MILESCFA

AIG Now Fed's Vehicle for Buying Toxic Assets

This is a GREAT article. While I hadn't thought about it like the author has, I think he's "bang on" (my wife's British).

But unlike the author, I don't own AIG stock, and here-in lies the rub; I think the Fed is "bang on" too. (Please read-on before voting me down!)

I use to cover insurance companies for the institutional buy-side. AIG was simply the ONE stock that EVERY investment/fund manager HAD TO OWN. As recently as a year ago, 900 funds owned AIG stock.

Today that number is STILL (amazingly) 473. I looked at all the other big insurance companies in Investor's Business Daily's database, and even more amazingly, it IS STILL the widest held insurance company by my count (nudging out Met by 10). And FYI, looking back at Dec '07, no other insurance company came even close to AIG's 900 funds (HIG had 519 fund owners).

The author seems critical of the FED's manuvering within AIG, but the Fed didn't run AIG into the ground. Regrettably, I can't answer who did, but while "Hank" Greenberg is complaining about AIG's current management, he was at the helm when the ship was turned toward land (ergo, before "running aground").

Why did AIG veer toward land? It was where many of the other "must own insurance stocks" lived, such as MGIC, Ambac, MBIA, etc. All the mortgage insurers and municipal bond insurers "printed money" when I was a buy-side analyst, so investment firms also had to own them (if they could; collectively the market caps were often too small). Municipals essentially "never" defaulted (ok, "Woops"?) and mortgage insurers rarely lost money when borrowers were still required to put down 5% and home prices "never declined".

I don't think that AIG invented CDOs, but they became the Titanic ship sunk by them. Perhaps AIG would simply have been better off buying MBIA, Ambac, etc.?

So I've been worried that the Fed said the purpose of the TARP was to buy distressed assets. Then the Fed seemed to say there was no way to place a value on those distressed assets so it was going to "invest" the money directly in the troubled banks. Meanwhile, the government's investment in/loan to AIG reached levels that are essentially one-quarter of the TARP.

I was outraged, thinking that the Fed was bailing out this single company while letting Lehman fail and "wasting" the TARP money on banks that weren't lending the money (except that they are lending it back to the Fed by buying bonds or, worse, buying other troubled banks so that they become "even too bigger to fail").

Thus I want to thank the author for pointing out to me that the Fed is using TARP funds in the originally stated manner, albiet it is cloaked in the veil of AIG. The Fed IS BUYING distressed assets, just not directly.

Perhaps it could have done a better job, as the author notes about Ambac and MBIA, but I think the real problem is the Fed didn't feel it had the luxury of time because, apparently, AIG really is too big to fail (and perhaps this is a "Lehman lesson"). And valuing these extremely complex (CDO) assets really would take a lot of time.

When the author says "... the Fed may lose it's 79.9% investment", it sounds disingenuous, more like the author is worried about losing his investment in AIG. From my perspecitve, AIG is dead and gone, and it is a shame (and was a sham!). AIG WAS a "must own" stock in my day, but now, in my humble opinion, it is a "must avoid" stock.

As for THIS Fed, it didn't cause the problem (it was Greenspan's Fed that let the credit bubble get out of hand). From this article, I now surmise that THIS Fed is doing a better job than I figured, which is ironic: I've essentially moved to all cash and for the first time ever, I've been considering buying gold. This article actually reassures me a (small) bit.

Now if the Fed would just say it... "We ARE buying distressed assets, it's just we're using AIG to do it."