AIG to Retrade Its Bailout Yet Again? (Banana Republic Watch)

Sports fans, your humble blogger earnestly endeavors to keep up with the machinations of of big financial firms to extract rents from the poor chump taxpayer, usually by invoking scary images of the financial version of nuclear winter. Since we seem to be heading there anyhow, I’m at a loss to explain why these tactics should have such sway with the officialdom, save that they labor under the delusion that their efforts are having a positive effect.

The latest canard is the pretense at negotiations with AIG. If you recall, AIG, which is regulated by a host of countries at the insurance subsidiary level, came begging to Uncle Sam because it had a credit default swaps unit at the holding company level that had written unhedged policies that looked pretty certain to crater the parent company. Even though the subsidiary companies are well regarded (in many cases very well regarded) they cannot readily upstream cash to the parent. The only way to realize value is by selling them, and this isn’t a great environment for doing that.

What has been appalling about AIG is that Uncle Sam initially imposed a suitably puntitive deal but then for reasons that remain a mystery, relented . Since the federal government is NOT a regulator of AIG, there was no reason to expect the authorities to step in, save Ben Bernanke and Hank Paulson’s attentiveness to the needs of the financial sector generally. AIG has globe-spanning operations, and there is no good reason why the US public should be stuck with the consequences of their lousy risk management decisions. But not only did AIG get considerably more in loans in version 2.0 of its deal with the US government, but the terms on its initial loans were improved considerably.

I have to tell you, in all my years of private sector dealings, when a company comes back for more money, particularly when it has missed targets (as AIG did, it claimed the initial loan would be sufficient), the new money, be it debt or equity, comes on vastly more costly terms. And it is simply unheard of to revise an initial deal to be more company friendly. I do not know why the travesty of the kow-towing to AIG’s faux needs has not resulted in more ridicule.

And it only gets worse. AIG is on the verge of getting even more fawning treatment from a “sympathetic” government. Do little guy deadbeats get such kid glove treatment?

From Bloomberg:

American International Group Inc., the insurer bailed out by the U.S., may restructure its rescue package for the second time in four months as the recession drains the value of mortgage-backed bonds and corporate debt.

AIG may announce that it is converting the government’s preferred shares into common stock to relieve pressure on the New York-based firm’s liquidity, a person familiar with the situation said yesterday. AIG pays a 10 percent dividend on preferred stock, and none on common shares

Yves here. What moron negotiated this deal? Why does AIG have an option? AIG is a ward of the state, it really ought to be nationalized, but instead we preserve the fiction that it is a private entity, which means it can loot the public by paying large numbers of executives “retention bonuses”. The US debt per AIG employee is $1.4 million. With that level of required repayment, AIG should be on a choke hold. But instead, we allow them latitude that seems completely unwarranted.

And why does “liquidity” matter? This again goes back to the fiction that it is a viable entity. Liquidity in a business backstopped by Uncle Sam is an irrelevant concept. Since the taxpayer will pay whatever it takes to keep AIG afloat, niceties like ratings and liquidity are bogus concepts (if we were in an ideal world, someone at Treasury should have told the rating agencies to quit publishing ratings, but oh no, having no ratings to fall back on would lead to confusion and would hurt AIG. Anyone still owning AIG bonds post the bailout is an adult able to assess the risks, and are not entitled to special treatment. There has been plenty of time for widows and orphans to get out. Back to the article:

Details of a new rescue package may be announced when AIG posts fourth-quarter results, said the person, who asked not to be identified because talks with the government are private. Results may be disclosed next week…

The government is “sympathetic” to AIG’s circumstances and the turmoil affecting would-be buyers and may change rules governing the sale of assets, the person said.

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  1. Anonymous

    Thanks again Yves for an impassioned plea for financial sanity. Please continue to speak truth to power.

    Didn’t it use to be that we had a principled attorney and accountant class that would have this criminality tied up in the courts so that it couldn’t continue?

    Are they all too busy sucking the Federal teats to bother? You would think that it would be in their self interests to salvage some sort of rule of law, mercantile society going forward.

    So that leaves this bit of electronic white noise to cry out for truth, justice and the American way that we were taught in high school rather than the moral bankruptcy we see being played out by our leaders.

  2. Glen

    Pitchfork? Check.
    Rope? Check.
    Torch? check.

    Right, let’s go gets us some swindlers and run ’em out of town.

  3. Lune

    Yves, since you’re such a fan of George Orwell, I’m sure you’ll enjoy the end of Animal farm:

    Twelve voices were shouting in anger, and they were all alike. No question, now, what had happened to the faces of the pigs. The creatures outside looked from pig to man, and from man to pig, and from pig to man again; but already it was impossible to say which was which.

    I guess Orwell understood our politicians (democrat and republican alike) and their puppet masters better than we ever did…

  4. bb

    AIG has put the u.s. gov’t in stalemate: it can’t let it go bankrupt due to the huge one sided CDS bets. many players will go under as they have no one else to hedge with.
    u.s. banks could be saved with another tarp, but european banks won’t be. so the latter will have to liquidate usd positions and send the buck in tailspin. this will make it impossible for the u.s. gov’t to borrow anymore and will lead to monetization of all future debt. hyperinflation will ravage the already decimated pension savings. then repeat again and again until the state of russia of 1998 is reached.

    the cheapest option is to support AIG as it is and hope for the best.

    and people, don’t be hypocritical by demanding bankers pay cuts! all of us socialists already know that spending, preferrably debt financed, will save the world :)

  5. Steve

    Can’t blame the Fed for this earnings surprise. They only own 79.9% of the equity and couldn’t even get a seat on the board. Which is a good thing, because otherwise they would look like dopes for not going over the books and verifying what management was telling them. Fortunately, our confidence in Ben and the lads will remain undiminished. They really couldn’t have known. And good thing they won’t go over 79.9% ownership through a conversion, ’cause that would trigger the change-of-control event on CDS written against AIG, and could, you know, have systemic consequences. Well played, Ben, another bullet dodged! Your confidence in private sector management has already been validated and rewarded!

  6. d4winds

    AIG, like Citi and now (thanks to Lewis) BofA, is a financial black hole. They will be back with ever larger tin cups with each set of new financials. Each time the story will be “Who could’ve known?”

    Sometimes, you just have to quit throwing good money after bad. Let ’em file. Let the chips fall.

  7. Anonymous

    “….The only way to realize value is by selling them, and this isn’t a great environment for doing that…..” That was an understatement.

    Nationalize and you put the past, present and future losses on the books which would in turn be part of the national debt…Better to just die by trillions of paper cuts.

    If taxpayers are going to backstop Banks, Auto Industry, RE…..why not the Insurance Industry? Once, twice, three times….

    Using any positive income to pay down AIG’s debt wouldn’t leave any funds to pay claims.

  8. Anonymous

    ha, this is pure politics. I am pretty sure AIG has a gigantic backing that can push congress and white house.

    The question is WHO? (no status quo media is going to report this. Not major news paper, not television, ect)

    until somebody reports and names name, this will keep going.

    (so. who? of course we are dealing with people who can kill people here. so …)

    as of now, and I think the rest of the world will prepare for this to:

    This will be Japan style L shape recession. AIG, BoA, Citi will keep sucking up liquidity needed for recovery.

    and what’s worst as Asia recover, money will go hard to asia. (think of this as US high growth sapping Japan liquidity in the late 90’s)

    I am watching how the asian realign their supply chain (are they going to start making stuff for asian market), how they clean up real estate (china specially), and how the Asian free trade shaping up in general. (flow of money and information are still hard for average investor, compared to western banks)

    I figure by late summer we ought to see how asia is doing.

    …ugh, the change of money flow won’t be pretty for sure.

  9. alex black

    I have no idea if this is true or not – I have no background in finance (I’m a freaking novelist), but I read tonight that AIG has a long history of business in China, and has large counterparty obligations with Chinese investors, primarily pension funds, and that the Chinese are being quite insistent that AIG be made solid enough to cover their obligations. And the Chinese have a decent-sized hammer to use for leverage – um, they practically OWN us. Perhaps no coincidence that AIG is extorting Treasury for more money and better terms the same week that Hillary just spent time in China begging them to keep lending us money. Connecting these dots, if they be true, it would appear that the Chinese are asking us to jump, and Geithner et al are asking “How high?”

    Does anyone who knows more about AIG’s Chinese business have the ability to confirm, deny, or elaborate on this?

    Politicians shoveling money to their financial backers is as old as time, but if it’s the Chinese calling the shots here, that would be a profoundly seismic shift in this whole ugly dynamic. Comments?

  10. Ginger Yellow

    I’ve got to agree with BB – it’s not the bondholders that the Treasury is worried about, it’s the counterparties, and with good reason. All those losses that AIG’s taking from its CDS portfolio? If AIG goes bust, those losses effectively revert to the counterparties (minus some mark to market already taken on AIG itself). That said, Yves, you’re absolutely right about the way the way the bailout has been handled. If it’s too big to fail, either make the bailout punitive or nationalise formally and be done with it.

  11. Martin, the Netherlands

    Do I understand correctly that the US government’s participation in the common stock of a company is resteicted to 79.9% because they would have to consolidate the company in the national accounts?

    Do I also understand correctly that even owning over three-quarters does not entail the right to fire the board and really star mopping up the mess?

    Do I understand correctly that -at least in the case of AIG- the US government has handed over large amounts of money, has received preferred shares (which are, in terms of who gets wiped out in which order, comparable to deeply subordinated bonds, but still some kind of bonds)?

    Do I, finally, understand correctly that the US government has agreed to exchange thoese preferred shares for common stock, which will not pay a dividend for years to come, due to some crazy phenomenen called “deferred tax assets”, and are, in terms of riskyness, the first ones to lose their value?

    If the answers to these four questions are four times “yes”, then the US government should be congratulated on being such alert regulators, when letting things get out of hand, and on being such tough negotiators, after things had got out of hand.

  12. john c. halasz

    Here’s what I don’t understand. AIG got into trouble with the CDS contracts, because they lost their AAA rating. The U.S. gov. forks over a ton of money, but their rating continues to deteriorate, so they come back for more. But are the CDS positions so inherently lousy that they imply huge losses to be inevitably realized, (since apparently most of them were written to assist European banks in regulatory arbitrage manoeuvers, by making the perceived risk of assets on their books appear lower, so those banks could proceed to take on still more leverage, though AIG could cherry-pick which such assets it quasi-insured, which is why it thought it was a risk-free easy-money business),- or is it that the decline in AIG’s rating requires it to raise ready cash or secure credit to post as collateral on margin calls, regardless of the actual risks assumed, (since they are not on the hook for the whole of those banks’ balance sheets, but only selected assets)? Either way, why not just nationalize the whole company 100%, thereby returning the AAA rating via the U.S. government, (and in the meantime gaining direct ownership over those supposedly entirely sound insurance subsidiaries, reassuring the likes of the Chinese), and then go to the European governments and demand that they clean up their banks and properly re-capitalize them to sound leverage ratios, while cooperating with them in unwinding those CDS positions? Oh! I forgot…

  13. Anonymous

    According to CNBC, AIG is about to post another huge loss. “Sources close to the company said the loss will be near $60 billion due to writedowns on a variety of assets including commercial real estate.” The financial channel also reports that the need for capital may be so great that AIG might have to enter Chapter 11, something the government has spent over $130 billion trying to prevent.

    At the risk of preaching to the Choir, I have to blow off some steam . . .

    AIG going to the Well again is rediculous and sickening. Add Citi’s need to beg again, and GM needing more money than it would take to start a whole new car company . . .

    CNBC’s comments indicate that CDS’s are not the problem, but they are one reason why the US supposedly cannot allow AIG to fail. If CDS’s cause problems of this magnitude, why are they still unregulated? But that is just the tip of the iceberg.

    The whole scene stinks of stupidity and incompetence. The more people cling to entangled, self-serving fantasy’s, the deeper everyone is being drawn into a very deep black hole.

    This is like a caualty in the Civil War – the legs are infected with gangrene. Either we amputate the legs, or the patient is going to die.

  14. Swedish Lex

    Writing from France, I wonder at what point U.S. citizens will take to the streets. I am truly puzzled.

  15. jmd

    Ex-Lehmanite here…you know, every single counterparty has had loads of warning that AIG is on its last legs, for a year now. This is simply governmental malpractice. Counterparties, schmounterparties…they have all had to reserve for the possibility that AIG would not be here for long, and so fearmongering that they will go down with the black hole of AIG is simply mistaken. Maybe hedge funds have not been reserving, but let their investors deal with that. Most pension plans and other regulated investors such as traditional insurance companies have only a small basket of 5% approximately in which to invest in hedge funds, in any case. Remember, here, Blankfein said that GS had reserved against losses to AIG and had collateral

  16. Anonymous

    ‘It is simply unheard of to revise an initial deal to be more company friendly.’ — YS

    Yves is talking about the private sector here, where incentives of profit maximization apply.

    For both government agencies and their private-sector wards, it is commonly the case that the more you lose, the higher the funding you get in the next fiscal year. It seems that we’ve taken the cost-plus defense contracting model, and extended it to the auto and financial sectors. A trillion here, a trillion there, pretty soon you’re talkin’ all the money in the world.

    I have long contended that democratic government coupled with the money illusion generated by a fiat currency is a doomsday mechanism. The Treasury is regarded as a bottomless well, and those who draw deeply and regularly upon it are rewarded at the polls. Austerity doesn’t pay. But now crisis has elevated ordinary unrestraint into panicked recklessness and highly purposeful looting.

    Obama’s ‘fiscal restraint’ speech yesterday was the same one we’ve been hearing for decades — root out government waste by reducing travel, copying on both sides of the paper, computerizing processes, etc. This has never worked, and never will. To really slash gov’t spending, you’ve got to zero out big stuff — for instance, bring all overseas troops home and get out of the unpopular, money-losing global policing business. But of course, no one from the Depublicrat duopoly is ever going to be an agent of change, campaign slogans to the contrary.

    The real tragedy here is invisible. It’s not the zombie companies being kept alive, as macabre as that is. It’s all the new start-ups — the companies that might have solved our energy deficit, or cured cancer — which will never happen, because all available capital was vaporized in sustaining the 21st century equivalent of buggy-whip manufacturers and steam locomotive builders.

    The level of malinvestment is so large that it’s hard to see how future generations can ever reverse falling living standards … unless force majeure provokes a massive systemic failure, sooner rather than later.

    Burn, baby, burn — let it bleed.

    — Juan Falcone

  17. Anonymous

    “The government is “sympathetic” to AIG’s circumstances….”

    Just like the FBI guy who asked Madeoff:

    “There must be some INNOCENT EXPLANATION.”

    as in:

    “Have someone really powerful call me and this all goes away.”

    As Naomi Klein has suggested, it is all one giant Crime Scene which grows colder as the FED and US Treasury finance the flight of the PERPS.

  18. Anonymous

    ‘All those losses that AIG’s taking from its CDS portfolio? If AIG goes bust, those losses effectively revert to the counterparties.’ — Ginger Yellow

    Well, bingo. Those correctly positioned to profit from defaulting debt via CDS contracts with AIG now have their payoffs effectively guaranteed by the U.S. Treasury.

    So if the vicious downward economic spiral can be extended, these CDS’s become a limitless, expanding fountain of government cash. As economists are wont to tell us, ‘Incentives work.’ Yikes …

  19. Ginger Yellow

    John, your latter assumption is correct – the rating is relevant mainly because a downgrade requires AIG to post more collateral (and, theoretically, it hurts their ability to generate new business, but that’s hardly an issue now).

    jmd – Counterparties have had plenty of warning, but a) cynically, unless they’re in very good shape capital-wise, they’re only going to provision as much as they have to, and b) the US government has given every indication that it will not let AIG default, so maybe they’re not being so unreasonable.

    I can guarantee you that most banks haven’t written down the value of AIG CDS to zero. Even monoline CDS, which are much less likely to be supported by the US government and which have been in obvious trouble for even longer than AIG, haven’t been fully written down except for the very worst (and commuted CDS, obviously). For instance, as of February, Barclays reported reserves of just £1.7bn against monoline exposure of £8.4bn. That includes a £2.2bn US RMBS portfolio, 80% of which was speculative grade!

  20. ruetheday

    It’s all about protecting Goldman, obviously. And yes, the European banks too. It’s sickening. We’re watching the greatest transfer of wealth from the average taxpayer to the wealthy banking elite in history, yet CNBC has the victims all believing that this is about deadbeat homeowners who aren’t paying their subprime mortgages.

  21. Ginger Yellow

    FYI, the reserve on that RMBS portfolio is £500m.

    Much of AIG’s CDS book was in negative basis trades on AAA CLO tranches. Those are likely to face a lot of downgrades, and some losses, over the next couple of years. Provisions on those are very low at the moment, and marks are quite high, in the few instances where they aren’t being held in the HTM book these days.

    I’m not saying AIG should necessarily be propped up (and if it is, it should certainly be nationalised), but it’s simply a fact that if it defaults, banks will have to record tens of billions of dollars of new writedowns (if not more from all the knock-on effects a la Lehman).

  22. Anonymous

    “It’s all about protecting Goldman, obviously. And yes, the European banks too. It’s sickening. We’re watching the greatest transfer of wealth from the average taxpayer to the wealthy banking elite in history, yet CNBC has the victims all believing that this is about deadbeat homeowners who aren’t paying their subprime mortgages.”

    Watching Obama/Reid/Pelosi/Summers/Geithner rape taxpayers to bail out bondholders and CDS holders is disgusting. Keep talking people. At some point, the public will revolt against the bankers.

    I’ll vote for anyone running against bankers. I don’t care if they are a communist or a nazi. As long as they shaft the bankers.

  23. Anonymous

    Yves, I’ve really enjoyed your blog because you lace your insight with outrage. With this piece, however, you’ve overdone the outrage and skimped on the insight, and it comes across as ranting.

    At this moment, my outrage has subsided, because I’m quite scared. I hope you will follow this up with some balanced analysis on such questions as other commenters have mentioned: what is the evidence on the effect of letting AIG fail (re: CDS, China, etc.)?

  24. Anonymous

    F*ck this government and F*ck Obama. I donated to his campaign, so no whining from the Obama worshipers.

  25. Anonymous

    to the person from France. I cannot believe the people in the US have not taken to the streets either. Maybe they have and the MSM just don’t report it. The media is bought and paid for by TPTB.

  26. Anonymous

    to Yves:

    Thanks for the blog and your continued well thought out comments on all the articles. I was surprised to see you on one of the financial channels the other day. Glad, however, that you were there telling the truth.

  27. bb

    for all riot minded readers: you cannot riot! this is anti-social and you will lose your unemployment benefits if arrested for doing that. you cannot do it if employed either for the same reason. you work ‘at will’. you’ve got a mortgage to pay off. by protesting you risk your job and further aggravating the banks’ portfolios. this in turn creates more future tax liability for you on top of the immediate stress of foreclosure.

    let me repeat it again: you cannot afford yourself to riot against the crooks and cronies! it is far cheaper to let them plunder your assets and future income.

  28. d4winds

    In Sept., AIG needed $40bn, then rejected a private offer on a weekend–which would have prevented its Mon. morning credit downgrade and associated collateral increases–to hold-out for a Treasury bail-out, which it got on Tues. after the Mon. morning downgrade, so that it then needed $80bn. Later the $80bn was revised upward to $150bn and credit terms were relaxed.

    Now it will post a $60bn loss–the largest ever by any US co.–and needs that much for continued ops and to prevent another downgrade plus yet more for collateral.

    $40bn, $80bn, $150bn, at least $210bn (is it really $300bn?).

    This looks like a geometric progression. Oh boy, I can’t wait to see what it looks like next year at this time.

    Pull the plug. It’s time for Chapter 7.

  29. Anonymous

    This may be mor “personal” than you think.
    Cornelius Starr, and the Starr family that started AIG, is the same family which gave the world “Judge” Kenneth Starr.
    His skin at risk here?
    how about the Bush family interests in Carlyle? Were they at risk if AIG defaulted on the CDs?
    Was this about protecting Republican $$$?
    No welfare for you, but welfare in the billions to politically-connected families?

  30. VoiceFromTheWilderness

    It’s starting to look more and more like the whole “financial bailout” game, is actually a bailout of private equity empire builders. At times some of the proposals are even becoming out and out ‘keep the stock market up’ plans.

    It seems Invidious Comparison has truly arrived, and now is in consolidation mode. The only thing that matters is the hope that someday I might be an empire builder too.

  31. Anonymous

    bb – thanks for your well-meant advice, but dissent does not have to be criminal.

    The desecration and destruction of the once-fantastic economic engine called the USA is progressing at such a pace that any sort of recovery will soon be impossible.

    We take action, or we die. It is getting to be that simple.

    Fortunately, the spirit of Concord alive & well in many hearts (Check out New Hampshires' HCR6).

    A few bold steps could make a huge difference. Start with a 5-year moratorium on all Credit Default Swaps and Mortgage foreclosures.
    As for the pirates of Wall Street, start up a new, Federally-owned bank in each State (later to be privatised), and re-enact Glass-Steagal.

    At this rate, we have no more than 6 months to get on the road to recovery. From that perspective, we have no option but action like this.

  32. Anonymous

    Perhaps it is not to reveal the “personal” connections between prominent American political families, and these give-aways, that the Fed refuses to release any info about who particularly is receiving these massive sums from the US taxpayer?
    Will all US spending by the Fed Gov in future be done in secret, so as not to upset the recipients?
    Or does this apply only when the sum is greater than 50$ billion?
    Is this when the principle of open and transparent government bends in a democracy?
    Why? let’s have some names, please.
    Go, Bloomberg!

  33. Independent Accountant

    Ginger Yellow:
    I am a member of the tin foil hat brigade. Where is Goldman Sachs hand in this? How much remaining exposure does it and Morgan and the rest of the usual suspects have to AIG?
    Sorry, no AR-15 here. But I can contribute my Boy Scout skills at knot tying and have plenty of rope. Can you use me?

  34. Blurtman

    It has been reported that the AIG bailout money went directly to Goldman Sachs, Merrill lynch and other US and foreign investment banks:

    But lets analyze the Goldman Sachs money machine.

    1.) collude with Moody's and Standard & Poor's to issue fraudulent ratings on mortgage backed sceurities (MBS)

    2.) sell the MBS at huge profit

    3.) roll these MBS into credit default obligations (CDO), have them fraudulently rated, and sell them at huge profit

    4.) as you know how toxic this garbage is, buy insurance on it from AIG

    5.) the garbage you created and sold goes bust, now collect even more money from AIG and now the US taxpayer.

    Recall that estimates place the unhedged buyers of credit default swaps at approximately 50% of all holders of CDS. So the US taxpayer is paying off speculators who bet on the decline of these CDO's. Now one can imagine that the very creators of this garbage, who knew how bad this stuff was, made money both ways, and we are paying them.

    Why should there not be a revolution?

  35. Anonymous

    An alternative to revolution is intentional default. Draw down your unsecured credit lines, convert the cash into the sole remaining bearer asset — gold — and then DEFAULT. Creditors will get judgments against you, but they’ll be uncollectable. Sell gold as needed to fund living expenses.

    Screwing the banksters for mega-thousands is a very viable option for anyone who doesn’t need to borrow in the foreseeable future. Think like THEY do — that is, think like a criminal. Rob banks the nonviolent, safe, ‘legal’ way. LOL.

  36. Anonymous

    we reiterate our determination to preserve the viability of systemically important financial institutions so that they are able to meet their commitments.

  37. Miguel_Swanstein

    Ginger Yellow – Thanks for the thoughtful comments. I think you are spot on.

    So USG is stepping into the breach to perform on AIG’s protection sales contracts as the parent does not have the financial ability to do so.

    I suppose the idea is for USG to “run up the tab” on these shortfall payments for as long as is needed with the idea that they will eventually get made whole with the proceeds from AIG’s yard sale of its businesses, while hoping that there no other smoking craters in AIG’s book in the interim (sounds like the Q4 results may throw water on that notion).

    Any idea of how much protection they wrote? It seems like we still don’t have are arms around the total exposure. If I were running things, I’d be interrogating Joe Cassano like he was a member of the Taliban (though he’s certainly done more damage to America) to get me a number…..

  38. Anonymous

    The reason the government won’t let the over-leveraged institutions fail is because they are the foundation of an overleveraged government. If the financial sector is allowed to shrink as natural forces want it to, the government would have to shrink to match. See, the government’s real worry in this is, it is trying to save ITSELF.

  39. doc holiday

    A few ideas here: The falling markets have just hit me this morning and I now understand inside my brain, that the downward spiral is almost The Mechanism or process, by which a discount for future value is being discovered. Hence, as Japan re-sets to a stock market that has headed backwards in time by 27 years, and when you hear that the largest companies there are worth about 1/4 of what they were 18 years ago, you have to stop, sit down and think about this.

    We are in the process of redefining the nature of future value and grasping as to what future cash flow is; we are as a global people re-establishing a standard for understanding value, by having an auction that finds a floor for value. The very nature of capitalism and the value of money is being reviewed by a new generation of people around the globe that do not trust the financial system.

    The discount for future value is uncertain, because too many banks, holding companies, insurance companies, hedge funds, pension funds, Treasuries, GSEs and a long list of entities involved in collusion and corruption are all unwilling to disclose what assets they are holding — and so they conspire to withhold information which is needed for investor discovery, for DD, for terms related to future value. This is the very process of distrust that kept banks from lending to each other. Now we have a condition where investors realize that it’s not just the banks that are causing liquidity concerns — it’s the entire financial system that is in chaos and decoupled from truth, honesty and standardized accounting laws. The American government with it’s decade of non-regulation has peaked out with it’s TARP corruption and now they have exhausted all credibility and destroyed all confidence and trust in this government. TARP is the tsunami crescendo that snuffed the lights out of capitalism and democracy, because we allowed our leaders to engage in too many unregulated ponzi schemes. Congress and all the nepotism in our government turned a blind eye to the destruction of America, because they were all crooks on the take from lobby groups!

    The systemic global crash is simply a process to discover what future value is and the current discount will continue to increase if good assets are not separated from bad corporations. The longer this game of discovery goes on, the less stocks and bonds will be worth, and the longer the governments continue to be in denial and essentially protect their friends, the longer this process will take! We need only look at Japan as a beacon of financial stupidity and look at the cost of denial and pride. Obama has to wake up to the fact that tossing money at this systemic global problem is not a solution, it just contributes to it!

    My best bud Einstein, as you all know, screamed and yelled and spit out that you can’t solve a problem on the same level at which it was created, i.e, derivatives got us into this mess, and they aint gonna friggn get us out — the truth will set you free!

    See: § 502(5)(E)(E) In estimating net present values, the discount rate shall be the average interest rate on marketable Treasury securities of similar maturity to the cash flows of the direct loan or loan guarantee for which the estimate is being made.

    Also see deal with car maker a few years ago with Jimmy Carter, where TREASURY had an actual contract that a car company had to deal with in terms of future obligations:

    Sec. 9. // 15 USC 1868. // (a) Loans guaranteed under this Act shall
be payable in full not later than December 31, 1990, and the terms and
conditions of such loans shall provide that they cannot be amended, or
any provision waived, without the Board’s consent.

    * Please check for grammer, spelling, logic and shit like that…

  40. chacona

    AID counter-parties? What counter-parties? Ah, yes, as RGE Monitor today suggests:

    "cont.: Among large counterparties that made margin calls and now benefit from ongoing AIG bail-out: Goldman Sachs Group, Merrill and Société Générale, UBS, Barclays, Credit Agricole's Calyon investment-banking unit and Royal Bank of Scotland; Deutsche Bank and Canadian banks CIBC and Bank of Montreal."


    "Overview: The day after Lehman's default AIG was downgraded thus triggering large margin calls by its counterparties that were relying on AIG's AAA rating for their credit and capital enhancement bought from AIG, among which many European banks. The Fed had to step in immediately by taking a 79% stake of AIG and extending emergency loans of a total $150bn. As credit markets continue to deteriorate, margin calls on AIG's derivative positions increase–> Tavakoli: AIG bailout money is a huge taxpayer funds transfer to AIG's financial counterparties."

  41. Anonymous

    Swedish Lex said…
    Writing from France, I wonder at what point U.S. citizens will take to the streets. I am truly puzzled.

    I’ve said before that I was keenly jealous of France’s general strike. If you read excellent blogs like Yves instead of watching the US mainstream media, the lack of American outrage is completely incomprehensible.

    The average American likely spends 2-8 minutes a day thinking about this, and the tools the mainstream media gives her for her investigations are blunt and inappropriate for the task. Americans are misled, confused, and – let’s admit it – far too complacent about our government.

    So long as the paychecks keep clearing, bellies stay full, and entertainment stays on things won’t change. But once/if U-6 unemployment goes over 25%, our kids are going hungry, and Obama is STILL giving political cover and funds to the banks while explaining the new austerity that means we can’t have social security, our pensions, or national health care – then I think our heavily armed and slightly crazy country may give Russia’s shock doctrine crisis some impressive competition in the history books.

    – StewPDX

  42. Blurtman

    @ doc holiday:

    The discount factor is an expression of risk, and as there are many, many unknowns and a lack of trust, that discount factor would have to be pretty large.

    Another way to look at it is that we have already accessed that future value today, we’ve spent it, and now there is only a vaccuum out there into the near future that we are compressing down on. Look at it in terms of a continuum. We have created a large discontinuous event by sucking into the present what would have been a contiunal progression of value. There is now nothing behind that hole for a good number of years, and until we reset and link up with that continuum, we are in free fall.

  43. centiare

    @11:32 – good observation. I’ve been making essentially the same point for quite some time.

    Look, the modern welfare state is completely dependent on the underlying economic model to sustain tax receipts and fund transfer payments. No welfare, no peace.

    The dirty secret is that the USA is not some happy, unified culture/society. In fact, it’s a lot closer to the armed, violent sectarian situation in Iraq (in our case, race) than many outsiders think.

    Now, here’s the important point – it doesn’t necessary have to be any specific type of economic model to sustain the welfare state; FIRE just so happens TO BE the current, extant model.

    In other words, if the welfare state had developed during the period of NE whaling, we’d have the same exact scenario as gov’t desperately attempted to restore order as the whale population was being decimated.

    And that’s what make this particular period so dangerous – the market isn’t being allowed to re-allocate investment to finance new, future productive products/services like alternative energy, medical discoveries, etc.

    The central governments are so intent on preserving power/order, that they are using the private economy’s investment capital to keep their own game going.


    It’s hard to believe that the government is just going to continue to throw money at AIG, Citi, GM, etc. At some point it will no longer make sense, if it even does now, and these companies will go bust. Then what happens to the money the taxpayers have put into them?
    This is a colossal blunder with no end in sight. I feel as powerless as a citizen of the former Soviet Union. Good grief!!

  45. doc holiday

    Blurtman said…,

    Not all is lost and the spiral is based on the finality of rarity and at some point, things and places of value will be wanted by those who have faith in order being restored:

    FYI: “A collection with this quality of modern paintings is scarce,” said Pierre Loudmer, a Paris-based art adviser. He said he was not surprised to see high prices paid even in a recession: “Established private collectors, art foundations and new players want this kind of cake.”

    Seven artists’ records were achieved, headed by the 35.9 million euros, with fees, paid for Henri Matisse’s 1911 still life of cowslips in a vase, Les coucous, tapis bleu et rose estimated at 12 million euros to 18 million euros.

    The evening’s most spectacular performance against estimate was the 8.9 million euros paid by Giraud for a unique 1921 Marcel Duchamp “readymade” of a perfume bottle with a photograph of the artist’s female alter ego, Beautiful Breath: Veil Water on the label, taken by fellow-surrealist, Man Ray. The 6-inch high boxed bottle, featured in many books on Duchamp, had been acquired by Saint Laurent and Berge in 1990, also from the Paris dealers Galerie Tarica, who supplied the couple with their most important acquisitions.

    Before the auction, dealers said that this was the first time a major unique, rather than editioned work by Duchamp had come on the auction market in recent years. The final price quintupled the high estimate and exceeded the auction high of $1.8 million paid in 1999 for a replica of the artist’s notorious urinal readymade.

    >> Ok, so suckers are born every day — but, there is a point where things become rare and increase in value; this probably will not happen with derivatives that are were engineered with smoke and mirrors, but things that are real, that are rare which will continue to have pedigree will be sought after. Hence, the process to find a market bottom and standardize the discount for future value will take people coming off the sideline to invest in things in real assets that are discounted, and obviously, this will take friggn time!

  46. Anonymous

    Very simply, AIG is a corporation with limited liability. It may very well be insolvent and unable to pay its obligations. In that case, a corporation should go bankrupt; it is the only sound management practice.

    To continue throwing money into that black hole, means we are not running a corporation, we are running a charity.

    We are running a charity for GS. How nice of us.

    Something has to be done about this. It’s time to dust off the Declaration of Independence.

  47. doc holiday

    Re: 1st anon: ” Are they all too busy sucking the Federal teats to bother?”

    This whole business of sucking on teats and cute piggy images, must STOP right here in this thread — like dead-in-the-tracks! I’m friggn tired of people not seeing or realizing the reality that TARP and all its coiled and warped framing is all about being snake bit and that the global financial system is in a trance, because the system collapsed as a result of the injection of venom from the collaborative collusion of an evil devil-like mentality that is biblical and serpent-like in its cancer-like domain and ambition to destroy.

    If I were outside of my brain, I’d suggest the world has been taken over by aliens or reptiles or that there is a regression towards a neo-age of Neanderthal Banking!

    See also: Toxinology

    That was a prayer.. and in closing, no more pig teats — see this for what it really is!!

  48. melpol

    If anybody thinks times are bad in the U.S. they should thank God that they are not in the same country as the writer of this blog.

    “Hard times are here and it is getting worse. Donations cannot buy enough food to feed a starving family. Savages from a near by jungle village claim that the buttocks and thighs from a medium size human can provide enough food to last a month. The obese are hiding in terror because their meat is the choicest. Only people with farming experience can avoid eating their family and friends. Let us pray that good times return along with traditional food.”

    Let’s wish them luck!!

  49. Anonymous

    Some here are noticing that the US electorate is seriously sitting this one out. It’s a bit hard to understand. It may have something to do with having become serfs; most Americans are not living in the same country that you see on TV or in the media. They live in a parallel country of vastly reduced expectations. They have minimal and stagnant wages, no hopes for betterment, and only consumption of cheap junk from WalMart to give them joy. They lack union representation so their jobs are really gifts from the mighty who hire them, until they are sent overseas. Corporations run the government and don’t even bother to pretend otherwise. Likely 50% of America was without hope, without future, without a plan even before the meltdown, and the current crisis only reinforces their belief that the universe is there to punish them. Someone might say they are ready for the revolution, to take back their dignity, but I think not. They are timid and cowed, taught to accept whatever fate gives them in exchange for being allowed to go unnoticed. In exchange for their involvement in society they are allowed to watch 500 channels of TV, so long as they don’t complain about the programming and don’t skip the commercials.

    The situation may not have parallel in history. Corporations were a novelty at the start of the last century, humanity was inexperienced in handling entities that are both immoral and immortal. Aside from horror stories about immortal vampires that live by sucking the blood from their victims, we have no reference in popular culture to act as a guide in framing the challenge. If the Corporation really is the perfect usurper of the human spirit, the perfect parasite, then just perhaps we are fully doomed. The way the financial crisis is playing itself out whispers to me that we are mentally in thrall to the vast sweep of power now in play and cannot ourselves turn away from the sight and save our minds.

  50. Anonymous

    @anonymous 10:17:

    Those corporations’ commitments extend only to the assets of the corporations themselves. They are organized under law as LIMITED LIABILITY corporations, and their liabilities are thus legally limited.

    To expect a corporation in the finance game to go beyond its legal liabilities is absurd, that is never how the game has been played, and the rules must remain the same now.

  51. Blurtman

    So we have had a phenomenon where Moody's, Standard & Poor's and Fitch, the rating agency oligopoly, have stumbled very badly in the issuance of totally inaccurate ratings for mortgage backed securities and securities based upon MBS. The scope of this inaccuracy is unprecedented, plunging the worldwide financial systems into meltdown, approaching a depression of the world economies. So only two things are possible when entities are so wrong about so much:

    1.) incredible incompetence

    2.) fraud

    We know from leaked testimony from a cursory SEC investigation that analysts at these ratings agencies knew that the ratings were bogus.

    We know it is fraud to profit by selling securities using misrepresentation.

    The scope of these bogus ratings nd selling of boguly rated securities is causing an economic depression.

    So where oh where are the criminal investigations?

    I know bad peanuts have killed several people which is truly sad, but one would think that the incredible speed that the FBI applied to investigating the peanut crisis would be applied to the investigating the cause of a worldwide economic colapse.

    What is going on?

  52. Anonymous

    What is going on is that the system has already crashed, and the coverup is in progress.

    Lots of stuff is in play, it’s very exciting now. It should be a time when we can have a lot of influence.

    Let’s exert as much influence as we can in as many ways as we can find. Think outside the box. The world is watching.

  53. robert

    does anyone rember the scene from the movie “Fight Club” at the end when all the buildings housing the corporate financing giants come tumbling down as the two main charactes look on in awe and amazement.

  54. DanyBoy

    Alexander Hamilton would be proud!

    Protecting the “uber-class” is a time-honored tradition even in America and is codified in our laws.

    Today the American uber-class is the corporate elite, embodied in the golfing CEO (used to be exclusively Fortune 500, now even startup stars can be included, we’re less picky).

    Where things got off the rails: Bonuses and big payouts are accorded before performance rather than contingent on performance. Rich guys or gals who have a guarantee of wealth don’t have the hunger and drive to innovate, compete hard and excel. The key Darwinian forces in our system perished.

    Instead of rewarding results we reward “talent”. This is the key mistake: capitalism was not designed to reward you for being born with certain genes. Those genes need to be tested and challenged and competed against and must struggle to succeed. Think anyone at AIG is trying to struggle? Our government wants everyone to believe they are cool and collected as usual, so they are covering up for them.

  55. Anonymous

    DanyBoy I think you are missing the point now. Sure these corporations screwed up and sure they overpaid some people.

    But then they were bailed out, against the very clear popular will. And to add insult to injury they used that money to pay bonuses.

    Now they come to the well again and get even more bailouts. There seems to be no way the taxpayers can force it to stop.

    But maybe there are ways, codified in our most honored and oldest national traditions. “The Tree of Liberty …”

  56. alex black

    The question had been posed – “who do these government officials think they are speaking to – morons?”

    Today Bernanke said that he thinks maybe the recession will end in 2009. The stock market immediately rose 4%

    I rest my case.

  57. Yves Smith

    Sorry for joining late, I was sick last night and am still under the weather, and so wrote a more skeletal offering than was ideal.

    The point I neglected to mention here, (when I have in other posts), it that there are legal theories by which CDS might be voided. Some have argued for getting rid of them entirely; others to restricting them to users who own the underlying bond/exposure as of date certain.

    Had such an approach been taken with AIG, even after the government started providing loans, the CDS exposure would have fallen substantially, by at least 3/4, maybe more. That in turn would have enabled AIG to repay most of the loans.

  58. Anonymous

    Thanks Yves. I don’t recall those legal theories, but I would not be surprised if they are known.

    That is the way to go. If the CDS are making the company insolvent, void those CDS or declare bankruptcy. Certainly don’t pour good money down the rat-hole.

    Enough bailouts for rich people and foreigners!

  59. Juan


    Setting a new floor in the sense of your above comment = devalorization, destruction, of paper claims to wealth, of what is truly fictitious capital. Indeed this is a crisis for the rentier class and the form of capitalism that class personifies, a form which present incarnation began developing during the 1970s and, just as in earlier times, was destined to fail.
    why? There are limits to the quantity of surplus value which can be appropriated, there are as well limits to the possibility of substituting credit inflation for surplus. iow, contradiction between the real and financial is a cumulatively asymmetric unity that sharpens, blows through the superficial prosperity of its own creation and transforms,,,, a new floor will be reestablished on the basis of labor created surplus value rather than capitalized anticipations.
    In the mean time though, everything, no matter how socially illogical, irresponsible and retrograde, will be attempted to resurrect the status quo ante.

  60. Anonymous

    Why aren’t Americans rioting? Um, Barack Obama wondered out loud why Americans weren’t rioting in the streets, before he was elected, and he lives in the US.

    You underestimate how dumb most Americans are and how education levels have declined in the past decades.

    Americans who are Republican still believe that tax cuts work to create jobs. For 8 years, George W Bush and dimwit former US Labor Secretary Elaine Chao rarely met their monthly jobs creation target. In the US, it takes the creation of 100K-130K new jobs created per month just to absorb new graduates into the US workforce. Most Americans don’t know the 100K-130K threshold, because main stream media rarely prints it, certainly not the Wall Street Journal.

    A good example: Most Republicans swallowed all the “family values” claptrap that Fox News and George W Bush could pump out. I remember the Fox channel when it started as a UHF channel. Fox ran “Married With Children” twice a night, and it was one of the most salacious comedy shows on television. Kelly Bundy (Christina Applegate) was a teen slut. The next door neighbor Marcy D’arcy (Amanda Bearse) was gay (for all the Republican right wing gay phobia). If Fox could maximize advertising dollars, they did, good business principles. If they could maximize voter turnout by putting emotionally laden wedge issues on the ballot, Karl Rove saw that it happened. Most Americans are too dumb to put 2 and 2 together.

  61. Blurtman

    Hi Yves,

    It is more than galling that our Treasury Secretary believes we should bail out CDS speculators, i.e., those who do not hold the underlying CDO that AIG wrote CDS on.

    When I queried my two US senators and one congressman about this, only one responded, stating that she voted to confirm Geither as Treasury Secretary because he was not a Wall Street insider!!!! She also would not comment on taxpayers paying off speculative bets of non-hedging CDS holders.

    What is the motivation here – incompetence or complicity?

  62. Anonymous

    Doesn’t matter what the motivation is. If they’re not doing the job, they need to be replaced. Now, not in 2 years.

  63. robert

    anonymous @ 6:02

    So you’re the bright one? Please enlighten me with the riots that were the result of the smart educated class torching their upscale houses and cars?? Please take your incomprehensible polital gibberish elsewhere (the neighbor to Al Bundy was gay?- I mean who gives a shit!)

  64. Anonymous

    I guess AIG is the conduit through which hedge funds and I-Banks take their cash.

    BAd AIG, they need all that cash! When in reality people are robbing America through this entity.

    If allowed to go bust, how could the long holders of the SWAP’s collect their cash.

    SOme are being enriched in unimaginable terms.

    I am Canadian and this makes MY blood boil.

    If I were an American, I wouldn’t just sit and watch my country being looted by the banksters.

    The US is like a jelly doughnut. The insiders are sucking out all the good stuff. Soon enough all that will be left is a hollow shell.

  65. Anonymous

    Further to Yves’ comment … the refrain one hears over and over is that ‘we can’t value the toxic assets.’ Obviously, there’s a lack of transparency.

    Yet, there has been no legal reform to enhance the transparency of structured debt — for example, by requiring issuers to post their own models used to create, value, and slice and dice it. Nor has there has there been any regulatory reform to require rating agencies to examine, say, 30 years of default history instead of only four or five.

    Nor has there been any consideration of re-enacting Glass-Steagall, now that all the investment bank wolves are disguised in commercial-bank sheep’s clothing. Nor of imposing leverage limits, or minimum down payments on real estate.

    In the wake of Depression I, the Securities Act of 1934 represented a clear consensus that the government could not sort good from bad investments. But it could certainly demand full disclosure.

    When every KongressKlown and regulator claims that they are flying blind (even as they disburse billions on emergency grounds), legal reform to either ensure transparency, or to simply outlaw, structured finance products ought to be Job no. 1. But as far as I know, it’s not even on the radar screen … much less the existential question of whether fiat currency condemns us to a Sisyphian struggle against sequential Bubbles and busts (as I firmly believe).

    Our system is broke. Our culture is collectively retarded. Boomers is losers. Us so stoopid. Sauve qui peut …

    — Juan Falcone

  66. Anonymous

    Blurtman said…

    What is the motivation here – incompetence or complicity?

    That is the multi-trillion dollar question, isn’t it?

    Hanlon Razor’s goes “Never attribute to malice that which can be adequately explained by stupidity”, and it is tempting to resort to this simple formulation.

    The problem I have with it is this: There are countless ways to be stupid, many of which would have ended in rendering the ruling elite relatively poor and with modest power.

    But this is not what we have. We have massive “idiocy” that just happens to result in epic looting and massive gains for the ruling class. I can’t believe this is a coincidence, and therefore find stupidity a totally inadequate explanation for what has occurred.

    I think I owe Yves for pointing me to William K. Black’s paper on “Control Fraud”. I’m now reading his book, and through its lens can’t help but see the entire US economy as a giant con:

    – StewPDX

  67. robert

    @ Juan

    You are right.Boomers are the worst generation and were begot incredibly by a generation that truly sacrificed- scripmed and saved to make sure their kids had a better life. With the boomers it has always been about them with no notion for a common purpose regardless of all the hippy antics and touchy feely introspection. Actions speak louder than words.

  68. Anonymous

    As an average chump (a.k.a. “taxpayer”), do I have the option to take Citi stock over AIG stock? I’d rather not hold any stocks listing below $1… I have my pride, you know…

    Vinny GOLDberg

  69. Anonymous

    Anon 6:02,

    Hahaha! You must be European. Because only Europeans judge the entire USA based on Al Bundy and Fox News (both of which are entertainment, btw). I suggest you watch some PBS or C-SPAN, or listen to NPR if you want real information. And trust me, PBS offers better information than all the BBCs or France-24’s of the world have to offer, and it’s an American station (partly government subsidized too, btw).

    My friend, America is a very large, diverse, and complex country. Judging the entire US based on George Bush or Al Bundy just shows how little you understand. How would you like it if I stated that every Frenchman suffers from adult ADHD simply because Sarkoszy obviously does. Should I apply that psychiatric diagnosis to every person living in France?

    What America has and the rest of the world lacks sorely is an ability to self-examine, to introspect. That means that it retains the hope for change. I haven’t seen much introspection in Europe lately, except perhaps in Germany, who I admit has a new national spirit.

    I was born in Europe, but I have lived for over 30 years in the US. At the moment I am, unfortunately, having to spend time in Europe, which I detest. But an very much looking forward to returning to the US asap. Look, the US has its problems, indeed, it has a lot of problems. But you guys in Europe are still in the Dark Ages. Every single good thing you now enjoy here (i.e., democracy, prosperity, peace) came from the USA. Even this ridiculous EU is nothing but a very poor and unreasonable facsimile of the USA. Without us (yes, I consider myself 100% American, and 0% European) you would now be fighting World War 20, engaging in new (and improved) genocides, and just being petty. These last 60 years you had it good, but that at the price of the US defending you, and Easter Europe living under tyranny. So please, quit the self-congratulatory backslapping session, and don’t give yourself too much credit for your accomplishments.

    May I also suggest you learn to pick up the trash from central Paris, build some decent roads in Greece, and get the trains to run on time in Spain, if you plan to live off of tourism in the 21st century, as you have little else to offer. But keep praying America will remain strong, else you are likely to become part of the NIUSSR (New and Improved USSR)…

    Vinny Goldberg
    PS – my last name is not really “Goldberg”, thus I am not Jewish, so please restrain your anti-Semitic reactions, as I am sure they were flaring up while you were reading this…LOL

  70. Anonymous

    Vinny I agree with you. Some Chinese colleagues were arguing with me the other day, thinking Americans are a bunch of weaklings. They are living here in America, some on H1B visas, some on more permanent status.

    I reminded them of WWII, that Americans are not incompetent. I also took the opportunity to mention briefly that we saved their bacon from the Japanese.

    We can do it again. We just have to knock the bankers down to size. We’re working on it. TARP didn’t sail through easily did it? Nobody (outside the country) expected all that trouble we caused, did they? It was just the opening salvo.

  71. Anonymous

    Anon 7:56,

    Thanks for agreeing. :)

    I think much of this anti-Americanism is driven by envy and disappointment, actually. A world without America would be a very dark world indeed, because America is greater than itself; it represents many people’s hopes for something better, even if they never move to the US. But it was nice to know America was there. While I was growing up behind the Iron Curtain, it was nice to listen to the Voice of America every evening – it gave me hope that the Orwellian society I was living in was not all over the planet. Bush really scared a lot of people, and he robbed the world of its America, so they are now angry with us. In a sense, Bush killed the America that the world loved. It’s like taking away a promise from a child. I’m a psychologist, so I think about these things.

    I hope we can find our way again. I think we can. Who expected Obama to win!? After seeing this past election, I think we can do anything. If anything, a new depression would only make us stronger as a society, would cure us of this materialism, and draw us closer to one another. And I think this world will accept us again.


  72. bondinvestor

    one thing which i think everyone is missing from this debate is exactly what the true ramifications of "punishing the bankers" is. if you let AIG file – and the entire european financial system collapses – the losses are going to be felt by more people than just the managements, staff, equity and sub debt investors.

    the losses will be borne by ordinary savers who placed their money in the bank because they thought that their deposit account was a safe, liquid instrument that was as good as cash.

    you cannot make depositors whole if you are going to liquidate big swathes of the financial system at fire sale prices. furthermore, the amount of money required to make whole all the deposit accounts around the world that would be settled below par in a mass unwinding of the system is too great to be financed in the government debt market at anything like the current rates.

    so if you're the Fed & Treasury, what are you supposed to do? i agree that the politics of bailing out mis-managed, over-leveraged companies is awful. and i completely agree that the process has been bungled by the government. the retention bonuses, etc are things that probably should have been handled differently.

    but, let's not forget that the goal here is to calm the markets, prevent a disastrous unwinding of the system, and ultimately protect taxpayers.

    it's not clear to me that the wholesale liquidation of AIG at fire sale prices, the commutation (or worse) of the CDS contracts, or a punitive attitude towards non-AIGFP managers accomplishes any of these goals.

    they may make the public "feel" better in the short term, but the risks are enormous and very real.

    if there is a run on citigroup, bank of america, UBS, RBS, Lloyds, etc, depositors are not going to get 100 cents on the dollar AND have unlimited access to their money. their deposits will either be termed out to match the maturity profile of the assets, OR they will be allowed to cash out at some fraction of par. that will be the only way to fairly protect the rights of ALL depositors in the midst of a systemic run.

    the poster who said that AIG has the US government over a barrel is right. shame on us for allowing a massive, unregulated player in the CDS market to become the single largest counterparty to the global banking system. but let's certainly not compound the error by (a) forcing a systemic meltdown; and (b) destroying the franchise value of the operating assets that are going to be used to repay the debt the public has incurred to effect a gradual unwinding of the CDS book.

  73. Anonymous


    You missed the point. Been said here and elsewhere that the CDS contracts could be voided, there are ways most or all could be. That would end the AIG abuse.

    That should have been examined seriously, no evidence that anyone in power has. That is a much less “bad” choice that letting CDS via AIG suck the economy dry.

    This far less radical than some of the moves in the Great Depression, such as the confiscation of gold. But no one has guts these days as far as bankers are concerned.

  74. Blurtman


    The risk lowering capabilities of the AIG CDS are fictitious and so are the ratings of financial institutions who claim to be lowering their risk through these CDS.

    As fictitious as the ratings of mortgage backed securities and CDO’s have been.

    Continuing this fraud is not a good solution.

    It has been estimated that 50% of CDS are not held for hedging purposes, i.e., are held by speculators, but you do not address this.

    Your logic is nothing more than a shakedown based upon creating fear. I am doing what should always be done with bullies – calling you out as being FOS.

  75. Anonymous

    Bondinvestor said:

    if there is a run on citigroup, bank of america, UBS, RBS, Lloyds, etc, depositors are not going to get 100 cents on the dollar AND have unlimited access to their money. their deposits will either be termed out to match the maturity profile of the assets, OR they will be allowed to cash out at some fraction of par. that will be the only way to fairly protect the rights of ALL depositors in the midst of a systemic run.

    That’s just NOT a good enough reason to impose the tyranny we have now, where banks with world-destroying debt are kept limping along at back-breaking cost to the worlds taxpayers. IT MUST END, or we will take down one or more fiats, or one or more countries political systems.

    You can purge the corruption from the system, or enslave the world. If a massive haircut on commercial depositors is the price of freedom and authentic (not crony) capitalism, so be it. They’ve had months of warning that these banks are insolvent.

  76. Brad

    Thanks Yves and brain trust, y’all are great. I like seeing ideas I have sliced and diced here in the comments before I post them…

    We former neglected children are so inclined to hope that today is the day authority will come around and acknowledge us… So perhaps this next hope is illusory: could Obama, by focusing on across the board deficit reduction, be constructing the right perspective from which to place bank looting in context? Congress members will watch with much more interest when their program are on the block vis á vis zombie bank reanimation. Opportunity cost only matters if you actually believe you must choose.

  77. Richard Smith

    Specifically on AIG there may be several processes playing out. IIRC they insured $150Bn of RMBS and $350Bn of corporate debt. So:

    a) continuing deterioration in the lousy RMBS credits they are covering. That’s the polite version; the impolite one is that they never owned up properly in the first place.

    b) nascent deterioration in the relatively good corporate stuff.

    c) If a read-across from other life insurers is justified (and why not; they are all exposed to the same markets) a sudden decline in the solvency of AIG’s ‘good’ life businesses.

    That lot is pretty well evidenced and enough by itself to explain the need for more cash. AIG kind of pwn USG on this one. It is a like that old joke about how much you owe the bank and who’s in trouble.

    Until USG gets a proper plan together this way just keep heppening with AIG. I trust Yves’ blood vessels are up to the strain.

    A further wild speculation is that AIGFP was so far out of control that it actually wrote a whole lot more insurance than the AIG management realised, and that $500Bn exposure fig is too small. This guess is based on no evidence at all – except for the precedent of many other out of control busts, from Lehman back to Barings and beyond.

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