Springtime Budget-Busters -- Savings Experiment
Save on Spring Cleaning With a New Vacuum -- Savings Experiment
In the film version of Tennessee Williams' 'Cat On A Hot Tin Roof' (1958), Maggie 'The Cat' (Elizabeth Taylor), knows her husband Brick (Paul Newman) is hiding something, but she can't figure out what it is.Later, we learn that Brick is hiding the truth about his father, millionaire Big Daddy (Burl Ives), and he slowly gathers the courage to end the mendacity that has permeated their lives.
At some point the nation will, likewise, end the mendacity about American International Group (NYSE: AIG) and announce the full, probable cost of the orderly stabilization of AIG. For economic conservatives, market absolutists, most Republicans, and others who oppose government intervention, the above would be bad news, but at this juncture, it appears to be unavoidable.
Fed Chairman Ben Bernanke has already provided not-so-subtle hints regarding the system risk posed by AIG. In Capitol Hill testimony this week, Bernanke repeatedly used phrases like "unavoidable," "we had no other choice," "there were no other options," and "Senator, we did what we had to do," in reference to the Fed's decisions to intervene and bolster AIG.
Comment: The above is Fedspeak, or the Fed's way of emphasizing the large degree of systemic risk represented by a potential AIG failure.
AIG operated a number of business over the years but most recently, during the housing bubble, AIG sold credit protection called credit default swaps - - really a form of credit default insurance -- on mortgage-backed securities / bonds and on other collateralized debt obligations. Its counterparties span the globe. And there was just one problem with AIG's operation: it had nowhere near the capital sufficient to pay for major claims for credit default swaps.
In short, AIG was a certainly reckless and probably illegal insurance operation.
For those investors who find it hard to understand AIG's business and exposure, here's an analogy: say you sold fire insurance for 10 neighbors' houses. You collected premiums, but never held enough capital to rebuild even 2 of the houses, let alone 10, should a major fire occur. Then, a major fire occurred and 7 of the houses burned down. You can't pay, and they are left without homes, because they were counting on your insurance to rebuild their homes. That's essentially what AIG did.
$163 billion: Just the first step
On Monday, the Fed and the U.S. Treasury announced the third version of the government's bailout of AIG, CNNMoney.com reported, providing the firm an additional $30 billion in capital, bringing total U.S. taxpayer exposure to AIG to $163 billion. AIG reported a $61.7 billion loss in Q4 2008.
And, astonishingly, that will undoubtedly represent just the first step with regard to government resources to support AIG.
Due to AIG's myriad of credit default swap products, derivatives, and other financial products, and its deep connections to the global financial system, AIG will probably need at $200 billion more in assistance, and may need as much as $300-500 billion, so says economist David H. Wang. Wang added that he's "100% in support of the Fed's decision to intervene and stabilize AIG."
Monetary Policy / Economic Analysis: To be sure, no one wants to further increase the national debt and / or the Fed's balance sheet, but if economist given what we know about AIG's relationships, the U.S. has no other choice. The impact of an AIG failure on already-constrained U.S. and global financial systems would far exceed the costs of an AIG bailout. And one can only imagine the further slowdown in the economy, should credit be constrained more.
A some point the Fed, if it hasn't already, should dialogue with the European Central Bank, Bank of England, Bank of Japan, and other major central banks regarding potential help in AIG's stabilization, given the counterparties that exist in these countries, particularly if the bill for AIG exceeds $500 billion.
A $500 billion intervention for one company? Who would have imagined this 10 years ago? Nevertheless, it is stabilize AIG, we must.
Financial Editor Joseph Lazzaro is based in New York.
Goldman Earnings Sink After Buffett Dividend
Johnson & Johnson's Income Falls 23%
Burberry Shares Leap on Sales Update
Reader Comments (Page 1 of 1)
3-06-2009 @ 4:26PM
Allen said...
Mr. Lazzaro: I am glad that someone has finally stated the obvious about AIG: That it was a giant, probably illegal, ponzi scheme, concocted by Hank Greenberg and his successors. The whole company was a giant house of cards, which has now collapsed.....with the American taxpayer being left to pick up the pieces.
One thing that seems to have been ignored is that the corruption, mismanagement and fraud at AIG was institutionalized, and that no one at the top can ever claim that they were not being kept informed. Every AIG office throughout the world sent overnight reports to New York, as well as computer generated reports detailing every aspect of operations. The corporate culture was one of "we are bigger than everyone else and we do not play by any rules other than our own." The problem was that AIG believed its own lies (computer models) which said that the worst case scenarios could never happen - garbage in, garbage out - but management got to hear what it wanted.
The only thing to do now is a total cleanout of the entire company, then dissolution and sale of its assets. That is the only hope of recovering any of the tax dollars poured doen the AIG sewer.