 03:17 PM

[a. palmer jr.:]

Probably not the best idea to thumb your nose at the administration at this time. President Obama has almost four years to try to figure out how to get even with AIG. Ditto for many members in Congress. They can all still get together and make any kind of law they wish, and the way I understand it AIG is owned mostly by the US taxpayers anyway.

Mar 18 06:21 PM

[Bruce Vande...:]

March 19 update: AIG insurance divisions may have big problems. See www.newsweek.com/id/18...

This seems never ending.

Mar 19 10:21 PM