Tuesday, February 24, 2009

CNBC: AIG May Post $60 Billion Loss - Seeking More Taxpayer Help

The saga at AIG just gets more and more pathetic; the government is repeating the same pattern [Sep 16, 2008: Federal Reserve Considering Loan Package to AIG] - when they swoop in to rescue they claim losses will be limited, it's a long term "investment" and "heck we may even make money in the end". They said we'd be limited to $200 Billion in commitments "worst case" with FranFredron - already Freddie has come to the trough twice and Fannie is on its way.... now we go on with AIG. [Nov 9, 2008: AIG Needing More of Your Grandkids Money] My initial cynicism towards the "cost" of the AIG bailout has been more than justified - it started as $85 Billion, and before today had grown to $150 Billion.

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.

.....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.

The sick thing is the original bailout, as reported by Bloomberg, was basically a payoff to Goldman Sachs (GS) and Morgan Stanley (MS) - i.e. direct transfer of taxpayer dollars to those firms (via conduit called AIG) - you really should read this one if you are a newer reader [Oct 17: Your Tax Money Paid to Investment Banks and Hedge Funds via AIG]

Oh but we're not done yet - the absurdity of this all is much like Citi we are going to get common shares! (yee haw!) in return for our money! Joyous! Shares in what would be a stock worth $0 in return for taking on the risk of propping up said entity. A wonderful deal.
  • American Insurance Group, the insurance giant that is 80-percent owned by the US government, is in discussions with the government to secure additional funds so it can keep operating after next Monday, when it will report the largest loss in U.S. corporate history, CNBC has learned. Sources close to the company said the loss will be near $60 billion due to writedowns on a variety of assets including commercial real estate.
  • That massive loss is likely to spur downgrades in its insurance and credit ratings that will force AIG to raise collateral that it doesn't have. In addition, if AIG's book value falls below a certain level, as it seems certain to do, it will trigger default in certain of its debt instruments, say people familiar with the situation.
  • All of this adds up to a huge headache for the Federal Reserve and Treasury, which have already provided over $150 billion of assistance to AIG.
  • Talks between the government and AIG are focussed on how the company can swap some of the debt held by the government for equity in AIG. (this is just absurd - the equity is worthless, just plain worthless) The problem is that the government's ownership stake cannot exceed its current 79.9 percent, leaving officials to try and find a creative way to transfer value to the US in exchange for AIG reducing its debt so that it can then borrow more from the government to meet its collateral calls.

Not only is this absurd but we are doing the same with Freddie, Fannie but it's not in the public light anymore - the losses are going to be massive there. And we'll be doing the same for Citigroup (C) and all those Countrywide loans and Merrill Lynch toxic assets sitting inside Bank of America (BAC). Not to mention the Bear Stearns adventure ($29B) that the Federal Reserve manages. It's plain amazing the concept of trading money for worthless shares is even contemplated. It's a zombie! I said so in November, and it's a zombie squared (or cubed!) now. What a sham. (again if you have time to read 1 article , read the October 17th piece about how the original infusion was basically Hank Paulson paying off the investment banks for counterparty risks - these dirty deeds are everywhere but not spoken about. "too complicated")

[Nov 11: AIG Executives Caught Again]
[Oct 8: AIG Executives Party it Up Post-Bailout]

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