Sunday, February 1, 2009

The AIG "model" for insolvent institutions

A collapse has various stages, but all collapses start with the financial system. So if you want to talk about what has collapsed, you probably would be better off starting with what hasn't!

Real estate, and all real estate loans have already collapsed and every derivative with them. And the banks have collapsed with their stock prices. So realistically, the financial sysytem is now insolvent; but we need to pretend that it isn't!

Last week, the outrage was over Merrill Lynch and BofA. It was a collapse, but it was just a slow moving one. Just like Citigroup hitting up the taxpayer for $45 billion, and then getting guarantees on $300 billion of loans.

This weekend, AIG threw another bomb at the taxpayer. They want you to backstop their loans. But it is instructive to look at AIG's lies, because this company was the "model" for companies to follow, which are insolvent, which must pretend that they aren't! So let's look at a brief AIG timeline:

AIG first asked for $40 billion from the Fed in September, up $20 billion from two weeks previous to that, and after they couldn't "shuffle" $20 billion form it's regulated insurance business.

A week later AIG needed $85 billion.

Before Thanksgiving, AIG needed another $50 billion, and the taxpayer tab was now up to $152 billion. But remember that spin?

Between loans and the capital injection, the government's $152.5-billion commitment is almost double the Fed's initial $85-billion loan. Still, the security of the government's collateral -- the assets of the company -- is likely improving because the Fed is removing distressed securities from the company's balance sheet and the government is now a direct stakeholder.

The week before Christmas, we found out that AIG had another $30 billion of losses.

Three days before Christmas, AIG handed out $450 million of retention bonuses to those who caused the mess in the first place, and AIG's Liddy defended the company on CNBC.

The day before Christmas, we found out AIG needed another $16 billion.

And now two days before the SuperBowl, AIG has it's hand out again:

"We're looking at a broader array of recapitalization options," said Paula Reynolds, an AIG vice chairman who is overseeing the restructuring of AIG, which was rescued by the government in September with a bailout package that now totals $150 billion.

"We both realize that the environment's changing and we have to adjust to that environment," Ms. Reynolds said in an interview, referring to the federal government. She joined the company after the bailout to help the giant insurer break itself up to repay a massive federal loan.

AIG first said they neded $20 billion. Now it's $150 billion, and they now want you to backstop every other loan on their books.

So the next time, you hear about these banks that were "forced" to take $25 billion from the TARP, think again.

They took the money because they needed it!

And they are just using the AIG model for insolvent institutions!

No comments: