AIG in Review

Well, it’s done. AIG is getting another bailout.

I have to admit I don’t fully understand the ongoing AIG bailout saga, so I thought I would do a little research to try to figure out what is going on. I thought I would just look up all the term sheets, but I found it’s harder to get that kind of information from the Federal Reserve web site than from the Treasury web site. For example, the original September 16 press release doesn’t say what the terms of the 79.9% equity interest are, and I still haven’t been able to figure that out. If you know the details, let me know and I’ll update this post. In any case, I think this is the best single-page overview you’ll find on the web.

September 16: The Federal Reserve gave AIG an $85 billion line of credit for 2 years at a very high interest rate – 3-month LIBOR (an interbank lending rate, which is generally pretty low) plus 8.5 percentage points on the full amount (whether or not it was drawn down). In exchange, the government (not sure which entity) got warrants on 79.9% of AIG stock – I don’t know what the price was, or if they were ever exercised.

October 8: By early October, AIG had already drawn down over $60 billion of its credit line. The Federal Reserve authorized the New York Fed to “borrow” up to $37.8 billion in illiquid securities from AIG and give it “cash collateral” (I think that means “cash”) in return. The problem was that AIG had lent some securities (call them A) to counterparties in exchange for cash or other collateral (call that B), and had then used B to buy some other securities (C) that had lost value. So when the counterparty wanted to return A and get B back, AIG couldn’t give them B back, because the money was tied up in C. So the New York Fed agreed to take C and give AIG cash so AIG could close out its trade – meaning the Fed effectively got stuck with the risk.

November 10: This time the Fed and Treasury got together.

  • Treasury invested $40 billion of TARP money in AIG for preferred stock paying a 10% dividend. Treasury also got warrants with an exercise price of $2.50 on 2% of AIG’s outstanding common stock (although I don’t know how this relates to the original warrants on 79.9% of the common stock.)
  • Some of that $40 billion was used to pay back the line of credit, which was reduced from $85 billion to $60 billion. The interest rate was reduced from LIBOR + 8.5 percentage points to LIBOR + 3 percentage points (a huge reduction), and the term was extended from 2 years to 5 years.
  • The New York Fed created a new entity called AIG RMBS LLC with $1 billion from AIG and a $19.8 billion loan from the Fed. That $20.8 billion was used to buy residential mortgage-backed securities from AIG. Those securities had a face value of $40 billion but a “fair value” of $20.8 billion, or 52 cents on the dollar. (I wonder what those RMBS were on the books at prior to the sale.) The purpose here was simply to relieve AIG of some toxic assets and minimize its losses on them. Interest on those securities and proceeds from sale will pay back the loan to the Fed, meaning that AIG will take the first $1 billion in losses and the Fed anything else. The $20.8 billion paid to AIG (to buy the securities) was paid back to the New York Fed to retire the lending/borrowing facility created on October 8.
  • The New York Fed created another entity called AIG CDO LLC with $5 billion from AIG and a loan of up to $30 billion from the Fed. The purpose of this entity was to buy CDOs from third parties who had purchased “insurance” (credit default swaps) from AIG. Since AIG’s biggest exposure was the possibility of having to pay out on this insurance, the idea was to buy up the assets (CDOs, in this case) that had been insured and require the third party to close the CDS contract. (Imagine AIG had underpriced insurance for houses on the Gulf Coast, and the government was buying the houses in order to cancel the insurance contracts.) According to the Fed web site, it looks like this entity has spent $20.1 billion to buy up CDOs with an aggregate face value of $53.5 billion – 38 cents on the dollar – but I’m not certain I’m reading that correctly. If those CDOs lose value, AIG bears the first $5 billion in losses, and the Fed bears the rest.

So as of November AIG had a $40 billion preferred stock injection and a $60 billion credit line. AIG had also put $6 billion into two new entities which could borrow up to $50 billion from the Fed and use the total funds to buy toxic assets: some from AIG (and I have no idea if we overpaid for those or not) and some from third parties.

March 2 (updated 3/2 7:30 am): The announcements are out.

  • The $40 billion in preferred shares that Treasury got in November are being exchanged for $40 billion in preferred shares that are on better terms for AIG. There’s no way to get around this point. It’s the Series D to Series E conversion on the term sheet. The new preferred shares pay a “non-cumulative” dividend, which means they basically pay no dividend. More specifically, they only pay a dividend if AIG decides to pay the dividend. And they are non-cumulative, meaning that if AIG skips a dividend payment, they never have to pay it. (With a cumulative dividend, if you skip one payment, it gets added onto the next one.) The only condition is that if AIG skips the dividend for eight quarters in a row, Treasury can appoint some members of the board of directors.
  • In addition, Treasury is providing up to $30 billion more in cash in exchange for more preferred shares on yet different terms. That’s the Series F on the term sheet. I don’t see anything about dividends, so this is basically an interest-free five-year loan.
  • The terms on the credit line will be improved by reducing the floor on the interest rate (previously 6.5%). In addition, the credit line will be reduced by up to $34.5 billion, according to the two following provisions.
  • Two life insurance subsidiaries will be put into separate trusts. After AIG and the New York Fed agree on the valuations of those subsidiaries, the Fed will buy up to $26 billion in preferred stock in these trusts. That money will be used to pay down the credit line.
  • AIG will create new entities that own the rights to the cash flows from certain blocks of life insurance policies. The New York Fed will loan these entities $8.5 billion, which AIG will turn around and use to pay down the credit line. The $8.5 billion will be paid back (or not) by the new entities from the life insurance cash flows. (In other words, AIG is securitizing the life insurance policies and the Fed is buying the securities for $8.5 billion.)
  • AIG is issuing convertible preferred stock equivalent to a 77.9% ownership share to Treasury. This looks like Treasury is exercising the rights it got under the original loan agreement. The terms of the convertible preferred stock were not released as far as I can tell, but we can probably assume there are no dividends.

In summary: AIG gets better terms on the first $40 billion in preferred stock; AIG gets $30 billion more in cash in exchange for new preferred stock on even better terms; and the credit line gets reduced by giving Treasury some assets (that AIG was presumably unable to sell on the open market). The overall effect is to reduce AIG’s debt burden and shift more risk to the taxpayer. Whether the taxpayer got a good price for taking on that risk is far too complicated for anyone to figure out from just reading a term sheet, since it depends on the nature of the assets.

I know that AIG is different in many respects from the banks that everyone is worried about. In particular, AIG was a net seller of CDS protection, while most banks are (should have been?) net buyers of protection. But one thing still scares me. When the weekend of September 13-14 began, AIG said it needed $40 billion. After digging through the books, Goldman and JPMorgan put the price tag at $75 billion, and declined to put together a consortium to lend the money. The Fed lent $85 billion, thinking that would be enough. Almost six months later, we still don’t know the extent of the damage.

Update: I rewrote the March 2 section.

Update 2: Does anyone else find it strange that, less than one week after announcing that future capital will be given to banks in the form of convertible preferred shares with a 10% dividend, Treasury has already issued preferred stock on three different sets of terms (one to Citigroup and two to AIG), none of which are consistent with last week’s announcement? Also, with the AIG Series E and F, we have reached a new high (or low) of generosity, with a noncumulative dividend in one case and no dividend in the other. Of course, this is a company we already “own” – we control most of the equity, and we have implicitly guaranteed the debt – so maybe none of these terms really matter.

46 responses to “AIG in Review

  1. There isn’t going to be an end to all these bailouts. If future generations are going to be indentured servants paying the debt, this is what they will have gotten for the money, not power grids, improved sewers, water systems, bridges, etc…

  2. Awesome timeline and review.
    Yet still more questions than answers.
    thanks

  3. James.

    Great summary.

    What I would also like to know is why only the US Government is putting up money to save AIG?

    As I understand it, many of the counterparties to the various toxic assets are European banks and other foreign entities. Why isn’t the Fed going through AIG’s books to determine what share of the exposure is held by institutions of these other countries and then demanding that their governments step up to the plate and rescue those portions of the portfolio.

    Alternatively, why doesent the US government just split out and guarentee only those assets that affect US banks and then use US taxpayer funds ONLY to support assets that directly affect US Banks?

    It just seems to me that somehow we have defined this problem as a US problem that we must fix where instead it is an international problem that every country has a stake in helping resolve to protect the institutions of their countries. As I seem to recall it was a foreign subsidiary of AIG that was writing most of the toxic assets, so again why did is suddenly become a US only problem to fix?

  4. if the following may provide some perspective:

    “…The banks quandary is easily understood thus; the Corporate customer – IBM – wants to borrow additional funds but if such a loan is granted Big US Bank will have far too much capital lent out to a single counterparty. On the other hand, Big US Bank dare not to displease IBM, who may opt to take all of their business to another bank who will make the loan. Until recently large corporations could use this threat to their advantage, forcing banks to make loans that would put them on shakey ground financially. Not surprising, this led to failures of some of the weaker institutions from time to time. Starting the mid 1990′s Financial Engineers came up with a solution – the Credit Default Swap. It works like this : “Assume that Big US Bank simply must issue a new loan to IBM. But such a loan will drive through the internal credit limit that Big US Bank has established for IBM; that maximum amount of money they will lend to this counterparty. So Big US Bank goes ahead and makes the loan, but simultaneously purchases a Credit Default Swap, typically from another Investment Bank, for example, Big Foreign Bank. Big Foreign Bank will make Big US Bank “whole” should IBM default. That is, if the IBM misses a payment, enters into bankruptcy, etc, Big Foreign Bank will insure that no money is lost by Big US Bank…” http://everything2.com/title/Credit%2520derivative

    and to what/whom is the emerging market government and corporate debt owed?

    “…Capital is desperately needed by many this year. Russia has to renew about $600 billion. Ukraine and Hungary, which have already tapped the International Monetary Fund (IMF) for loans, have to roll over about $30 billion and $15 billion in debt respectively. The Latin American Shadow Financial Regulatory Committee, a group of finance experts led by Harvard economist Ricardo Hausmann, estimates that Latin American governments will have to rollover about $250 billion in debt. India and China face external debt payments of $260 billion and $2.4 trillion respectively. According to ING Wholesale Banking, emerging-market governments and corporations need to repay some $6.8 trillion of debt… All these sums mentioned do not include the debt that these countries would need to take on if they were to try fiscal stimulus like the industrialized countries plan to do…” http://online.wsj.com/article/SB123327870587231645.html?mod=googlenews_wsj

  5. Great job. I believe, because many credible people seem to think so, that if the government didn’t step in to bailout AIG and the banksters, we would currently be in a complete economic collapse. But one can’t help thinking that while this would be horrible in the short term, it would also provide the spur necessary to make the authorities attempt structural solutions rather than the piecemeal approach described above. I think that simple solutions have an enormous advantage even though their short term consequences might be messier and more painful. AIG blew up. Wouldn’t it be easier if right now we were working on repairing the damage rather than still trying to contain the explosion? At the very least repairing the damage is constructive work where each day could build on the previous day’s accomplishment. The current approach has the depressing feature that every day gets worse not better.

  6. petoskystone

    just a passing thought: given the risks the taxpayers have been stuck with (without giving informed consent–but that’s a rant), how much more or less of a risk would it be to let aig file bankruptcy–or just go belly up? y’know, letting a free market economy act like a free market. how much of the hysterics against bankruptcy has a basis in theory, if not in fact?

  7. James,

    Thanks for your continued extraordinary effort to keep the rest of us informed. How you find the time is beyond me.

    One assertion you make that I think is important is that banks were likely net buyers of CDS — in which case any payment due to default is a net transfer from AIG to the banks (thus the importantce of keeping AIG afloat for the recapitalization of the banking sector as a whole).

    I’m concerned because I’m not sure that this is true to the scale that we think it is. As a bank I could manufacture synthetic morgages by buying bonds and SELLING CDS all day long. I could do this at very low cost relative to a bank that had to originate the underlying mortgages.

    Given the tomfoolery unearthed to date, it’s not obvious to me that banks were not making their quarterly growth numbers ths way, resulting in an aggregate banking sector loss of many times the loss that could be generated on the underlying morgages themselves.

    This “X” factor is the critical uncertainty wrt how much total capital the banking sector needs.

    I think this issue is as-or-more important than any other subject discussed so far, and I personally can’t get my head around it.

    Thoughts?

    Cheers,

    EW

  8. Why aren’t they actively cleaning-up AIG? Why fiddle with the terms of the bailout instead of actively fixing the problems?

  9. I appreciate more than you know the explaination of these various bailouts, however as a wholle it seems like trying to plug a leak in a dyke, another leak springs forth as each one is fixed. I understand the need to somewhat customize solutions to each counter party, but until the Treasury and Fed seem to have an overarching “plan” beyond simply not letting anything fail, we will not see any traction in the private sector.

    I believe and so I think do many private investors, that there is money to be made in some of these “toxic” assets – but if the Federal Govenment who has had titular control of AIG, and hour by hour contact with the large national banks still can’t figure out exactly what is owned and what it’s value is, then how could I as a private investor possibly expect to get enough information to make a purchase? And until there is some movement toward that end, there is no end in sight for this crisis.

  10. Why fiddle with the terms of the bailout instead of actively fixing the problems?

    The core problem is AIG sold CDS’ to banks in the EMU which allowed them to exceed their balance sheet leverage requirements. Without this protection, many large EMU banks would be instantly insolvent, thus creating a massive meltdown. AIG is a keystone to the world’s financial structure.

    The problem is intractable because a large part of the balance sheet risk in EMU banks is in loans made in Eastern Europe, and these loans are going bad at an accelerating pace. When one of these banks fails, we will have an international incident because the US (through AIG) will be asked by the sovereign host to pay on the CDS. If the US doesn’t pay, it could bankrupt the sovereign. If the US does pay, we could be looking at a several hundred billion dollar bailout of the EMU.

    This crisis seems to be growing in complexity every day, and all the actions the US is taking look like stalling tactics. The question is, what are they stalling toward? I fear there is no good outcome.

  11. It’s obviously hard to know anything for sure in this convoluted game — especially since the key players all have a vested interest in obscurity. The timeline is an invaluable scorecard.

    But I really have to wonder about this statement:

    “Of course, this is a company we already ‘own’ – we control most of the equity . . . ”

    Do we? As far as I can tell from the timeline, the Fed was issued warrants which it appears to have never exercised, and those warrants are now being replaced with convertible preferred shares — convertible, but not converted.

    So it looks like Uncle Sam is left still owning a whopping big chunk of AIG debt, plus an even bigger chunk of non-cumulative preferreds. And the Fed continues to guarantee (for a fee?) the Enron-style partnerships created to hold the toxic assets left behind by AIG’s little securities lending arbitrage play.

    This doesn’t sound like “ownership” to me. About the only ownership feature I see is the right to, maybe, name a few AIG directors if the company skips two years worth of preferred dividends.

    So Mr. Kwack may be right, and the terms may not really matter, but it’s not because “we” own the company — it’s because “we” appear to be willing to spend whatever it takes to AVOID owning the company.

    About the only

  12. Fantastic post. Thank you for your work.

  13. From Nov. 10th:

    http://www.ft.com/cms/s/0/86c1cf26-aefc-11dd-a4bf-000077b07658.html?nclick_check=1

    “The Federal Reserve and the US Treasury now understand they are dealing with systemic risk rather than one company’s problems,” said Mr Liddy, a former chief executive of the insurer Allstate and board director of Goldman Sachs.

    In an effort to defuse a possible political backlash over the use of yet more taxpayers’ funds to save a stricken financial institution, Mr Liddy said the government could make money out of the latest deal( NB Don ).

    He pointed to the 10 per cent interest payable by AIG on the $40bn-worth of preferred shares to be acquired by the government as well as the interest on a $60bn loan from the authorities, which is set at 3 per cent over the London interbank borrowing rate.

    Mr Liddy also said that most of the gains from a rise in the value of AIG’s toxic assets over the next few years would be retained by the Fed, not the company. A special vehicle is being set up to take over the billions of dollars in illiquid credit default swaps and mortgage-backed assets owned by AIG.

    “The taxpayer is going to do very well out of this deal,” Mr Liddy said. ( NB Don )

    The debt securities which triggered AIG‘s collapse continued to plague the company in the third quarter. Included in its net loss was a pre-tax charge of around $7bn related to AIG Financial Products’ credit default swap portfolio, as well as a pre-tax impairment charge of $18.3bn from the group’s investment portfolio.

    Mr Liddy said that in the frantic moments that preceded the first rescue of AIG, regulators had not paid enough attention to the cash drain on the company’s resources caused by the toxic assets.

    Since the Fed did not regulate insurers, it had initially overlooked the pitfalls of the previous bail-out, he added.

    Despite receiving an $85bn government loan in mid-September, AIG was in danger of running out of money due to the high interest rate charged by the government and the need to put up capital as its assets continued to depreciate. ( NB Don )

    Mr Liddy said that with the new plan, the authorities wanted to avoid a repeat of the credit markets paralysis that followed the collapse of investment bank Lehman Brothers, which went bankrupt just before the first rescue of AIG.

    “The collapse of Lehman caused the credit markets to freeze up. Had AIG gone, it would have been even more significant,” Mr Liddy said.

    Mr Liddy pledged to press on with a wide-ranging programme of asset sales aimed at raising funds to repay the $100bn in capital injected by the government. (NB Don )

    He said the extension of the duration of the main government loan from two to five years and the cutting of the loan’s value from $85bn to $60bn would ensure AIG did not have to dispose of businesses at fire-sale prices.( NB Don )

    “We have more capital so we don’t have to sell good assets in bad markets,” ( NB Don ) he said. AIG has not announced a single major disposal so far, partly because potential buyers have not been able to get funding.

    Mr Liddy has said he wants to sell most of AIG’s life assurance operations, and close its troubled financial services unit, to create a smaller company focused on its general insurance business around the world.

    However, he reiterated that he wanted to keep a majority interest in its Asian life assurance and savings business – one of the jewels in AIG’s crown.”

    Asian businesses are like Banamex for Citi. It’s pretty clear that this plan is failing. However, I’ve yet to get a clear picture of why it’s failing. Theoretically, we’ve given AIG enough money to get through this downturn. It could be:
    1) No one wants to buy anything from AIG
    2) AIG is asking too much money for the assets
    3) The assets are turning out to be worth less and less
    4) AIG is still losing money on current investments

    From Bloomberg:

    http://www.bloomberg.com/apps/news?pid=20601103&sid=addciQsRKwjc&refer=us

    “AIG’s ability to repay “every single penny” owed to taxpayers, as Liddy vowed in December, is doubted by investors who drove the company’s stock about 80 percent lower since he took over in September. AIG may post a fourth-quarter loss of about $60 billion next week, said the people, who declined to be identified because talks with the government are private.

    “There isn’t a great deal of confidence we can take AIG’s word at face value,” said Bill Bergman, analyst at Morningstar Inc. “AIG shares trading this close to zero suggest there are real losses out there, and if there’s no value for shareholders, taxpayers may be taking some very significant losses.” AIG gained 10 cents to 56 cents in New York Stock Exchange composite trading at $10.47 a.m….”

    And:

    “Government help “allows unhealthy insurers to grab more market share in the short term at levels that are unsustainable in the long term,” said David Sampson, head of the Property Casualty Insurers Association of America, an industry group, in a statement this week.”

    In other words, AIG is the problem. The brand is the problem.Buyers believe that the losses are real. They will not appreciate. If they are correct, this could be an enormous loss to the taxpayers. It never occurs to people that, if foreign investors or any other investors thought that AIG was sound, they could invest in it or buy the assets at their asking price. Either investors in AIG take the losses, or the US taxpayer will. Which will it be? What am I missing? A miracle?

  14. Thanks for the info, but…

    How many times do I have to beat my head against a wall until people start talking about getting debt to take a haircut? Not to mention current employees.

    The TARP loans that went to GM and Chrysler came with serious demands for concessions from the UAW and current debt holders. It still might not be enough, but all stakeholders are taking a hit. Why are AIG and Citi getting the soft glove treatment?

    Debt must come to the table. Taxpayers will revolt when they realize that the pending liquidation of AIG will neatly cover paying counter parties and debt, with nothing left to repay taxpayers.

  15. Max:

    Do you have information that AIG sold CDS “to” EMU banks or “on” these banks?

    Another question, at what point does a CDO trigger a credit event that requires a payment of the CDS ‘insurance’ on this CDO. My understating is that a certain percentage of the underlying assets held by a CDO are expected to fail or default. At what point do these ‘normal’ defaults constitute a credit event, or default of the entire CDO, thus necessitating payment under the CDS?

  16. I found this interesting.

    http://www.aig.com/Our-Commitment_385_136429.html

    I still do not really understand the interconnections if AIG were to fail and default on its swaps. I assume it would trigger a massive loss of confidence in the world financial system that could devastate an entire countries economy.

  17. Phil McClelland

    James,

    Excellent research!

    I found it sobering to read through the history and see just how ad hoc the bailout has been. I wonder if anyone really knows the ‘rest of the story’…

  18. I’m calling this the Terry Schiavo bailout. The patient is technically dead (AIG, Citi, etc), but is getting a slow food drip and is on a breathing machine. This keeps the blood flowing, but there is no possibility of recovering.

    Time to pull the plug on the plutocrats whose wealth this effort is trying to save and nationalize these firms.

    I suggested a few days ago that the government could buy all of Citi’s outstanding stock for $10 billion. Now they could do it for just $6 billion. I’m sure the current stockholders would be looking back happily now if they had made the offer last week.

    Buying all the outstanding common stock of these firms at about market price, is no different in principle from what the gov’t forced Wells Fargo into doing with Wachovia and other similar cases.

    This fear about “nationalization” is both irrational and ideologically driven. I was hoping that after Paulson left a bit of reality would return, but apparently not.

  19. Thanks for this as-thorough-as-possible recap.

    As other commenters have mentioned, in addition to this recap I am very interested in learning more about the identity of AIG’s credit default swap counterparties. It seems to me that if AIG’s core insurance business is not rapidly losing money (which seems like a reasonable assumption), then the dramatic losses that have led to multiple injections of 10s of billions of dollars probably relate to credit default swap exposure (along with unrelated holdings of illiquid assets such as MBS).

    If my assumptions are relatively accurate, then much of the money given to AIG by the US government has been paid to credit default swap counterparties, or is being used in an attempt to allow those counterparties to continue to pretend that the credit default swap insurance is viable, improving the counterparties’ financial statements, capital position, earnings, etc.

    Long story short, and again as others have already noted, the bailout of AIG seems to be less about AIG and more about its counterparties. Shouldn’t the government be willing to tell us who those counterparties are? Goldman? Foreign banks? Citi? And wouldn’t it make sense to force the counterparties to feel a portion of the pain? A forced haircut on any AIG CDS payout perhaps? Isn’t one of the risks of buying insurance that the provider will go bankrupt?

    I would love to learn more about this if anyone has information.

  20. I just want an explanation from somebody exactly WHY we can’t get this giant to a manageable size and determine just what part we can’t live without.

    Certainly we don’t need to keep this leaking tanker afloat when the holes just keep getting bigger and bigger.

    Exactly whom are they insuring.

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  22. Thank you for trying to sort this out. The timeline is helpful. The problem is that nobody has any idea of how to dig us out of the current mess or at least how to mitigate the damages. Because nobody understands all the ways AIG’s obligations are embedded in the global economy everybody is afraid to let it fail.

  23. jeepndesert

    AIG doesn’t need a bailout from the Federal Reserve. The Federal Reserve and AIG do need a French-made guillotine.

  24. To these banks:

    How the U.S. Saved the European Banking System

    But the AIG case shows the importance of another link across financial markets, namely massive regulatory arbitrage. The K-10 annex of AIG’s last annual report reveals that AIG had written coverage for over US$ 300 billion of credit insurance for European banks. The comment by AIG itself on these positions is: “…. for the purpose of providing them with regulatory capital relief rather than risk mitigation in exchange for a minimum guaranteed fee”. AIG thus helped to organise regulatory arbitrage on a gigantic scale. A formal default of AIG would have had a devastating impact on banks in Europe. This explains why AIG’s problems had sent shock waves through the share prices of European banks. For the time being the US Treasury has saved, inter alia, the European banking system, but given that AIG is to be liquidated European banks now have to scramble to find other ways of obtaining the ‘regulatory capital relief’ they appear to need urgently.

    Get all that? It’s less well known than it should be, but Europeans banks have long been gaming their regulators, having far less than the actual capital reserves that they needed given their balance sheets. AIG filled the hole, selling credit defaults swaps to European banks via which they could tell regulators that they were adequately covered — at triple-A, no less — while carrying less cash than required.

  25. The aggressive response (as opposed to fiddling) would be to actually nationalize AIG (consolidate it onto the U.S. balance sheet), figure out what the worst-case exposure is, and commit that much cash from the Fed or Treasury. I don’t know enough about the situation (i.e., how many hundreds of billions of dollars that would take) to know if I’m actually in favor of that. The strategy to date has been to avoid consolidation – presumably so that we can keep open the option of stiffing AIG’s creditors if absolutely necessary. The result has been to leave AIG in this limbo where it is 79% owned by the government yet has its credit rating at risk of downgrade.

  26. I’m sorry you feel like you’re banging your head against the wall. Protecting creditors has been an article of faith since Lehman, even among the critics of the government. I agree that we should question whether this should still be an article of faith, but I’m not fully over to your position yet.

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  28. thanks for the recap, mr. baseline.

  29. If anyone is interested in a discussion of the identity of the AIG counterparties, a NY Times blog has taken up the question this evening.

    http://executivesuite.blogs.nytimes.com/2009/03/02/who-are-we-really-propping-up-with-the-aig-bailout/#comment-36739

  30. Does the above analysis include Maiden Lane II and Maiden Lane III injection of funds?
    How are Maiden Lane I, II, III performing?

  31. What do you make of the argument that all of this is necessary, because AIG is now bailing out European banks?

  32. The government effectively owns AIG, but it doesn’t want ownership in name or practice because it doesn’t want the “responsibility.” (So they would only be imposing tough terms on themselves.) I suppose there are, as yet, inadequate numbers of government employees who would know how to go about dismantling AIG, which will probably take years to accomplish in any event. (Is Treasury doing much hiring?) Perhaps values will increase by then. I think inflationary policy is the only way out of this. We are in for some really wild gyrations while trying to recover equilibrium. Maybe slow government action will tend to take some of the snap out of the whiplash. Free associating…

  33. I am pretty sure that Maiden Lane II and III are my 3rd and 4th bullets in the November 10 section. I do not know how they are performing. I believe the Fed publishes some details of their balance sheets, but since everything depends on how they decide to mark the assets, even that might not tell you a lot.

  34. bewilderedandindespair

    Mr. Liddy shouldn’t show his face in public–the gaul of him acting so matter of fact about what is going on!

    No matter how you slice it, with the wide range of opinions on what is going on, all the numbers and so called “facts’ that seem to surface about who the money is going to and should it have happened…no matter how much info is provided by AIG, until or UNLESS, the truth is told about who really received the first 85Billion ( from the back door of AIG) , we will never know if this whole fiasco was orchestrated with two gentlemen who look to have America’s best interest at heart, but who may have insisted on “letting Lehman fail” by refusing Lehman the 6 billion bridge loan, and with equal fervor insisted on “saving” AIG to actually pass the milk and honey in the front door and out the back to certain firms that became bank holding companies just in time for a TARP party in October!

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  36. Why am I still paying Geico $600 a year for car insurance?? The way I figure it, AIG now owes me 2
    years worth of car insurance, GRATIS!

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  38. i used to work for AIG in the 1990s. there was always something wrong with their approach, in my opinion. instead of looking for opportunities in new directions, they always followed the same, tired business model that kept them selling the same kind of policies – and, of course, this approach wasn’t what sunk AIG, it was the risky deals that did them in.

  39. Could it be that AIG’s bailouts are as much a geopolitical play as an economic one? An issue of national or international security equivalent to or more vital than the monetary issue.

    What if we were to allow AIG to default on its CDS obligations? The Euro banks exposure that is backed by AIG’s credit insurance is massive, in $’s and geographic area. Spanish banks are heavily exposed to Latin and S. America, full of coveted natural resources. All the other euro banks are up to their eyeballs in E.Europe. Right next door to Russia.

    So, do we let AIG fail? By extension cratering the banks, economies, and possibly the political systems of our strongest historical allies and by extension the areas to which they’re exposed. I don’t know. Thinking of it makes my head hurt and I still have a day job, thank God.

    But in the end I don’t think I’ll have to make up my mind. When it filters to Main Street that hundreds of billions of tax $’s are going through AIG to prop up the economies of foreign countries, the jig will be up. The political will for the next round of bailing AIG will vaporize.

  40. bewilderedandindespair

    Dear M,

    If it is indeed true, that companies all over the world would have failed if hadn’t been given the money that they have been given, that surely is a good reason.

    But, with Lehman being refused 6billion, and the next day AIG getting the 85B, it looked like a scheme to make money off of the failure of Lehman, and then pay off the bets with the gov money. I know, i have read all the articles about only an unbelieveable “5MILLION” being paid out NET, but that all seems so suspect and more a way to get money to Goldman and/or Morgan, but maybe that was a byproduct more than the reason.

    It is too bad that the public would resent the bailout for the world since AIG was the biggest maker of this mess, and with the size of failures that you suggest, it may be that this move saved the face of the US to some extent…and that is a good thing. Thank you.

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  42. And further, we have already far surpassed the amount of money that would make the AIG bail out worthwhile, with no end in sight. Just a Carl Saganesque Billions and Billions down the toilet for tax payers. And enormous unspendable fortunes for counterparties.

  43. Dear Mr. Fastow:

    AIG is not a true bailout in the sense of the banks are being bailed out. The fools at AIG financial products in Stamford (the “hedge fund” part of AIG) did a decent job of selecting risks. The credit default swaps they sold generally have not been called for payment.

    Where AIG FPC were idiots was in cash flow management. Where Warren Buffet wrote huge swaps insuring against market declines (which have happened), he is not required to post collateral – even though he is over $12.5 BILLION under water. Smart dude. AIG wrote default swaps on AAA tranches, which are not in default but they “forgot” that they would have to post collateral if the mark to market dropped on the tranches. Dumb dudes.
    So, the Market tanks, the collateral calls run to about $100 BILLION, AIG doesn’t have that cash, call Gov’t and hock company. That’s where all the gov’t money went. Notice the gov’t won’t say where all the collateral is going – despite the entire US Congress demanding to know….

    (NOTE – AIG could have done swaps similar to Buffet’s, but they would not have received as high a premium as they did for including the collateral right.)

  44. Excellent timeline & analysis here.

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