Monday, February 23, 2009

AIG: When $150 Billion isn't Enough

A few weeks ago, I read an amusing opinion piece in the Wall Street Journal that pointed to AIG as a fine example of why the government shouldn't be trusted to run our financial institutions.  The piece came to the somewhat comical conclusion that the government's intrusion into business decisions had ruined AIG's chances of ever becoming a thriving business concern.  The writer somehow glossed over the part about AIG's near certain death were it not for an initial $85 billion loan from the Fed, followed by other government guarantees that eventually totaled $150 billion.

With every ensuing earnings report, the news from AIG has gotten worse and worse.  First it was just the $400 billion in credit default swaps that were bleeding cash.  Next it was the abomination called the securities lending business, which blew a very simple and profitable business model by borrowing short and investing in long-dated illiquid ABS and MBS.  CNBC reported earlier today that the beleaguered insurance company is set to report a $60 billion loss next Monday.  Now this, I want to hear.  Because $60 billion in losses in one quarter on top of all the other losses is, I don't know, LARGE.  Unprecedented.  Absurd.  Ridiculous.  Feel free to insert other appropriate adjectives at your leisure.  CNBC's David Faber who reported the news mentioned something about commercial real estate losses, but I want details.  

The market initially did not respond to the news, which I found somewhat surprising, and then it took a tumble once the news sunk in.  The loss is huge and has implications for other financial firms.  First of all, many banks and insurance companies have significant exposure to the commercial real estate market, so an explanation of the breakdown in losses will be beneficial for evaluating other firms' exposure.  Second, if AIG is preparing a bankruptcy filing, as David Faber reports, the rush to increase margin requirements from its counterparties, one of which is Goldman Sachs, may reignite panic in the credit markets.  Many conspiracy theorists believe that Paulson chose to save AIG and let Lehman fail because Goldman would've suffered due to its exposure to AIG through its CDS positions.  Frankly, this seems like a fairly reasonable explanation for Paulson's choice, unless you'd just like to think that he was throwing darts at a dartboard.  In any case, I'm surprised that the insurers weren't pummeled on the news, and that most of the banks held on to their meager gains.

So here we are again.  Citi near another deal with the government.  AIG near another deal with the government.  GM and Chrysler near another deal with the government.  Is it a wonder that the market has made new lows and is trading at levels it hasn't seen since 1997?  


2 comments:

Reggie said...

Do the numbers even matter anymore?

Ralph said...

To invest in AIG would be to throw good money after bad. AIG is no longer a going concern regardless of what the government does. It is time for the taxpayers to cut their losses. To learn more go to www.newyorkshockexchange.com