AIG – Too Much Debt to Fail
December 15, 2008 – 5:30 pmAmerican International Group just received another monster Christmas present from you, me and your great grandchildren taxpayers. On top of the other hundreds of billions of dollars thrown at the insurer, the FED is about to print another truck load of cash to buy the company’s crappy mortgages and bad bets it can’t pay back:
American International Group Inc. sold residential mortgage-backed securities with a face value of $39.3 billion to a government-funded facility as the U.S. seeks to limit losses at companies that did business with the insurer. AIG will receive about $19.8 billion for the assets, which were held by the insurer’s securities-lending program, the New York-based firm said today in a statement. The facility was mostly funded by the Federal Reserve Bank of New York, which may collect the majority of profits if it sells assets for more than the purchase price, according to a regulatory filing.
The Fed has committed as much as $152.5 billion to rescue AIG from insolvency and minimize “disruption to the financial markets.” AIG stumbled when it lent securities to investors and used the cash it got back as collateral to buy mortgage-backed securities that plunged in value. When the investors asked for the collateral back, AIG wasn’t immediately able to pay.
Instead of being an insurance company, AIG played fast and loose with risk and counter risk and got burned on both ends. This sent the company rocketing up the creek without a paddle along with some of the biggest brokerage houses on the street. Since you can’t beat dollars out of a dead horse, former Goldman Sachs CEO Henry Paulson devised a publicly-funded rescue of the the brokerage houses and dressed it up in drag to look like a bailout of the insurer. Conspiracy theorist, you say?
American International Group Inc., the insurer rescued by the U.S. government, made $18.7 billion in payments tied to credit-default swaps to banks including Goldman Sachs Group Inc. and Societe Generale SA, according to a person briefed on the situation.The insurer sent the money to the banks in the three weeks after AIG’s Sept. 16 bailout, said the person, who declined to be named because the information is confidential. The banks bought the swaps from AIG as protection on mortgage securities that plunged in value.
“The AIG bailout wasn’t meant to help the American taxpayer,” said Janet Tavakoli, president of Chicago-based Tavakoli Structured Finance. “What this has ended up doing is helping the investment banks who had AIG as counterparty.”
The money just happened to go to the insurer’s policyholders. Pretty cool how that works, huh.
The largest recipients were Societe Generale, which got $4.83 billion, Goldman Sachs with $2.97 billion, Deutsche Bank AG with $2.92 billion, Calyon Securities with $1.89 billion and Merrill Lynch & Co. with $1.32 billion, the person said
Either way, we pay. And what happens to all the well-connected insiders now that they got paid?
AIG’s life-insurance units used the $19.8 billion along with available cash and $5.1 billion from AIG in the form of capital contributions to settle outstanding securities-lending transactions under its U.S. securities-lending program.
That settlement ended AIG’s securities-lending transactions with the Federal Reserve Bank of New York under an agreement announced in October, which totaled about $20.5 billion as of Friday. As a result of these transactions, AIG’s October securities-lending agreement with the Federal Reserve Bank and AIG’s U.S. securities-lending program have been terminated.
Yep, they don’t just slam the door when they are done, they close up shop. There are two certainties in this world. One is that it’s not what you know, but who you know. Two is that it’s better to be in too much debt to Goldman Sachs to fail than it is to be too big to fail.
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