Wednesday, September 17, 2008

Another One Bites the Dust!

Okay, here's the deal: your house is burning down. While that is happening, your fire insurance company is teetering on the edge of bankruptcy. If that were to happen, you might be tempted to call your congressman to get a little government assistance to the insurance company—you know, for the "public good"—at least until your business with them is settled.

The same thing is happening with AIG, except that the banks are you, the house burning down is widespread defaulting on mortgage securities, and AIG is the bond insurer of the securities the banks are holding. As the bonds fold (issued through Lehman for example), the banks want their reimbursement.

So the Fed puts $85 billion of taxpayer-funded treasury bills on the line to underwrite AIG, to make sure these swaps are covered. AIG cedes its control to the Fed, who now has a 79.9% stake in the company, and will sell off its performing assets... pretty much the rest of its insurance business, to cover this "bridge" loan. So the plan goes. Almost certainly, stock in the company as of the opening bell is worthless.

Some perfunctory motions were made to have private industry cover the AIG bailout, but there were no serious takers. The Treasury Department briefly pondered another conservatorship, but Fannie Mae and Freddie Mac required Congress to enact, which was easily piggy-backed on the mortgage rescue bill. For AIG this would take time, which it doesn't sound like it had. So the Fed was left holding the bag—or more specifically, taxpayers were.

My earlier prediction that the conservatorship of Fannie Mae and Freddie Mac was sufficient to cover the bailout fell squarely on its rear end less than a week later. You win some, you lose some. Time was when $85 billion was a lot of money. Now it's just pocket change casually thrown around at bankers whimsies.

ADDENDUM [10/8/08]: AIG takes that bailout money... and parties! Days after the bailout, AIG execs celebrated with a $443,343.71 "conference" at the St. Regis Resort in Dana Point, CA. They are planning another little gathering for their brokers in Half Moon Bay this weekend. [10/15/08]: Oh my goodness gracious they just won't stop!

No comments: