AIG: The Bottomless PIt
November 11th 2008 18:38
The NY Times today reveals that American International Group (AIG), who we've bailed out to the tune of $144 Billion, needs additional money. You and I have agreed to give then another $150 Billion. (I don't recall getting a call seeking my permission. Perhaps I was out that day.) The NYT writes:
About $30 billion of the government money will be used to buy complex debt securities that were insured by A.I.G. and about $20 billion more will be used to buy securities backed by home loans.
We are funding A.I.G.’s counterparties — financial institutions in the United States and Europe — but the government has not told us who these counterparties are and these counterparties have not borne significant losses on the financial contracts that led A.I.G. to the brink. The NYT suggests this new program will continue to keep the counterparties safe.
Meantime, Fannie Mae (FNM) and Freddie Mac (FRE) each received $100 billion, while FNM said yesterday after announcing a $29 Billion loss:
About $30 billion of the government money will be used to buy complex debt securities that were insured by A.I.G. and about $20 billion more will be used to buy securities backed by home loans.
At the heart of A.I.G.’s troubles are a type of derivative called credit-default swaps. They are essentially a kind of insurance that A.I.G. wrote on complex securities, known as collateralized debt obligations, sold in recent years to financial institutions. By issuing the swaps, A.I.G. was promising to pay these institutions — A.I.G.’s counterparties — if the debt securities defaulted.
We are funding A.I.G.’s counterparties — financial institutions in the United States and Europe — but the government has not told us who these counterparties are and these counterparties have not borne significant losses on the financial contracts that led A.I.G. to the brink. The NYT suggests this new program will continue to keep the counterparties safe.
“We’re funding somebody on the other side” of A.I.G.’s derivatives contracts, said Lynn E. Turner, a former chief accountant with the Securities and Exchange Commission who has been critical of the way the insurer’s crisis has been handled. Even though a large amount of public money is being extended, neither A.I.G. nor the federal government has been willing to provide the names of the company’s biggest counterparties, or their amount of exposure.
...If the company continues to suffer substantial losses "or to the extent that we experience a liquidity crisis that prevents us from accessing the unsecured debt markets, this commitment may not be sufficient to keep us in solvent condition or from being placed into receivership,"
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