Let’s see, the credit default swaps market, due to some netting, is now somewhere north of $30 trillion (as opposed to its earlier “north of $60 trillion” level). Investment banks were believed to have hedged most of their exposure via offsetting contracts, but AIG wrote naked protection. And as jAIG itself is at risk of getting downgraded again, the collateral posting requirements keep rising.
Some analysts (including Chris Whalen of Institutional Risk Analytics) have offered theories as to how the government could void a lot of CDS (some have argued for getting rid of them altogether, others argue for eliminating them in cases where the protection buyer does not hold the underlying bond/exposure). Before you say, “they can’t do that”, recall the effective confiscation of gold in the Great Depression. rationing, wage and price controls, the suspension of habeus corpus. There is a good deal that the Feds could do if they chose to, trust me. But it’s easier to bill the poor chump taxpayer than take on the financiers, even after they done so much damage.
American International Group Inc., the insurer deemed too important to fail, may get a commitment for as much as $30 billion
in new government capital after a record quarterly loss, said two people familiar with the matter.
The insurer may also be allowed to make lower payments on government loans, said the people, who declined to be identified because there was no public announcement. New York-based AIG may forfeit part of stakes in its two largest non-U.S. life insurance divisions to lower the firm’s debt, the people said….
AIG may give up stakes in American International Assurance Co. and American Life Insurance Co., two life insurance divisions that operate in countries from China to the U.K. The holdings would go to a so-called special purpose vehicle to eventually position them for sale so AIG doesn’t have to divest them at distressed prices, according to one person familiar with the matter.
From the Wall Street Journal:
The new deal, the government’s fourth for AIG, represents a nearly complete reversal from the one first laid out in mid-September. Back then, federal officials acted as a demanding lender, forcing the insurer to pay a steep interest rate for what was expected to be a short-term loan. Now the government is relaxing loan terms by wiping out interest in hopes of preserving AIG’s value over a longer period.
The plan raises the possibility that the 90-year-old firm will be broken up completely in the years ahead, with businesses being hived off in separate stock offerings, although that process would likely take years. The company is planning to combine its giant property-casualty insurance operations into a new unit, with a new name and separate management, and to sell nearly 20% of it to the public.
Under the new plan, the U.S. will give AIG access to up to $30 billion in new cash from its Troubled Asset Relief Program, or TARP, but will also cut the insurer’s $60 billion credit line with the Federal Reserve to $20 to $25 billion.
With the latest move, AIG will have the benefit of up to $70 billion from the TARP program; it got a $40 billion TARP investment in November. The total amounts to 10% of the $700 billion financial-sector rescue fund, money that most lawmakers did not expect would go toward propping up a troubled insurer. Officials believed they had little choice but to use the TARP money, particularly because they lack the authority to unwind a troubled firm such as AIG the way the government can do now with failing banks.
The AIG funding eclipses the $50 billion that Citigroup Inc. has received from three Treasury programs, and the $45 billion that Bank of America Corp. has received, although each of those firms might receive additional funding in coming months, if necessary.
The Journal really bends over for Citi. It conveniently omits the tantamount to $250 billion in guarantees that Citi has received. Last week, the Journal ran a piece that had the hallmarks of being a PR plant.
Alert readers pointed out earlier today, when the Bloomberg story first ran, that it fingered some of the big beneficiaries of the AIG rescue:
Goldman Sachs Group Inc., Societe Generale SA, Deutsche Bank AG and Merrill Lynch & Co. are among the largest banks that bought swaps from AIG, according to a person familiar with the situation. The insurer handed over about $18.7 billion to financial firms in the three weeks after the September bailout, said the person, who declined to be named because the information hasn’t been made public.