Tuesday, November 11, 2008

AIG

I need help. Can someone please try to make sense of what's going on with AIG, why it has become such a money-pit for my tax dollars, and what might happen if the government stopped injecting money into it? Are these loans, or are we buying stock? What's the long-term strategy? (Is there one?) I don't understand what's going on, and my cursory search didn't produce a primer worth reading. Explanations, links, and insults about my intellectual capacity are all helpful and encouraged.

6 comments:

Quirky said...

I'm completely impressed that you continue to be involved in what's going on in the world around you. I'm stuck in self-absorbed law school hell. Which obviously means that I can't give you any info.

tao said...

Take all this with a grain of salt.

The best article I've found that explains not only how the collapse happened, but why AIG is so important is here.

Even though it seems overly simple, AIG is too big to allow to fail. Not only do banks all around the world have holdings in AIG, AIG's largest trading partner is Goldman Sachs. An AIG collapse would trigger Goldman to collapse and that would spread around the world.

Since no one will loan money to AIG now, it's completely dependent on the Fed to maintain daily operations, which is why money keeps getting pumped into it. The money is being loaned to AIG in return for a "79.9% equity stake." What equity stake means, I'm not entirely sure, but it sounds like the Fed basically owns AIG now and will profit when AIG profits (though it may be implied that the money will just be funneled back into AIG).

tao said...

In addition, I assume the long term plan is to prop up AIG until either it honors all of its debt or the government steps in and does something about the CDS and subprime mortgage markets.

Oh, and: Duh, Sai. Pssh, you couldn't figure all that out yourself?

saisai said...

howdy quirky! thanks for reading.

you're clearly not totally self-absorbed... you read me after all!

don't panic--it's almost over. :)

saisai said...

hi tao! thanks a million. the article is bookmarked and i promise to read it. maybe if i know more stuff there'll be more to complain about! hooray.

Jon Rose said...

(0) This is a Fed operation. This is not within the usual scope of the Fed - the Fed regulates banks to mitigate the moral hazard inherent to its lender of last resort operations it performs. Here, AIG was not regulated, it was an insurance company of all things.


(1) The Fed took a 79.9% stake in it for essentially zero dollars. (Why not 80%? Don't ask. Has to do with rules about whether the AIG debt would have to go onto the federal government balance sheet). AIG shareholders got pretty much wiped out. No company has an incentive to act like AIG just to get this kind of rescue.

(2) As part of the deal, AIG was given access to up to 80 billion in loans, at a steep interest rate, from the Fed. This number has almost doubled though, and that's troubling.

(3) Why bother? AIG was "too connected to fail." Much like Lehman, and Lehman's failure has precipated the total meltdown of the US financial system. Fundamentally, AIG was on one end of a tremendous amount of highly leveraged bilateral transactions. Credit default swaps are the most exotic example. But there's the 300,000 cars it insures in california alone (fun ca fact.)

I offer a free hour long disquisition on any economic subject for one coffee.