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The Black Hole Grows: AIG Says it May Need Even More Money

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In case you weren’t keeping tabs (the number and variety of handout-recipients grows with every passing day), AIG was first given a loan (really, akin to a maximum borrowing authorization) of $85 billion with much fanfare and high drama, which was later quietly increased by another $37.8 billion. In the last ten days, AIG has said it intended to borrow perhaps as much as $10 billion through a separate, new commercial paper program.

Bloomberg indicates that AIG is now saying that it might need even more dough, although its latest plea does not have a figure attached to it. From Bloomberg:

American International Group Inc. has used $90.3 billion of a U.S. government credit line since it was bailed out last month, an amount that exceeds the size of the original loan meant to save the insurer.

AIG may need more than the $122.8 billion now available to the New York-based insurer, Chief Executive Officer Edward Liddy said Oct. 22. The company, which agreed Sept. 16 to turn over majority control to the U.S. in exchange for an $85 billion loan, got access to an additional $37.8 billion this month. AIG’s latest balance was revealed yesterday by the New York Federal Reserve, and is up from $82.9 billion a week ago.

“This emphasizes the uncertainty for anyone trying to put a number” on AIG’s cash needs, said Bill Bergman, an analyst at Morningstar Inc. in Chicago. The financial-products unit that caused most of the firm’s losses “is a big black hole.”….

“To the extent they continue to go down and we have to keep posting collateral, as it’s called in the vernacular of the industry, it’s possible it may not be enough,” Liddy said.

Liddy said in the interview that he thinks AIG “should be OK,” that he still hopes to stay within the $122.8 billion ceiling and that Treasury efforts to spur lending “seem to be working.” A spokesman for the New York Fed declined to comment. Brookly McLaughlin, spokeswoman for the Treasury, didn’t return a call seeking comment.

“The money is to meet our cash needs while we work out the rest of our solution, it’s not the total solution,” said AIG spokesman Nicholas Ashooh. “We still have to sell businesses and still need a permanent solution to the liquidity drain” from securities lending and the fixed-income guarantees known as credit-default swaps….

The insurer may seek a third source of cash by tapping a Fed program that buys commercial paper, a person familiar with the matter said last week. AIG will probably borrow less than $10 billion through the program, which is scheduled to start next week, the person said.

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29 comments

  1. Anonymous

    This is the elephant in the room as far as Governement intervention is concerned. The rescue of AIG, not the bankruptcy of Lehman, may well turn out to be the biggest mistake of all

  2. fresno dan

    Just get it over with – AIG gets all world tax receipts for infinity.
    There, done.
    And might as well get GM, Ford, and chrysler out of the way too.

  3. Anonymous

    It is cheaper for the government to lend companies just enough to put them into involuntary bankruptcy, and then buy them for pennies on the dollar out of bankruptcy and recapitalize them. All these government loans and equity infusions pre-bankruptcy make zero sense, unless you’re into crony capitalism. Post-bankruptcy loans and equity infusions by the government can keep businesses growing and expanding, and eliminate the brain dead shareholdes who cheered along while managedment drove their companies into the ground. Maybe even install new boards or CEOs composed of retirees with good track-records for restructing companies.

  4. Anonymous

    I have a question: who are the counterparties that are being bailed out by this government subsidy to AIG? Maybe we should let it default, I’d hate to think we’re protecting hedge fund profits.

  5. Anonymous

    “who are the counterparties that are being bailed out by this government subsidy to AIG?”

    Banks that bought hedges for junk securities in order to count the junk + hedge as a high grade investment for capital reserve purposes. European banks and GS bought a lot of protection from AIG.

  6. Richard Kline

    Soooo it sounds as though the plunge in bank share prices in Europe is triggering their swaps with AIG in high volume so that AIG has to keep setting aside real capital to keep those swaps in the black. In short by that reasoning, this is the US keeping a big chunk of the EU’s banks from bleeding out. If so, I’m not even saying that’s a totally bad idea from the start, but it is, as mentioned in comments here, a damn fool way to try to recapitalize busted banks. There are systemic issues here, but Paulson’s pro-industry, pro-plutocrat agenda biases are so severe I can’t really see my way into the thinking behind this move.

    Oh well, we’ve got the Heavy Mommy Tsunami rolling round the world’s equity markets today, and if we get double digits down on the SP and DOW we’ll have a cupboard full of busted china anyway. Busted is busted, doesn’t matter which side of the face cracked first.

  7. Anonymous

    I think we need to know who all these AIG Financial products people are. Its all blamed on one guy, but unless hes a financial master-mind who did each trade, there have to be 100s of other people involved there. last I heard AIGFP had about 400 people working there. Who are they and what do they do?

  8. Anonymous

    “Soooo it sounds as though the plunge in bank share prices in Europe is triggering their swaps with AIG in high volume so that AIG has to keep setting aside real capital to keep those swaps in the black. In short by that reasoning, this is the US keeping a big chunk of the EU’s banks from bleeding out.”

    Paulson doesn’t care about AIG or the European banks; he cares about GS. As Yves covered previously, they’d have like a 20B hole in their balance sheet if the protection they bought from AIG was destroyed in an AIG bankruptcy.

  9. Anonymous

    My numbers indicate that AIG’s outstanding obligations will require in excess of an additional 100B….

    I don’t know what formulations are being implemented for the numbers that have been published above and I’ll be charitable by calling them ridiculous. AIG is a “FINANCIAL BLACK HOLE”… Does anyone know the meaning of the term “exponential de-leveraging”…?

    Best regards,

    Econolicous

  10. patrick neid

    I always go with the 3 to 1 rule. Whatever number is settled on I multiply it by 3 and usually that proves to be ballpark. That puts AIG at 255 billion. The beauty of the rule is I get to put my feet up and ignore the news as the original number keeps getting larger. When it goes past my number I go out on the ledge.

    Now on to large numbers. Paulson and crew chirping about 700 billion gets us 2.1 trillion.

    We shall see.

    As a side note after today we will probably see plan D unveiled.

  11. Cool Head

    Don’t worry, they ran out of the first infusion because they spent it on a planned a spa workout, the second infusion helped pay for a golf outing and then a hunting trip. Perhaps they need more to now take their geniuses on a fishing trip?

  12. Bendal

    Ok, this is MY money we’re talking about (and everyone else’s, but you get the point). Congress should demand to see what we’re getting for all this money we’re pouring down AIG’s rathole. No more banker-speak, either; spell it out in nice clear terms that no one has to re-interpret.

    Either that, or withdraw all support and let them fall apart, with the government picking up the pieces.

  13. Anonymous

    Bendal. I think you are wrong. It’s not YOUR money; it’s your kids and grandkids money. We will not be taxed to pay for this money going down the rathole. It will be passed along to the next generations.

    Just like our little party in Iraq.

    Absolutely immoral to take on these things and ask our kids and grandkids to pay for them.

  14. Carlosjii

    “Treasury has been FEMAized by the Bush administration.” Krugman on NPR a few daze ago

    Krugman’s comments on NPR on why the bailout plans have gone so badly and the whole thing has been managed by Wall Streeters – bankers bailing themselves out at taxpayer expense.

  15. Anonymous

    I have seen on here and many other places calling for government end to CDS pmts. If that is done, you will have large unintended consequences. CDS are legal contracts trading under an ISDA the same as currency swaps and interest rate swaps. If the govt invalidates these contracts, may cause large problems in the interest rate swap markets which would kill mortgage lending and futher the housing spiral. CDS expsoure is an issue but a unilateral canceling of contracts is not the answer.

  16. Anonymous

    How do you “kill” something that is already dead? And if “not the answer” what is?

    Earl L. Crockett
    Santa Cruz, CA

  17. Anonymous

    I would agrue it is not dead for credit worthy borrowers that can put down 20%+ and afford pmts at a fully indexed rate. Without a functioning i-rate swap market not even these borrowers can get a mtg, no lender will build a mtg book if they cant hedge their rate risk.

    Not sure there is a good anwser for the CDS issue. A poor option but one that might not nullify contract rights is what they are working on which is getting offsetting trades paired and tore-up and going forward have a margined exchange product that is unwound via pmt and not left outstanding for years. Existing contracts should have option to be standardized and put on exchange but not required. If these existing contracts fail they should be allowed to and credit investors should take losses like equity investors.

  18. Anonymous

    ” If the govt invalidates these contracts, may cause large problems in the interest rate swap markets which would kill mortgage lending and futher the housing spiral.”

    Put all insolvent righters of CDS protection into bankruptcy, and let the bankruptcy court wipe out CDS buyers of protection. Bankruptcy law is old law, predating CDS. then let the government recapitalize any entities we want to keep around for jobs or whatever.

  19. Anonymous

    October 24, 2008

    As someone who has lived through several “you’re just being old fashion” market balloons like the “profits are no longer needed to be successful” dot.com bust, I do have an appreciation for your apparent limited experience, and mind set. Mortgages once were considered to be a safe place to park customer deposits back into the community from which the deposits came at a 1% to 2% spread over Fed rates. Your local banker knew you, knew who you worked for, had lunch with you once a week at the Lion’s Club, and probably drove passed your house daily on his/her way to their Bank. This was called, way back when, in biz school lingo, DUE DILIGENCE, a now forgotten distinction.

    The only bright light I’ve seen in recent times was an article saying that tons of deposits were being transferred from mega banks to local banks. I personally witnessed this phenomena while doing the same after a late night call to a client in July saying, “We need to get your funds out of WaMu, and over to Wells (SF Bay Area) as early in the morning as we can”. The young, very bright, upper management trainee doing his obligatory two years in the branch wilderness said that he had had a solid line of $150k to $250K checks come over his desk from elderly clients, just like mine, that same day, and then reported that the line had continued ever since when I last saw him two weeks ago.

    So I would say just put the $$$$gazillions of dollars you would like to be used to bail out Banksters into a new Fannie/Mac/FHA fund for new mortgages, not the feted toxic waste, Black Hole, Casino Scheme, Spa Retreat, crap they’re presently being spent on.

    That’s my answer.

    Earl L. Crockett
    Santa Cruz, CA

  20. Anonymous

    I assume your pontification is directed towards my post on adverse affects of govt broaching contract rights. I agree community banks doing proper underwriting and having a upwarding slowing yield curve would negate the need for i-rate swaps. However, for better or worse the majority of deposits reside in “mega” banks that rely on hedging as part of their mortgage business. Community banks don’t have the deposit base to support the housing industry, even after the downsizing in process.

    I don’t think the govt should put “$$$$gazillions” or any money into helping these firms or assets. As another poster stated, bankruptcy is the best course but think it should be in normal market operations, that is done without the govt canceling contracts.

    Thanks for helping correct my “limited experience”.

  21. doc holiday

    My empath triangulation abilities just all realized that Earthlings could use The Fermi Gamma-ray Space Telescope and THE LARGE HADRON COLLIDER as a means of triangulation to find The Missing Financial Black Hole, which may be somewhat like a Virtual Swiss Bank Account (VSBA) which is filled with unwanted derivatives and currency swaps that are really not there.

    See and feel: Fermi Gamma-ray Space Telescope
    http://en.wikipedia.org/wiki/Fermi_Gamma-ray_Space_Telescope

    Mission:

    Probe dark matter (e.g. by looking for an excess of gamma rays from the center of the Milky Way) and early Universe.
    Search for evaporating primordial micro black holes (MBH) from their presumed gamma burst signatures [Hawking Radiation component].

    Also see and feel: Higgs boson

    http://en.wikipedia.org/wiki/Higgs_boson

    The Higgs boson is a hypothetical massive scalar elementary particle predicted to exist by the Standard Model of particle physics. It is the only Standard Model particle not yet observed.

    >> I'm feeling the need to be given lots of money to create a huge amusement park, where mice will rule the world:

    See: To avoid a burst of land speculation, Disney used various dummy corporations and cooperative individuals to acquire 27,400 acres (110 km², 43 mi²) of land. The first five-acre (20,000 m², 217400 ft²) lot was bought on October 23, 1964, by the Ayefour Corporation[citation needed] (a pun on Interstate 4). Others were also used with a second or secret meanings which add to the lore of the Florida Project, including M.T. Lott Real Estate Investments (pronounced empty lot).

    Hmmm….

  22. Anonymous

    ” As another poster stated, bankruptcy is the best course but think it should be in normal market operations, that is done without the govt canceling contracts.”

    In normal bankruptcy operations, the debtor rejects/terminates all contracts that are losers for the debtor, and the counterparty just gets an unsecured claim subject to haircut. You don’t understand normal bankruptcy operations if you think bankruptcy protects counterparties from a haircut. Brokerage customers holding securities in a custodial account get protected, and counterparties to some contracts get to net flows under their contracts with the debtor, but none of that prevents a counterparty from taking a haircut.

    Banks want special favors; they don’t want regular bankruptcy treatment.

  23. chegewara

    the problem is not only aig, but also some german banks and in general close to AAA institutions (meaning they didn’t have to post collateral). the feds should first ban new contracts, second they should address the issue of the squeeze going on at the moment, by potentially organizing settlement auctions for the outstanding cds, and then banning the product whatsoever.

  24. Anonymous

    October 24, 2008

    Written after many “Give it up Earl” solitary conversations:

    The continuing saga of Anon vs. Earl blog posts:

    Your argument of “mega banks” relying on “hedging as part of their mortgage business” is what got us in this mess in the first place. Don’t you understand that it was that supposed to be “no risk”, “park-off-the-balance-sheet” attitude that allowed traders, buyers and sellers, to make up whatever new hot crap that they could come up with in order to max out and collect their annual bonuses before jumping to the next ship, all the while assuring the “mega banker” traders, who also jumped ship annually, that “You’re covered.”

    Back to basics please. Over and out.

    Earl

  25. Anonymous

    AIG needs to die. Sell them, fire them, jail them, do whatever it takes but they have failed miserably as a company.

  26. Anonymous

    There used to be rumors that AIG was an arm of the CIA. Maybe it’s being bailed out because of work AIG has done for the CIA in the past or is continuing to do today.

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