The Long Crisis

Posts Tagged ‘AIG bailout’

AIG has received between $160 billion to $180 billion in government bailout funds over the course of just the past few months. The original bailout request from AIG of $85 billion was bad enough but was soon followed by three additional requests. Each time the US Treasury Department transferred money to AIG the government proclaimed that AIG is “too big to let fail”.

Until recently AIG and the Treasury Department refused to disclose what AIG was doing with all of that taxpayer money and why they were burning though it so fast. Congress has been wondering along with the public.

This week Donald Kohn, vice chairman of the Federal Reserve, learned about blackmail, Senate style. When he refused to disclose the names of financial institutions benefiting from the bailout of American International Group he was confronted by several committee members. Finally the congressmen got to the point of threatening Kohn with no more dollars for the credit crisis – ever – if he didn’t spill the information.

Said Sen. Jim Bunning, R-Ky., “You will get the biggest ‘no’ you ever got. I will do anything possible to stop you from wasting the taxpayers’ money on a lost cause.”

In a way the threat worked. While Sen. Bunning and the committee still haven’t directly been given the sweetheart list a list has surfaced. A reliable source gave FORTUNE a list of 15 counterparties, with no dollar figures attached. Here it is:

Société Générale (France)
Goldman Sachs (GS, Fortune 500)
Merrill Lynch International
Deutsche Bank (Germany)
Calyon, Crédit Agricole(France)
UBS (Switzerland)
Barclays (England)
Coral Purchasing, DZ Bank (Germany)
Bank of Montreal (Canada)
Rabobank (the Netherlands)
Royal Bank of Scotland
Bank of America
Wachovia
HSBC (England)
Barclays Global Investors

While the Treasury didn’t list the amount that each bank on the list received you can be sure it was plenty. Basically, all of the banks on the list insured CDOs with AIG. When the investment went bad the banks turned to AIG for payment. AIG didn’t have the money so they turned to the government for a bailout.

Basically, AIG became a money laundering operation. The government made its “too big to fail” case, got the money, poured it into AIG, and AIG made payments to make the counterparties whole at tax payer expense. So AIG was used as a conduit though which billions of dollars were poured to bailout banks who had made risky bets that went bad.

Committee chairman Christopher Dodd, D-Conn., describes the counterparties as less than “innocent victims” who used AIG’s rating (then AAA) to take “enormous, irresponsible risks.” He complains, “It is not clear who we are rescuing.”

Well now we know. Do you feel any better about the bailout?

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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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