Really, this is getting ridiculous. First it was IBs, then it was GSEs, then S&Ls, now insurance companies? And (in all likelihood), car companies in the next month or so??? Is there any company in corporate America that is not too big to fail? Anyone willing to live by the invisible hand and die by it as well? Anyone? Anyone?

AIG and Fed defenders, I'm all ears!

the bridge loan only makes sense if AIG is going to be broken up and wound down in an orderly fashion.

think of it as DIP financing. the underlying insurance subs are going to be auctioned off in order to raise cash for holdco. holdco needs cash in order to (a) pay off the obligations of AIGFP; and (b) post collateral as the book is wound down. (AIGFP is an obligation of the holding company, i believe).

the global banks actually will be receptive to putting in $75B because the alternative is much, much worse: the wholesale unwinding of the CDS market. AIG was a big writer of protection, and probably didn't do much hedging. (as an insurance company, they are a natural seller of protection, and likely don't run a matched book the way JPM, GS and the market makers do.) the entire WORLD is long AIG counterparty risk via AIGFP. that includes the feds, via the interest rate swaps FNM/FRE have taken out to fix the duration of their retained portfolios.

AIG clearly has massive needs at holdco (ie, AIGFP). i suspect something more is going on than the well-known CDO exposures. i wouldn't be surprised if AIGFP was a big writer of FNM/FRE CDS, and LEH CDS. those two trades alone might have been enough to blow a $20-40B hole in their balance sheet (let's not forget that AIG started cratering just after paulson nationalized the GSE's. presumably the brokers who bought protection to offset their customer liabilities know who is on the hook for the claims payment.)

so let's suppose FM/FN blew another hole in AIG's balance sheet. then LEH starts tottering (another potential liability). the rating agencies are aware of this, and put the screws to the company to raise equity quickly. the street sniffs blood and the thing starts to unwind.

so AIG goes into the weekend looking for a miracle. Flowers passed. TPG passed. Buffett passed. those guys took a look and said "no thanks". we're more than happy to acquire some of your subs, but we're not injecting money into holdco (ie, AIGFP).

AIG then decides that their only hope is to approach the feds and threaten the system. the feds say, no way, and tell JPM & GS (two large CDS brokers) to deal with it themselves.

so JPM & GS are underwriting the DIP loan for the holdco. sure, the capital may avert a ratings downgrade in the near-term, but the reality is that no bank is putting in money unless they get paid back pretty quickly. the only way that happens is if the loan is secured by subsidiaries that are already on the market.

in the meantime, the market gets 6-12 months to gradually work down its exposure to AIGFP, in the hopes of averting another catastrophic hit on the heels of LEH.

what a massive failure of leadership, prudent risk management and regulation. unbelievable.

Are they really that desperate? Why did they refused a participation offer from a private equity firm this week end then?

Because the upper crust would’ve lost control of their Empire, correct?

So, in order to preserve their almighty self-importance in the food chain of the elite, they go and beg to the Fed.

Well…nyet!

They screwed up, it’s time to pay the piper.

The big boys go, or AIG blow…it’s that simple.

To update my blog comment of Sept. 9 2008:

Here’s the deal boys and girls:
1.The largest financial institution in the USA [add the whole financial system of the USA] is now being run by politicians.
2.There are no rules that apply to politicians.
3.There will be no rules, whatsoever, applied to the financial conduct of the former Fannie/Freddie [add the whole financial system of the USA] other than the “rules” of political expediency.

But wait! Dubya is meeting manana
with “all the kings horses and all of the kings men”. I wonder if he will see that all of those WMD that he thought were in Iraq were always right here at home in the Fed and the Treasury?

Earl L. Crockett
Santa Cruz, CA

I totally agree with Richard Kline’s post.

It was totally irresponsible for New York to give AIG access to secured assets from their subsidiaries.

When AIG goes, and it will, the fallout will be a disaster.

The scope of the problem (in terms of the tens of billions required to temporarily repair the damage) keeps growing every 8 hours, as we learn more from inspecting their books about just how reckless they were without adult supervision.

Matt Dubuque

WaMu debt lowered to junk by S&P!

http://www.bloomberg.com/apps/news?pid=20601087&sid=awDjhtIfoz_Q

Ca-Ching!

Cheers, Matt