Randomness (r_ness) wrote,
Randomness
r_ness

Oh, so about AIG...

...remember them? We the taxpayer bailed them out back in September, in order to save the financial system from itself, and we've been throwing money ($160 billion, so far) at them ever since. Well, they had a conference call yesterday to discuss their Q4 results. Here's what Floyd Norris of the NYTimes had to say about that call:
The chief executive, Edward Liddy, seemed a little defensive, and for good reason.

In the fourth quarter, A.I.G. said it lost $61.7 billion.

That amounts to $465,421 a minute. To put that in perspective, every six seconds it loses enough to pay full tuition for a year at Harvard.

How long will this go on? Will the government ever stop having to pour money into this black hole? Mr. Liddy ducks that question, explaining: “The marketplace is a pretty crummy place to be right now. When the world catches pneumonia, we get it too.”

He does not mention that A.I.G.’s financial irresponsibility was a major cause of the epidemic.

The government is committing another $30 billion to keep A.I.G. afloat. It also is allowing A.I.G. to pay less for the capital that the government already put up.

Mr. Liddy at one point refers to “our partners in the government.”

One analyst asks what A.I.G. will look like in five years. Mr. Liddy does not know, but let’s hope it is only a bad memory by then.
In case it isn't obvious, that's our money they're losing at nearly eight thousand dollars a second.

Matthew Yglesias adds:
But the long and short of it is that all this money we’re giving “to AIG” isn’t really going to AIG, it goes to AIG’s counterparties. These are mostly banks (many of them abroad) who bought insurance from AIG against the possibility of a global financial meltdown. It turns out that AIG can’t actually pay all the insurance claims. So were AIG to go down, all these firms who thought they were at least partially insured against catastrophe would find out that they’ve got nothing and they, in turn, would go under. Hence, the government is stepping in to, in effect, pay off AIG’s debts.

That seems reasonable enough. But the retrospective look at things is truly outrageous. The whole idea of the insurance industry is that if I buy insurance from you, you pay off the claims. Absent ability to pay claims, there’s no business there at all. It’s just fraud. Whether or not it meets the legal standard for fraud, I couldn’t say. But in ordinary language sense, it’s a fraud—you’re selling a service you have no capacity to deliver. And AIG executives made a bunch of money engaged in it.
And, as a matter of fact, it's important to remember that the entire CDO market was exempted from the normal reserve requirements insurers actually have to follow. From Barb Arrigo's editorial blog in the Detroit Free Press:
Reality stinks, as the saying sort of goes. And there’s a lot of painful reality in the news that AIG needs even more of our potential tax money to stay afloat – and that we have to keep AIG afloat because the entire financial system would come crashing down if we don’t.

“Banks relied on AIG’s financial products unit to back about $298 billion of assets through derivative contracts at year-end, making the company a ’systemically significant failing institution’ that has to be propped up, according to the Treasury.” – Bloomberg News

As best I understand them, these derivative contracts often were treated as if they were insurance products, but without the rules regular insurers have to follow about keeping reserves on hand. In effect, they just became a way to hedge/bet, mostly on mortgage backed securities and other credit products.

So while the housing market was going gangbusters, places like AIG were more than happy to sell gobs of derivatives because they never ever had to pay out any money on them. Apparently the worst outcome anyone even contemplated was that one part of the country might have a housing slowdown, but it could never happen nationwide or worldwide.

So, yeah, now it has happened. And if AIG doesn’t back up all the bets it took, every other financial institution in the country will probably be insolvent (not that they’re doing that well anyway).
Oh well, at least Ben Bernanke is angry about it. From http://blogs.wsj.com/economics/2009/03/03/bernanke-angry-about-aig/:
Ben Bernanke, known for his sober and professorial demeanor, railed against American International Group Inc. and told lawmakers he’s “very angry” about the company’s circumstances.

The Federal Reserve chairman, at a Senate Budget Committee hearing, faced repeated questions about the insurance giant a day after it reported a $61.7 billion loss while in the government’s hands. Lawmakers had enough anger in them; Mr. Bernanke appeared to up the ante.

“If there’s a single episode in this entire 18 months that has made me more angry, I can’t think of one, than AIG,” he said. “AIG exploited a huge gap in the regulatory system. There was no oversight of the financial products division. This was a hedge fund, basically, that was attached to a large and stable insurance company, made huge numbers of irresponsible bets, took huge losses. There was no regulatory oversight because there was a gap in the system.”

Lawmakers appeared to be somewhat receptive to his comments.
Well, that's all right, then.
Tags: money
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