AIG wrote more than $1 Trillion dollars of phony baloney paper--otherwise referred too as--credit default swaps (CDS). A Credit Default Swap is insurance on debt. In other words, if you own a bond (debt) you could buy insurance for that bond from AIG. For a tiny fee, AIG insured that if a company goes bankrupt and you own the worthless debt you get all your money back.
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The bad news for us taxpayers is that the CDS market is not regulated. So when AIG got in trouble and the regulators came in--lo and behold--they found that AIG had so much of this paper that if they went under the entire world financial system would come crashing down. This left no choice--bailout AIG.
At this point in this article I will suggest you take a look at the documentary--Inside the Meltdown--How the Economy went so Bad so Fast. There is a good description of the situation the regulators faced when they walked into AIG. When the regulators walked in the door they found out for the first time that AIG owed on a mountain of credit default swaps. Nobody had a clue beforehand. Put it this way, AIG made major bets-- they gambled-- against a scenario like we are seeing today. I guess you could say they hit the Powerball lottery 1000 times in reverse.
The mistake that AIG made was not running this so called portfolio of CDS like you run an insurance business. A typical insurance company might sell insurance in areas where hurricanes occur, as well as, locations all across the country. If there are a lot of hurricanes like we saw back in 2004-2005 insurance companies can lose a lot of money. However, they are still make money in other parts of their business not effected by hurricanes. What AIG did is the equivalent of the insuring the entire world against a natural disaster. Unfortunately for AIG, the entire world got hit by a natural disaster--a financial tsunami. AIG leveraged their balance sheet into near infinity via credit default swaps and now they are broke.
You probably didn't remember this, but, the original $85 billion we loaned to AIG back in September was supposed to be paid back in two years. Never.
Ok, count along with me, one potato--$85 Billion, two potato--another $38 Billion, three potato--a new deal for $150 Billion, four potato-- another $30 Billion, five potato Citigroup.....I think we are running out of potatoes.
By DEBORAH SOLOMON and LIAM PLEVEN
American International Group Inc. will receive up to an additional $30 billion in federal assistance as part of the latest revamp of its government bailout, according to people familiar with the matter.
The new funding is intended to support AIG as it absorbs $60 billion in quarterly losses and operational and competitive upheaval. Under the plan, the insurer will repay much of the $40 billion it owes the Federal Reserve loan with equity stakes in two AIG units overseas -- Asia-based American International Assurance Co. and American Life Insurance Co, which operates in 50 countries.
Repayment was originally supposed to be in cash with interest. In addition, AIG will securitize $5-$10 billion in debt, backed with life insurance assets, to further reduce its debt burden.
Following these moves, the $60 billion Federal Reserve credit facility AIG received in November will be reduced to $25 billion. AIG has already drawn down $40 billion of those funds.
The plan reflects the deepening exposure of the U.S. taxpayer to the embattled insurer. The assets AIG is transferring to the government in lieu of cash repayment are difficult to value. A recent auction for AIA, for example, failed to draw any bids. The goal of the original AIG rescue in September was to achieve repayment within two years. The latest version will likely leave the U.S. government entangled with AIG for years to come.
AIG's board was meeting Sunday afternoon to vote on the plan and was expected to give its approval.
Major credit rating agencies have already signed off on the deal. Without the support of the credit rating agencies, AIG would have faced crippling cuts to its ratings. The downgrades would likely have forced it to post billions in collateral on an array of financial contracts. It would have also triggered the termination of many corporate insurance policies, costing AIG billions more.
Write to Deborah Solomon at deborah.solomon@wsj.com and Liam Pleven at liam.pleven@wsj.com
 Bob DeMarco is a citizen journalist, blogger, and Caregiver. In addition to being an experienced writer he taught at the University of Georgia , was an Asociate Director and Limited Partner at Bear Stearns, was CEO of IP Group, and is a mentor. Bob currently resides in Delray Beach, FL where he cares for his mother, Dorothy, who suffers from Alzheimer's disease. Bob has written more than 500 articles with more than 11,000 links to his work on the Internet. His content has been syndicated on Reuters, the Wall Street Journal, Fox News, Pluck, BlogCritics, and a growing list of newspaper websites (15). Bob is actively seeking syndication and writing assignments. |
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