Sunday, November 9, 2008

AIG (AIG) Needing more of Your Grandkids Money

As is typical with government the initial number floated is only a fraction of the final cost. Based on how involved AIG (AIG) is with the credit default swap market I don't even think $85 billion... err, $123 billion... err $150 billion will be sufficient. Now on the plus side the first $85 billion did a great service in helping to bailout Government Sachs (GS) and Morgan Stanley (MS). [Oct 17: Your Tax Money Paid to Investment Banks and Hedge Funds via AIG] I wouldn't even normally post this stuff since it is almost daily we hear of a new and different mini-bailouts, but 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.

This also showcases the government's meddling and the case of unintended consequences. Mark my words - when Obama's team does a home owner bailout, the unintended fallout will be immense - unless there is some historic level of sense and "loopholes" closed you are going to see an avalanche of people who are now paying their mortgages begin to "default" to take advantage of whatever plan comes out of Washington in 2009 to "help stressed homeowners" - we'll check back at that time. Why should they be good little soldiers and pay their debts on a consistent basis when those in the bad behavior category get all the perks? Watch for it...
  • The Bush administration was overhauling its rescue of American International Group on Sunday night, according to people involved in the transaction, amid signs that its initial credit line of more than $100 billion and the interest that came with it were putting too much strain on the ailing insurance giant.
  • The Treasury Department and the Federal Reserve were near a deal to invest another $40 billion into the insurance giant, these people said. The new cash, which would be part of a huge restructuring of A.I.G.’s debt, comes after the government made an $85 billion emergency line of credit available in September to keep it from toppling and another $38 billion line when it became clear that the original amount was not enough. The money would come from the $700 billion that Congress authorized the Treasury to use to shore up financial companies.
  • When the restructured deal is complete, taxpayers will have invested and lent a total of $150 billion to A.I.G., the most the government has ever directed to a single private enterprise.
  • The government’s original emergency line of credit, while saving A.I.G. from bankruptcy for a time, now appears to have accelerated the company’s problems. The government’s original short-term loan came with an expensive interest rate — about 14 percent — which forced the company into a fire-sale of its assets and reduced its ability to pay back the loan, putting the company’s future in jeopardy.
  • The new deal would make the government a long-term investor in the future of A.I.G., something that Treasury Secretary Henry M. Paulson Jr. had previously said he hoped to avoid. As part of the restructuring, the government would lower the loan amount to $60 billion from $85 billion, but lengthen the duration of the payment schedule to five years from two years and also lower the interest rate. (wow, it's not turning into quite the "great deal for the American taxpayer" it originally was sold as - but again the key thing is Uncle Hank bailed out Goldman and Morgan - that's the important thing)
  • The government is also planning to spend an additional $30 billion to help A.I.G. buy “collateralized debt obligations” that it had agreed to insure and put them into a new entity, effectively removing them from A.I.G.’s balance sheet. (ah, here are the dirty little secrets - I was wondering where they were hiding - so now, you - the American taxpayer - are the proud owner of CDOs that are toxic waste. Let me guess, if I hold it long enough I'll make a lot of money - yep; heard that one before. Oh goodie, on top of it a new entity to house the crud - can we call it CRUD Incorporated? I mean as taxpayers we get to name our new entities right?)
  • A.I.G. would contribute $5 billion to the new entity, which would buy $70 billion of C.D.O.’s at 50 cents on the dollar. (aha, I love when a plan comes together - we buy something worth 20 cents on the dollar for 50 cents on the dollar and then tell the American taxpayer if we are good soldiers and hold it for a LONG time when the market comes back to normal we'll be able to sell it for 70 cents on the dollar - we're all winners here! What a steal for us! Here is my prediction - the vast majority of this will expire worthless circa 2011-2012 and just burn into the ether not followed by anyone but some GAO bureaucrat)
  • Finally, the government would invest another $20 billion to help A.I.G. buy residential mortgage-backed securities and similarly place them into another entity. (oooh! aahh! Can we call this one the Mortgage CRUD Incorporated? Or how about the Reverse Robin Hood Incorporated? More appropriate perhaps??)
  • The goal of both programs is to create separate entities to buy and hold A.I.G.’s most toxic assets and is aimed at shoring up the company’s balance sheet so it can continue operating and keep it from rushing to sell assets at depressed prices. (and we'll wind down these 2 separate entities until there is nothing left but a black hole formerly known as US taxpayer dollars - err, I mean these super duper entities will hold said toxic waste for 5 years and then we'll sell for a profit and send the money back to our grandkids! Yep)

[Sep 16: Federal Reserve Considering Loan Package to AIG]

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