Commentary

AIG Needs $12.5 Billion – Time to Pay Attention, Wall Street!

The stock market rumbled ahead on greased rails of delusion cheered by the glimmer of light perhaps flickering at the end of the credit crisis tunnel. But, the news Thursday afternoon signaled that the frail twinkling they thought meant hope may be an oncoming freight train instead.

After the closing bell Thursday, American International Group, the giant insurance and financial services conglomerate known by its ticker AIG, announced a staggering loss of $7.8 billion, following $5.3 billion dollars worth of red ink in the previous quarter, and the need to raise $12.5 billion in fresh capital, far more than street sages expected.

Coupled with another spike in oil prices, this news contributed to swift price declines on global equity markets Friday. It seems as though the effects of the credit crisis will last far longer than the cheery wizards on Wall Street expect.

The fact that stock prices have rallied over the past few weeks as the economy suffers through the housing market death spiral and tightening consumer purse strings, highlights the disconnect between investors’ expectations and reality.

Credit conditions remain tight for consumers and small businesses, even after a series of panicky whacks at short-term interest rates and the Fed’s bailout of Bear Stearns. Worst of all for the struggling housing market, mortgages are harder to get. (Speaking of America’s most notorious sinking asset class, more than 50 percent of mortgages issued over the past three years are for sums exceeding the price of the homes that they purchased.)

Wall Street has been digesting lousy economic news for several weeks as prices climb skyward, and the sad numbers spewed out by AIG will probably be ignored when trading resumes this week. But, there seems to be a disconnect shaping up between what investors want to believe and the bleak reality that is facing most Americans.

Easy credit, rising home prices and tame inflation rates created a wave of false prosperity. Now, the tide of easy money has receded, exposing a weak job market and virtually no money in the nation’s collective savings account. Meanwhile, as the news from AIG showed, the losses from the credit bubble pile up. It is just a matter of time before these facts smack investors in the face.

© 2008 Splendid Marbles.