The government takeover of American International Group (NYSE: AIG) is going swimmingly -- for AIG's top brass. They got an $85 billion bridge loan in exchange for an 80% equity stake last month. AIG has already spent $61 billion of that $85 billion and will now get another $37.8 billion.
But wait -- there's more. AIG executives spent $440,000 for a spa vacation at the St. Regis resort in Monarch Beach, CA after they got our $85 billion. If you clicked on the link to the St. Regis, you know that AIG goes in style. That's why it came as no surprise that it was planning another ritzy affair for its insurance brokers. That event, at the Ritz Carlton in California's Half Moon Bay, was going to "motivate and educate" 150 independent agents who sell AIG coverage. (Update: They planned a big sales conference at the Ritz-Carlton in Half Moon Bay, but just cancelled it after public complaints). See how well reverse-Robin-Hood economics works?
Is there any business reason for AIG to be burning through so much of our cash? It claims that it needs the money because of its securities lending business, which lent securities to hedge funds and got the value of the securities and a fee in exchange. AIG then used the cash to buy mortgage-backed securities (MBS).
See, AIG originally got the government money to help wind down its structured finance unit, which made the Credit Default Swaps (CDSs) whose collateral calls put AIG into such a precarious position. But AIG claims it can't wind down its structured finance business until it stops the bleeding in the securities lending business.
The Federal Reserve Bank of New York will give $37.8 billion to AIG's life insurance subsidiaries while taking the batch of toxic MBS off their hands. This is probably a terrible deal for the Fed since the MBS are probably not worth that much cash -- and by giving AIG the cash, it won't have to write down the value of the MBS.
Incidentally, it was John McCain's chief economic advisor, Phil "Americans are Whiners" Gramm who deregulated the CDS market back in 2000. And without that, AIG would not have been able to take on such a big CDS book whose collateral call drove it into our generous arms.
Would it be terrible if AIG executives had to use their own money, instead of ours, to pay for their luxury resorts?
Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He owns AIG securities and has no financial interest in the other securities mentioned.











Reader Comments (Page 1 of 4)
10-09-2008 @ 5:52PM
Dee said...
UTTERLY DISGUSTING!
10-09-2008 @ 9:46AM
Grandma Jane said...
What do you expect when you put the fox(es) in the hen house???!!! & by the way, can you hear the background music....it sounds a lot like theme from the "Godfather"!!
10-09-2008 @ 9:51AM
K said...
Do the AIG agents want a job? That should be motivation enough. If they aren't motivated, there are plenty of jobless people out in the market who would be very motivated just to get a paycheck.
10-09-2008 @ 9:54AM
Fed-up said...
Hey Feds, bail me out too! I need a spa vacation!
10-09-2008 @ 10:01AM
Kathleen said...
I worked 36 years as an RN and my husband has worked more than that as an engineer. We have never been to a spa or a luxury vacation. I resent tax money from hard working people being squandered this way.
10-09-2008 @ 10:04AM
Kathy said...
These guys live in a whole different world. At the very least you'd expect Paulson to require them to act in a politically responsible manner. Oh, but wait, he has that much money too. Silly me. Let us eat cake.
10-09-2008 @ 10:08AM
Texas said...
Will AIG PLEASE PAY MY HOUSE NOTE, AND THE 150 AGENTS WHO NEED MOTIVATION CAN COME CUT THE GRASS AND PAINT THE OUTSIDE. THIS IS WHY THE GOVERNMENT IS IN THE FIX IT IS IN. TAKE THE TOP MANAGEMENT OF THIS ^*&*)(*)*y$$^%$&^t COMPANY AND PUT THEM ON THE STREET, WONDERING WHERE THERE NEXT PAYCHECK IS COMING FROM AND WHEN THEY WILL EAT AGAIN. PS. YOU CAN ALSO TAKE THE PERSON OR PERSONS WHO ALLOWED MORE MONEY TO BE GIVEN TO THIS &*)*^^%$$%#@#%^%&)( COMPANY TO BE FIRED IMMEDIATELY AND THE GOVERNMENT WONDERS WHY THE PEOPLE HAVE NO FAITH WITH THEM....
10-09-2008 @ 10:10AM
Greg said...
Instead of spending the last seven years and billions of dollars chasing foreign terrorists and protecting our borders, we should have been watching the terrorists that have devastated our economy and continue to encourage the invasion from Mexico. All for the mighty dolar.
10-09-2008 @ 10:11AM
Peggy said...
As long as "we" the tax paying middle class accept this kind of financial abuse it will continue. The attitude today seems to be "grab the most and bail." Obama said they should have to pay the money back and be fired. That's at least a start.
10-09-2008 @ 10:17AM
MJC said...
Is this the rich man mentalaty? What happens when the money runs out???????? You cut back on frivolous activities. You dont have the money to go to the spa, get your hair done, nails, toes, night out on the town, etc. Get it.
10-09-2008 @ 10:17AM
Carol said...
Get real people! With the feds having a controlling stake in this company now, THEY should be calling the shots. Where is the promised "oversight"???? Send this article to your congressional representatives and DEMAND a cessation of these shenanigans!!! (and a CANCELLATION of the perks). By the way, the taxpayers need to know the names and SALARIES of all executives and board members--including those in the U.K.!! Get this information out in the news media immediately.
10-09-2008 @ 10:16AM
Bob said...
If the fed's dont clean house in this company ,than who are we to trust withe the 700B
10-09-2008 @ 10:17AM
Robert S. said...
I can think of no words to describe this besides, perhaps, outrageous. This is an insult and an assault on all Americans (with the exception of AIG honchos). The temerity of AIG to request more money, especially this soon, doesn't surprise me. The idiocy and naivete of the government to comply, does...although I guess it shouldn't. And if AIG is bold enough to overtly misuse these funds (St Regis vaction), can you imagine what is going on covertly? When the $700 bailout began the FBI promised to immediately begin investigation large corporation corruption ...why aren't they starting with AIG?
Why are we giving money to an insurance company at all when we allowed a large mortgage company like Countrywide to falter? Bailing out Countrywide would have at least made a little more sense to me. Who can we protest this to officially and how (I would appreciate someone telling me if they know)?
10-09-2008 @ 10:24AM
Herman said...
The government should have never GIVEN AIG the $85B in the first place, much less the additional $37.8B mentioned.
Half Moon Bay should immediately cancel the reservations for the salesmen who are scheduled to attend the "conference."
The executives who attended the last conference at a cost of over $400 thousand should be required to reimburse the government for the expenditure out of their own pocket, not from AIG's expense account.
10-11-2008 @ 7:07AM
Matt said...
AIG is not simply taking money from taxpayers. Of the $85 Billion promised loan, AIG is paying 12.5% in interest on any amount it borrows, and 8.5% on any amount it is not using, presently. Which other company or entity is the Governmnet asking for 8%+ interest from? Not Goldman or Morgan Stanley, who are hoovering cash from the Fed's Discount Window at 2% and less. Note Blackstone, which is 'managing' Bear Stearns' $30 billion portfolio for a 'modest fee'. Henry Waxman should be ashamed, as should most of Congress, many members, including Barney Frank, were sucking at Freddie Mac's teats fo cash while denying the need for real regulation of these behemoths (including Fannie Mae) which are truly costing taxpayers cash, some $200 billion...Give AIG a break.
10-09-2008 @ 10:24AM
Robert S. said...
I think Carol has the right idea. They need to be held accountable for their actions, and we need to know who "they" are. AIG executives (and then the executives of all the other companies we are giving money to) need to be made public and watched/investigated.
10-09-2008 @ 10:28AM
Guy said...
The American people are sheep that have been being sheared for decades (at least) but now the wolves have gotten so completely out of control that we taxpayers are being forced to intervene directly to pay for their greed and excess.
The CEO of Lehman Bros admits that he took over 200 million dollars from Lehman's shortly before the collapse, a congressman chastises him with righteous indignation, and then the sob walks out of the room, back to one of his several multi-million dollar palaces, and nothing happens.
This latest AIG ripoff is just more "business" as usual that will never stop until America is just another third world economy with 99%
of us on an economic treadmill while the other 1% live beyond amy pharaoh's wildest dreams.
The parallels to Imperial Rome are glaring and have been noted by many.
Go to the address below if you've got 23 minutes to spend hearing the bare naked truth from one of the most eminently qualified persons you could ever hope to tell it like it is.
http://www.pbs.org/moyers/journal/09282007/watch.html
10-09-2008 @ 10:26AM
Herman said...
Carol:
I for one have already expressed my displeasure to my two senators and one representative in the US Congress. And I have already received a canned response from one of the senators expressing his thanks for my interest in government and letting me know that he is working diligently for his constituents. (LOL)
10-09-2008 @ 10:30AM
Liz said...
What can we do? Who can we write? People from California should go and protest in front of the Ritz Carlton.
10-09-2008 @ 2:25PM
Bob poppop said...
FLOOD YOUR SENATORS AND CONGRESSMEN WITH PHONE AND E-MAIL IMMEDIATELY TO STOP THIS