Last night we learned that AIG would have “made available” to it another $30 billion in taxpayer funds. The government also loosened the repayment terms on the at least $150 billion already down the AIG rabbit hole, because otherwise AIG is likely to go into default.
Why do we keep throwing money at this ghastly company? Yes, yes, because AIG is “too big to fail.” If AIG triggers a default (by, for example, suffering a downgrade from the ratings agencies), banks around the world will start calling the insurance and insurance-like contracts that AIG sold them; AIG doesn’t have enough cash to cover them; AIG goes into bankruptcy; banks around the world are out a ton of money; credit freezes up; sh*t hits fan. Too big to fail.
But what if AIG is also too big to save? Isn’t it starting to look possible that AIG put itself on the hook to such an extraordinary extent that even the U.S. government cannot save it, at least without compromising itself in the process? Today, it’s another $30 billion. Next week, maybe another 40. These numbers are astoundingly huge — the amount handed off to AIG already exceeds the GDP of nations like Egypt, New Zealand, and Hungary. It has to end somewhere, doesn’t it?
What happens when the company that’s too big to fail is too big to save?
Why allow a monopoly to hold the government AND the U.S. Taxpayer hostage? Seriously. Where is Teddy Roosevelt when we need him.
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p>See: http://www.whitehouse.gov/abou… [Link to a Biography of Theodore Roosevelt]
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p>Roosevelt won the Nobel Peace Prize for mediating a regional conflict. He saw himself as the protector of the American People, and at least according to this biographer, tried to ensure that neither labor nor capitol held undue sway.
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p>Again, if a company is too big to fail – it is time to break that company up for the good of the nation and the taxpayer.
and, as Deb Butler says, break it up. Fire the greedy slobs who are in charge, and zero out the shareholders who bet on them, while still keeping in place the critical bod-insurance programs that are hemorrhaging money.
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p>It’ll cost a mint, but so does continuing to feed these pirates; fortunately, the USA happens to have a mint. Bite the bullet, yank the tooth, and get on with things.
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p>Once the dust settles, if any of the pieces are profitable, auction them off and regulate them.
It pretty much is nationalized. The government owns nearly 80% of AIG and the plan has been all along to sell the parts. The problem is, no one is likely to buy until the economy turns around. The stock is at 42 cents so it is pretty much zeroed out…
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p>I’m not saying nationalization is wrong (or right), but this is one of the problems with it. Either you put more money in or kiss $200 billion good bye.
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I have dealt with people and their failing businesses for many years. It is sad to watch people sink all their money, then their friends’ and family’s money and then maybe what they get from the local shylock down a hole that can never be profitable. They can’t see change in their lives. They doom themselves by considering failure a personal insult.
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p>Blessed are the few that, when they see the signs of failure, nip the impending disaster in the bud and cut their losses. These people are known as survivors.
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p>Bankruptcy was designed to create an orderly resolution of difficult business situations. Either a reorganization of the structure and debt or a liquidation of any assets to the creditors. Throwing taxpayer money (credit) at the problems through bailouts or nationalization only allows the corpse to linger, increasing the taxpayers’ debt.
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p>Governments, and their politicians, have unlimited taxpayer funds to support failure. What we’ve seen in the past with respect to failed government policies, agencies and bailouts will continue. It is the nature of the beast. Heaven help us.
I think it is testimony to the power of Wall Street that Obama hasn’t been able to break out of this paradigm. It took Japan a near depression to muster the political force to take on their banks.
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p>Pretty soon, though, time will have its due. If the economy continues to get worse, Obama will be a one-term President no matter what catchy slogan he adopts and how many Facebook pages he has. That will have a way of concentrating his team’s minds in, say, 2010 if not before. Let’s hope it doesn’t take that long for them to grasp the nettle.
Look forward to hearing more from you!
I stand openly opposed tot he continuation of the bail out of AIG I firmly believe we need to let it fall in order for the dust to settle on the entire financial system followed by a re-regulating and recapitulation funded by tax dollars. Dumping money into the AIG money pit accomplishes only one obvious result. That is we are demonstrating to investors that unethical, immoral, and rampant greed will be rewarded if done on a large enough scale. With an 80% stake what happens when we are facing another quarter of loses as investors and banks place calls on CDS and we are faced with the need to buy up another 25% share in order to stave off the collapse? Is 105% ownership enough or do we wait and see what the summer quarter brings. How much are we willing to lose? How much can we afford to lose? How much are we willing to pay in the future for a private companies greed? And WHY?
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p>What disturbs me the greatest with the Obama Teams approach to AIG is the unwillingness to clean house of both the board and top management. As a result it is my belief they have failed to prove to the world and more importantly to the investors that new policies that will prevent the taking of such future risk, risk that cannot reasonably be calculated on any scale, will not just occur again in some new form, what steps are they taking to reasonably provide a basis of faith as we try to move forward.
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p>I use the analogy of driving in traffic, anyone ever find themselves on a packed highway here in Massachusetts streaking along at 50-60 mph with only a cars length in front and behind and cars to your right and left? If you have you have felt the routine confidence of everyone doing their part in driving skill and behavior, just the same as you are. Now what happens when the individual 2 cars up decides he doesn’t want to be in the middle lane he wants to be in the right line and instead of signaling or even looking he cuts the wheel to the right and plows into the car on the right side of him then slams on his brakes and causes the individual behind him to slam into him and so on and so on. You suddenly have a lack of confidence that all of those other people on the highway with you actually know their responsibility to use caution and good-driving skills that do not endanger you failure destroys your faith and confidence. The resulting catastrophic pile up that stretches for miles and a lose in faith that the other drivers now feel as well causes the net effect of and unwillingness to return to the same circumstances that existed before for fear of the same result. Well our financial industry suffered that pile up and restoring faith and confidence is not an easy task, yet leaving those drivers responsible on the road is highly unlikely to make anyone else feel safe thus confidence will not return. This is certainly true in our financial markets simply look at the behavior of the Stock market over the last three months.
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p>Bail Out AIG with out removing those bad drivers and putting regulations into place that may seem meaningless, since many will say we are not likely to go down that road again, sets a tone to the other victims of this pile up that you are putting into place changes that acknowledge their concern and fear and that you can assure them this will not happen again, business has changed, and it is now safer. We have failed to do this as we continue to bail out AIG and Citibank and BofA and it should be no surprise that confidence has not returned.
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p>Certainly in the case of Citibank as well and to a slightly less extent to BofA, the lack of confidence on the street is clearly a reflection of the fall of their value as the prices continue even after 2 bailouts it should be crystal clear that other changes need to occur in order to return confidence, BofA may not share to the same extent as Citibank in Speculation and hedging yet the market has made clear that they are unwilling to enter into new partnerships, the market has dictated the need for a change. President Obama’s economic team must recognize the need for a new tone and reestablish in the system a sense that we will not repeat and will change in order to earn the confidence we once had if we are to move forward with a recovery.
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p>Placing all of our financial eggs in this bailout basket leaves us fewer and fewer options and the inability to continue to provide a safety net for those who are innocent from feeling the pain of the process.
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p>With the growing operating deficit and the need for cash infusions we are facing a real need for an extended economic boom in order to pay off the debt we are now forced with carrying. May I point out one last fact many have talked about those people who over bought homes as the key to what has happened and that main street is to blame, if this were the only reason the billions we have spent thus far would have purchased all of the homes currently in foreclosure and those at risk for the next two years. Foreclosure rates have not exceeded 10% nationally, if we are to believe the banks and federal government primary home mortgages currently in the US total just under 30 Trillion dollars 10% would be just under 3 Trillion. If you add up the tarp money I and II and the stimulus along with FDIC and the 1 Trillion opened up and loaned and guaranteed by Treasury on Banks and Money Markets the figure is well north of 3 Trillion to date and still home values are falling and more bad news fills every morning news paper.
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p>As Usual Just my Opinion
not too big to save — if we fully nationalize it, sack all its executives and grab the bull by the horn, then sell the sucker off piece by piece as we fix the company, to make our money back, or at least some of it.
The company is already effectively nationalized – taxpayers own nearly 80% of the stock. They can’t take more than 80% without taking on full responsibility for all of AIG’s insurance contracts. The current CEO was installed by the government after the first round of bailouts; he had nothing to do with getting AIG into the mess it’s in. Recent attempts to sell the parts of the business that are still functioning have been unsuccessful. There seem to be no good options — it’s not like nationalizing a bank.
Is there a worst case number?
But I bet that’s not the ceiling, at least theoretically.
Here is a link to a 2 Month old story that if you read carefully they were at a quarter of a Trillion. Much of the new reports do not go back and look at the total picture as of yet they are still trying to wade through the new deal.
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p>http://www.usatoday.com/money/…
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p>It is likely that until the books are fully open we may never know the full extent yet we can hypothesize based on the cash reserves they are now trying to hold suggest that the total dollars of CDO’s CDS’s they hold and wrote could be in the several trillions of dollars. As we buy a bigger stake in the company now about 250 Billion with this last cash input we are likely to see little or no return based on the current discussion of selling off and breaking up no one is going to pay full market value in a fire sale and we are likely not to hold because of the risk of the vortex of loses pulling the last dollars out of the federal system in a vain attempt to stave off the collapse.
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p>As Usual just my Opinion
then it really will be a quarterly bloodletting until either it dies… or we do.
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p>In the case of the CDOs attached to a mortgage there is real value at the unwinding of it. It’s called ‘a house’. Other people might refer to it as ‘real estate’. We’re not in this pickle because of a suddenly vanished value on housing. We’re in this pickle because of an inability to pay for housing at the prices set during the bubble. Housing prices are falling overall, in part because of excess housing supply and in part because of extra-ordinarily tight credit supply (which might loosely translate to ‘demand’ in this instance). But when all the dust clears and the mortgages get straightened out they’ll be some real value attached to them.
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p>So it’s axiomatic that the CDO’s will never be ‘worthless’.
Bankrupt it! Boy, do I feel sorry for the poor suckers who own AIG. Who are they?
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p>Oh. Wait…
Not sure if you’re serious, Bob, but if that is the case why not give every man, woman, and child $100,000 right now?
Now that would definitely stimulate me to spend.
I know a trillion doesn’t sound like a lot anymore, but $30 trillion seems a little rich, even for Uncle Sam.
Sometimes you’ve gotta spend money to make money. Anyway, I guess I was taking Bob too literally.
We can, indeed, print as much money as we want. It’s just made of paper. The government has done something similar to what you suggest, but on a much smaller scale: a few hundred or a few thousand dollars to individuals. Your suggestion would, just for the sake of discussion, quadruple the money supply. Prices would go through the roof i.e. there would be a lot of inflation. The dollar probably would crash because it would be worth less, which would add to the inflation. The expectations people have about prices would be dramatically reset. Inflation might continue for many years after. I suspect the government ultimately will do something between your suggestion and what it is doing now. The payments may also be indirect i.e. funneled through a variety of intermediaries, and not direct cash payments to individuals, for a variety of reasons, many of them unfortunate.
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p>What I meant by my promotion comment, however, was more limited: the dollar is very strong right now, so we can afford to print more of them.
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p>… this is what the Fed (Bernanke) has promised to do by strewing several trillion dollars worth of ‘bailout’ funds hither and yon.
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p>I think there was initial panic, and in the initial panic some monumentally bad decisions were made: Lehman was allowed to go under; AIG was nationalized sorta blindly and only now are we getting to the extent of the issue; BofA bought Merril for (what it thought was) a song only to find that idiots in charge were well and truly idiots and bluntly in charge… And I think that Hank Paulson was just another low-expectation, attention-deficit thumb-sucker of the Avignon presidency.
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p>The point is, from where I sit, it’s hard to tell if the credit crisis isn’t as bad as the initial response to the credit crisis. And believe me, I think the credit crisis is plenty bad.
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p>Thank You best laugh I have had since the crisis strated 2 years plus ago. Well Said!!!!
… how a bankruptcy would work. The real problem with letting AIG fail is the disposition of their commitments to banks on the hedges that they provided against mortgage backed securities’ failures. Talk of AIG not being able to make good will necessarily create a domino effect on the banks who are owed,… even before the disposition of such debts is dealt with in the bankruptcy procedures, because just the perception might be enough to start a bank run on multiple banks simultaneously.
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p>Those potential bank runs are the reason, I think, that people are afraid of letting this one go belly up.
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p>OTH, all of this pretending that this will work itself out through loans and subsidies doesn’t begin to address the amount of liability we’re talking about. If banks are afraid to liquidate their junk mortgage assets because ignorance is preferable to a true valuation, imagine what the incentive is for ignorance on the default swaps AIG guaranteed is? AIG doesn’t want to know because then we’d be ‘sure’ of AIG’s insolvency even with all the subsidy and loans the government could muster. The thing that is helping is that the bank’s willful ignorance of their losses gives them an incentive to stay in the dark about AIG’s commitment to them as well.
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p>At some point the valuations are going to happen. I don’t see how we avoid it indefinitely. I also don’t see how AIG remains in tact afterward without defaulting on the guarantees they made to the banks. I don’t see how to minimize the fallout of AIG’s defaulting on guarantees without a structured government intervention. Even with such an intervention, I have trouble seeing how even minimized fallout on the banks side doesn’t result in a run on the banks. When the valuations happen, the government will probably have to declare something like a one month bank freeze.
Which is why I sstand mby a position that to do it now rather then empty the treasury to the point that we are unable to raise capitaol to jump start the patient(the economy) we are risking more now then ever the inability to recapitalize the banks because of the drain created by AIG.
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p>Lets be honest tot he investors and the banks it was buyer beware when they bought these securities and insurance vehicles they were never insured by anyone other then AIG these were never covered by anything government related.
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p>Now lets also be honest the majority of business that AIG was in before they started down the road of CDO’ and CDS’s the insurance business was profitable and I can not believe that the insurance end of the business will not be scoped up by another insurance company. Yet if the capitol is not available to buy the business because we went all in on the bailout we are likely risking the long term future.
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p>Why wait till there is nothing left in the cubboard I would rather see the governmetn step in and make those who invested in banks with FDIC be made whole with out risking over printing and deflation. That is a an economy none of us want to live in.
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p>As Usual just my Opinion
… figure out how not to have a depression initiating bank run when we start being honest about liabilities.
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p>I think we understand each-other. I guess my question is that from my perspective they seem to just be delaying the inevitable. OTH, maybe there is a way to head off a bank run initiated by valuation of AIG’s liabilities that involves ‘slow nationalization’. I hope there is a plan and this is how they are doing it,… I just can’t tell from my admittedly layman’s perspective.