The Long Crisis

The U.S. government said Monday that it is revamping its bailout of insurance giant American International Group (AIG), committing up to another $30 billion of taxpayer money. The increase in AIG’s stake is designed to keep the firm from failing on its financial contracts of some 300 billion dollars. This was after AIG reported that it lost nearly $62 billion Dollars in quarter four of 2008.

In addition, the government said Monday that AIG still poses a systemic risk to the U.S. financial and insurance markets. The firm guarantees about $300 billion of asset backed securities and other debts.

The new addition brings the total U.S. assistance to AIG to $163 billion, a government official said. However, AIG no longer has to pay dividends on the government-owned securities, which should ease its financial burden and assure rating agencies will not immediately cut AIG’s credit rating.

Let’s see if I have this straight. In order to keep the zombie AIG alive the US government has poured $163 billion into the firm in the hope that AIG will be able to cover $300 billion in various loan guarantees. It seems to me that we are rapidly approaching the point when we would be better off letting AIG go down the tubes and the US government directly guaranteeing AIG’s obligations.

The move, the third government effort to rescue AIG, follows closely on the heels of the government’s third and latest attempt to rescue banking giant Citigroup (C) last week and demonstrates the growing severity of the financial crisis brought on by plain stupid lending and borrowing decisions over the past several years. Yet, those financial executives who made the stupid decisions have received cushy bailouts rather than the prison terms they deserve.

“In the short term, the plan would appear to address in particular the risk of a credit rating downgrade… If downgraded again, AIG would have to post further significant collateral,” Credit Suisse analysts wrote in a Monday research report.

The government is still buying into the story that if it did not take such actions, AIG would have had its credit ratings cut by major agencies, and that would have triggered the need for the firm to post collateral it did not have. This is a crazy financial world we are in. A company in AIG’s condition is still receiving high credit ratings, not due to it’s own credit worthiness, but because if ratings are downgraded it would cause havoc for the world’s financial system. So much for a rating system you can believe in.

“Given the systemic risk AIG continues to pose and the fragility of markets today, the potential cost to the economy and the taxpayer of government inaction would be extremely high,” the Federal Reserve and Treasury Department said in a joint statement Monday.

For the full year 2008, AIG’s reported loss was $99.3 billion, or $37.84 a share. Now that’s a company the taxpayers should be investing in. Har! Who in their wildest dream can believe that AIG is a good investment for the American taxpayer?

There must be a dirty secret or two still hidden in the AIG – counterparty – US government alliance that the government is truly bat ass scared will be revealed if AIG completely fails. AIG is clearly a zombie institution. Probably in time it will be down rated by some credit rating agency that decides to finally come clean. By delaying the inevitable no doubt conditions will be made even worse.

No one in government is brave enough or honest enough to speak the truth about the failure of the American economy and that it can not be fixed without first letting the zombie institutions die. There will be no good escape from this financial meltdown. The drip, drip , drip, approach taken so far in trying to bail out AIG and other “too big to fail” institutions means we are all freaking doomed to a very long crisis indeed.

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