Commentary

AIG Gets More of Your Money

What the hell is going on with American International Group(AIG)? First the U.S. government tossed the embattled insurance giant an $85 billion credit line in September – when it decided to let Lehman Brothers file for bankruptcy – and that was increased by $38 billion last month. The spiraling cost of the AIG bailout seems to symbolize the national financial bailout effort as a whole; as the pile of money being spent keeps growing, the mechanisms and logic behind it seems to be dissolving before our eyes.

Now, a whole new plan is emerging from the bowels of the Treasury that expands the AIG bailout from $123 billion to $150 billion. I’m having a great deal of trouble understanding what is actually happening. I’ve read stories from the NY Times, The Washington Post and the Wall Street Journal to try and get a better understanding of AIG’s growing resuscitation bill. Now I’m pissed off! I really feel as if I’ve wasted my time.

The Wall Street Journal summed the latest AIG developments up as follows:

“Under the terms ironed out late Sunday, the government would give AIG more money, including $40 billion from the U.S. Treasury’s $700 billion Troubled Asset Relief Program.

It would also receive less interest than on the bulk of the original loan, while freeing AIG from exposure to some of the risky financial instruments that nearly caused it to file for bankruptcy protection.”

Continuing with:

“The $150 billion in government aid consists of a $60 billion loan, a $40 billion preferred-stock investment and $50 billion in capital largely to purchase distressed assets which are to be placed into two separate financing entities.”

The Washington Post offered this explanation:

“The new plan expands an existing government bailout program from $123 billion to $150 billion. But more significantly, it restructures the plan to include much less debt and instead provides direct government investment in the company.”

And The Wall Street Journal explained the effects of the AIG rescue effort to date:

“The government’s original emergency line of credit, while saving A.I.G. from seeking bankruptcy protection for a time, now appears to have accelerated the company’s problems. The government’s original short-term loan came with a high interest rate — about 14 percent — which forced the company into a fire sale of its assets and reduced its ability to pay back the loan, putting its future in jeopardy.”

So, the line of credit is being reduced, and the interest rate AIG pays will be lower, but the feds are buying an ownership stake – which is what they already had as part of the conditions set forth in the initial line of credit.

Another essential part of this new plan calls for the government to buy $30 billion of collateralized debt obligations (CDOs) and cough up another $22.5 billion to help AIG purchase residential mortgage securities that it insured. AIG will pony up $6 billion of their own money (where did they get that from?) and place both piles of crappy assets off its their own balance sheet. (This toxic asset removal is designed to save AIG and its 100,000 employees from the abyss.)

Oh, and The NY Times explained that AIG is also allowed to borrow another $20.9 billion through the Federal Reserve’s commercial paper program.

I also discovered a very long but informative post on Naked Capitalism that gave a much more complete history of the U.S. government’s costly embrace of AIG. It’s loaded with acerbic criticism of the extremely expensive, yet half-assed approach taken by Treasury officials.

To sum this investigative experience up: it sucked. I had to sort through a lot of dry and meandering text – except for the Naked Capitalism piece – to get even a tenuous handle on the latest in the AIG bailout saga. In the end, each article from the major papers offered only a fraction of the overall picture.

After combing through these messy explanations, it was clear that the government’s original approach didn’t work – AIG was still hemorrhaging cash. So, the feds lightened up on the interest they charged AIG, paid $40 billion for an equity stake they already owned, and exposed the taxpayers to more risk – those toxic assets left AIG’s balance sheet and were posted on ours. And to top it off, the government paid 50 cents on the dollar for AIG’s garbage, when private investors paid less than half that. (Naked Capitalism’s story mentions Lone Star, a hedge fund, that bought Merrill Lynch’s CDO portfolio for 22 cents on the dollar – receiving funding from Merrill – now that’s a sweet deal!)

The sad part is that I don’t think this is even close to the full story on the AIG bailout. And, no one else seems to know the full story either. The Treasury and the Fed are just throwing money around in the vain hope of containing the Wall Street crisis. This is why I changed from a reluctant proponent of the financial bailout idea a few months ago into a pissed-off critic. Please, tell me what you think. Did I get this part of the AIG saga wrong? What did I miss?

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© 2008 Splendid Marbles.