AIG Borrows From ... Itself

The Governor of New York, possibly thinking about his tax base, and perhaps 30,000 jobs, has allowed AIG (AIG) to borrow $20 billion from its subsidiaries.  Details are scant, but this can be one of three things:

• AIG has surplus assets in its NY-domiciled subsidiaries in excess of their risk-based capital requirements.  If true, borrowing against these would be a no-brainer that should have been pursued long ago.  Favoring this view is the NY Governor, who says AIG is “extraordinarily solvent.”
• AIG has surplus assets in its NY-domiciled subsidiaries, but not in excess of their risk-based capital requirements.  Borrowing against these would be a risky gamble, because it lowers the amount of risk margin available to absorb adverse deviations.
• Some combination of both — say that AIG has only $15 billion in surplus assets in its NY-domiciled  $5 billion would reduce risk margins.

The risk here is that you end up with insolvencies of some of AIG’s subsidiaries.  Though potential losses to policyholders would be unlikely to be large, assessments would be made to other insurers through the state guaranty funds in order to keep policyholders whole, but potentially at a cost to the other insurers.

This has the potential to look really bright or really stupid, and in a short amount of time, too.  Final note: It’s not impossible, but I would be surprised if the Federal Government or the Federal Reserve intervenes on AIG when it would not with Lehman (LEH).

Comments

[gabe borens...:]

The issue is not why ,the important news is that AIG has secured an access to 20 billion dollars.Likely more on the way from other sources.
The market had ignored the good news .We have a record short open interest .I a scheme of financial universe AIG ismore relevant b than most other institutions .Let's what is the rest of the solution of AIG.

2008 Sep 15 04:12 PM

[JasonC:]

AIG is simply going to call the Treasury's bluff and present eligible securities to the Fed for discounting, to the tune of $20 to $40 billion. Then we will see whether the discount window is actually open, or whether the Treasury's newfound moralism is actually intended to drive the entire financial system to collapse.

The Fed had to inject $95 billion today, while the ECB and Bank of England added $50 billion more between them. So far the non-bailout costs 10 times what a bailout would have cost. And counting.

These people are idiots, and the ideologues applauding panic and destruction are utter fools.

2008 Sep 15 04:29 PM

[vodka_tonic:]

FED should have saved poor LEH....sad

2008 Sep 15 04:34 PM

[bennie:]

I think you all are mising teh point.

Excess risks were taken and teh sin is being paid for,

no free lunch.

AIG ? looks like toast

2008 Sep 15 05:52 PM

[sodajerk:]

Bring on Warren Buffet to save the day

2008 Sep 15 09:23 PM

[williambanzai7:]

AIG is chewing its paw off.

2008 Sep 15 11:14 PM

[Reinko:]

Total derivate positions of the US banks is a multiple of the world domestic product; one day this will crash.

Total derivate positions on credit default swaps are 62,000 billion US$.

Now Lehman has gone this market is stirred up a bit and the sudden liquidity needs for AIG are rather likely related to the problems on the CDS markets.

The next days will bring more wisdom to this, for the time being Forbes has a very good article on this:

www.forbes.com/home/20...

Suddenly 70 to 80 billion needed? It all has the smell of derivatives...

2008 Sep 16 06:14 PM