With apologies to actor William Shatner, How big could the bailout of AIG get? Really big.The U.S. government -- which is all of us, citizens and taxpayers -- may have to increase its investment in American International Group (NYSE: AIG) by still another $70-80 billion to keep the insurer solvent through the end of 2009.
Just call it USG-AIG
AIG, which reported $43 billion in losses tied to home mortgages in the past quarter, "will probably not function properly if it doesn't receive another cash infusion by September 2009," economist David H. Wang told BloggingStocks Tuesday. Wang based his forecast on his projection for cashed-in credit default swaps stemming from home mortgage defaults.
AIG is a major issuer of credit default swaps, actually a type of credit default insurance, which many holders of mortgage backed securities and bonds purchased to hedge against bond issuer defaults.
"If we project a rise in home mortgage defaults through Q2 2009, that will likely take credit default claims to levels that will require more money for AIG in late 2009," Wang said, although he qualified his projection by stating that it is contingent on negative U.S. GDP for Q1/Q2 2009. A U.S. economic recovery in Q2 2009 is possible, but not likely, Wang said.
AIG's shares fell 15 cents to $2.14 on Tuesday at mid-day, amid a broader market sell-off.
Citing systemic risks, the U.S. Federal Reserve first intervened to extend an $85 billion loan to AIG on September 16. AIG received an additional credit line of $37.8 billion on October 8 and then $20.9 billion more on October 30. Then Monday, the Fed restructured its financial support for AIG, reducing its loan to $60 billion from $85 billion, and buying $40 billion in preferred shares and $52.5 billion in mortgage securities owned or backed by the company.
Tuesday's Fed announcement brings total U.S. government assistance to about $150 billion. Wang's most likely U.S. GDP model sees that assistance increasing "to about $220-$230 billion by the end of 2009."
Is there an alternative to the massive taxpayer assistance for AIG? Right now, there isn't, Wang said. There is no willing private capital source. Foreign sovereign wealth funds have similarly shown virtually no interest. And the consequences of an AIG operational failure "would be extremely negative, possibly devastating, for already stressed credit and financial markets, with very unpleasant economic consequences," Wang said.
So it is fund we must, he said.
Fiscal Policy & Economic Analysis: Yet another event in which the United States is left with a series of unpleasant choices. The one saving grace in the financial crisis -- after the good will and productive capacity of the American people, of course -- has been the dollar's relative firmness, due to a flight-to-safety by foreign investors. That's lowering the U.S. government's borrowing costs to as low as $40 billion in annual interest for $1 trillion in loans. If interest rates remain low, that will enable the U.S. to service its enormous debt until it can start paying it down after the U.S. economy begins to recover.
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Reader Comments (Page 1 of 1)
11-11-2008 @ 7:36PM
Wil said...
None of this is on OPbama. The whole bailout picture is Bushs's package. It would have been better for the government to underwrite bank loans with strict accounting. Instead we gave the money to the big shots and now the auto companies want a gift too. If GM< can't make money selling cars, we can buy imports like we do with all the other products outsourced.
11-12-2008 @ 7:52AM
andyg8180 said...
Let them tank... I'd rather deal with the repercussions of losing them than give them more money...
Dear AIG,
SUCK IT
Sincerely,
Me
11-12-2008 @ 9:03AM
mark said...
In my 50 years alive the democrates have never acomplished anything positive, they are always wrong when it comes to war, economics and social. this is a party that will kill babies, but protect baby killers.this is a party that appeases the downtrotten, but won't advance the cause of self responsibilty. This is a party that thrives on peoples weakness and not there abilities. Its funny how every area of this country that is hardest hit by economics is the areas controlled by democrates. At some point the dumb and ignorant of this country have to stop voting democrate because its cool to do so.
11-12-2008 @ 9:17AM
BHarrison said...
Hasn't AIG now become the "poster child" and supreme example of the BAILOUT program?
Doesn't this PROVE that it is a total waste of capital to attempt to prop up ANY corporation that is so totally insolvent? Granted, the initial bailout efforts were to head off a complete loss of faith and crash of our economic infrastructure . . . but that time has passed in the sense that the pervasive problems throughout our economy are now apparent.
haven't we reached the point and time in which corporations are required to "save themselves" or to go into bankruptcy. The USA simply does not have the capital or wherewithal to save all of the troubled corporations. Likewise, those who purchased houses/condominiums for real estate specualtion or homes that they could not afford should be allowed (required) to suffer the consequences. The american people have been DUPED again by the government. The Bailout was ALWAYS INTENDED to "save the FRAUDULENT corporations . . . not the homeowners who bought homes that they could not afford.
We need to stop the "insanity" and let the capitalism of the maket place determine who can survive on their own. Corporations can provide full disclosure and attempt to raise private capital. The LEGITMATE HOME BUYERS (not speculators) should be offered longer term, reduced mortgage payments, IF they can qualify for such mortgages . . . if they can't qualify, then they should be foreclosed on; and they should go rent a home or an aprtment that they CAN AFFORD.
the "bottom line" is that the government has "bought a little time" in all of this, and attempted to shore up the FRAUDULENT corporations . . . and now the flood gates have been opened, revealing the extent of damage that has been done due to FRAUD and CORRUPTION. Now it is time to let the chips fall wherever they may.
The people who were worried about losing on their stock values, are now being fleeced in many other ways, and impacted by the evolving debacles.
It's time to let "capitalism" prevail with "integrity". That will be the hard short cut to "recovery" . . . otherwise we are destined for a long, slow, painful demise. All they are doing NOW is to distribute the losses to those Americans who did not participate in these risky ventures.
11-12-2008 @ 9:33AM
BHarrison said...
Proposal for a "NEW America": How about if Americans learn to not be manipulated by the devisive "Republicans vs Democrats" tactics which is merely a way to DUPE the Americqn people, and to distract them from the REAL main issues.
What if Americans learn to vote for the indiviudal candidate, based on the merits of the man, his integrity, and his personal platform, not party dogma or negaitve B.S. campaign 30 second sound bytes? Shouldn't we have term limits for Congress? Too often the corruption in Congress is based on "old dogs protecting their turf and positions". "Corruption" appears to eventually creep into MANY of the old dogs performance.
Isn't that what has happened behind the scenes in this UNPRECEDENTED DEBACLE?
11-12-2008 @ 7:58PM
Jason said...
If you give a mouse a cookie
http://nomedals.blogspot.com
11-20-2008 @ 9:53AM
Allen said...
The government bailout of AIG was misguided from the beginning - and has gone from $40 billion to $150 billion and counting. (Note: AIG is so totally buried in debt and obligations that it will take somewhere between $400 and $800 BILLION to bail it out.) When the government gave away our money to AIG, their stock was trading at $1.25 per share. Today (November 20), it is trading at $1.51 - so much for the value of the bailout! To date, AIG has not sold any of its various businesses, nor has it reduced staff (note Citibank just announcing a 53,000 person reduction in force).
Most of AIG's problems can be attributed to disgraced former CEO Martin Sullivan, who was perhaps the most inept and least educated (he has a high school education! - can he even read and write?) CEO of any major company. Mr. Sullivan's corrupt practices have driven AIG from a blue chip Fortune 100 company to a bankrupt non-player in world financial markets.
AIG should immediately file bankruptcy, as to do otherwise would be merely forestalling the inevitable. This would allow it to dump its obligations and top-heavy management, to liquidate those portions of the company which still have some value (aircraft leasing and property & casualty) before they, too, "tank". In reality, the impact on the world financial markets of an AIG bankruptcy would be a mere "blip", like that of Lehman.
Finally, the government (state or federal) should prosecute formers CEOs Sullivan and Willumstad for fraud. Present CEO Liddy has proven unable to effectively manage, so he should be replaced immediately.