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.
From Bloomberg:
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.
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Another 24 months of $25B each to go. Black hole do increase their mass, and emits lights near the event horizon :-(
We’re heading for a big bang of $.
Long live the United States of Socialist republics.
Yves…
As to CDS: The ratings agencies are maintaining AIG’s rating based on its TARP access, which rating is imported onto the swap counterparty so their book is being guaranteed by TARP, except indirectly…
Can you advise whether and to what degree this is more, the same, or less than the same implicit backing given the policyholders…
I presume the inherent claims-paying ability of AIG is being propped up by this as well, is there any way to tell whether that is “benefiting” people more fairly, perhaps more equally, than the CDS backstop is benefiting banks?
I just like to be sure before I go into high dudgeon.
It sucks, no matter what.
Any idea how long AIG will be allowed to sell insurance below market and take money from the non-propped-up insurers (I assume they are selling below market because market premium would have to include the risk that the insurer won’t pay).
Why does AIG have any private shareholders? This is a nationalized entity in all respects but name, isn’t it?
The injection of $30 billion surely should include the remaining 20.1% – or is there some kind of weird accounting consolidation trick at work?
Yes, it has to stay below 20% to avoid consolidation.
You are really asking, “If this were being done in the private sector, would the tax guys say, “cut the BS, you have all the practical incidents of ownership of the whole dam thing, so consolidate,”
Oh yes. Almost surely.
But who says they have to play by the rules?
Like shoveling greenbacks into a furnace – with the about the same effect.
I’ve been in PR in Silicon Valley for more than a decade – I agree with the comment about the story looking like a PR plant….and predict that we’ll see more of the same in the coming months as companies and the government seek to shape [read: control] the taxpayer reaction.
Great job, Yves.
So is AIG the backdoor to funnel money to banks that would be insolvent otherwise?
No, AIG is the backdoor to funnel money to banks some of which would be insolvent and some of which would just have less.
There’s an important distinction. For example, Do you suppose that, say, haircutting 35% of the payments to Goldman or JPM, suppose theyre $10B each of the $300B, would push them over?
Thats the real crime, that it’s not just insolvent banks, or banks that would without this go insolvent.
I’d like to know how much of the protection AIG sold to banks is insuring assets or speculative prop positions held by those banks, as opposed to being a reinsurance leg of other CDS transactions sold on by the banks to their customers. I suspect many banks can’t afford to substitute for AIG on losing positions, rather than profiting directly from the AIG bounty. If AIG hadn’t `handed over’ the $18.7B, the counter-party banks would be insolvent rather than profit-challenged. Nice game of dominoes.
Anyway, threatening to void all purely speculative CDS obligations on a date certain would lead to a rally in the underlyings… :-)
You may misunderstand something, although to be fair it’s not widely explained.
I used to represent participants in CDS structuring, and typically what would happen is you’d put together a big basket and the riskiest 15% give or take was sold off, leaving the safest 85%, which you didnt bother selling off, instead you just paid AIG 7bps to 10bps (later 15 or 20) as a “fee” to take on the risk.
AIG did a ton of this.
So it’s not quite “prop” stuff, instead it was as if AIG was a never-ending “goto” buyer for the “AAAAA” tranches.
They were a facilitator, if you will.
So again, it wasn’t prop in that the bank was making the fee on the formation and syndication, not on how well the basket actually did.
I remember when 80B was a lot…
That was less than six months ago.
Yves,
HSBC situation is bigger than LB and far more destabilizing.
D
Are we not at the point where as an entity of the US gov’t AIG should have to disclose in detail to what institutions it has as a counterparty and in what amounts? If the gov’t is going to have to step in and provide credit maybe some of the more radical suggestions regarding CDS are in order. The idea of the gov’t money should be to stabilize the system not to preserve the existing and future revenue flows of swap dealers.
Chief
Looks like Obama’s “Spread the wealth around” agenda has morphed into “Spread the losses around.”
The guy’s really into spreading….
This is rich, we have the mother of all circle jerks (Economatic Maytag Cowabunga Wipeout) with AIG as the pivot man. All parties and counter-parties that are removed from the circle of love, will not receive satisfaction.
Man the dirt that must be hanging over the Uberments head at this moment, at home and internationally to provide the impetus for these actions.
skippy…Hard to bring kids up with good values, with highly educated adults acting so poorly.
Yikes looks like things could really get even more ugly if housing keeps going lower don’t you think? Aig scares me.
http://financialrealityrevisited.blogspot.com/
http://www.prospect.org/csnc/blogs/beat_the_press_archive?month=02&year=2009&base_name=post_2
Click the link (or click "brushes9" above and hear Dean Baker chew Megan McArdle a new asshole.
Also, read those comments, like mine:
A libertarian analyzes the world based on reason, not emotion. But, before anyone say that that is a good thing, imagine the emotion-less activity of BTK, the serial killer. Reason, without emotion, is sociopathology, verging on psychopathology (ie, BTK and Ayn Rand, and the "person" of The Corporation).
In the interview, do Megan's sentences and arguments sound disjointed, similar to output from an AI prototype? That is because only emotion allows us to humanely organize our language output, something AI machines cannot yet do. Through emotion, we can poetically organize our thoughts by properly feeling where each word should go, and which argument should follow next,..we are efficiently measuring each and every meaning, putting everything in its proper place. Megan, apparently, is emotionally compromised, to put it mildly.
So, the WPA built many good things, but also extended the lives of many people who, otherwise, would have died. This latter point, Amity Schlaes, nor Megan McArdle, would not understand, because they are just dusted off, articulate and salaried sociopaths, or psychopaths, not surprisingly, similar to the modern day corporation.
Goto McArdle's Atlantic webpage to let her know how you feel..
http://meganmcardle.theatlantic.com/archives/2009/02/a_grim_world_tour.php#comments
Yves,
All this CDS business reminds me of a spectacular but not well known bubble in Kuwait. Some info here. I can’t find a good online source.
http://en.wikipedia.org/wiki/Souk_Al-Manakh_stock_market_crash
In that case some arab Sheiks bid up stock prices by writing post dated checks and these checks began to circulate as assets. Eventually some of the checks bounced and it all cam crashing down. The CDS business reminds me of this bubble.
I believe the situation was resolved by pronouncing the checks null and void but maybe I am misremembering the details.
Yves, when will we be able to post living links on “blogger?” Am I missing something?
I can do it on Calculated Risk..
You do great work!
Didn’t we just have a Black Hole Alert? This is like the person who cries wolf (here)!
Here is a related Oh My God Story with Black Hole Alerts: Tevatron
The Big Bang (TARP Model) was supposed to have happened last year.
Then the Large Hadron Collider blew a fuse that had been wired by a couple of teenagers from Turkmenistan (I’m kidding. They were actually from the backstreets of Vilnius.) and had to be shut down for major repairs.
Meanwhile, it seems, physicists at the Fermi National Accelerator Laboratory in Batavia, Ill., have been tinkering with their Tevatron.
Gads…. just when you thought things were safe again!
Yves,
Did you see Jim Baker’s FT op-ed? Sums it up.
Re: “Like shoveling greenbacks into a furnace”
I like that idea! Bernanke could have a printing press running at high speed and the paper could be turbo-jetted into a blast furnace and they could burn money at a rate of a few trillion a year; think of the efficiency! I imagine a supercomputer could be used to model a turbine used as a green source of energy for The White House and all those other building that house congress and the relics of our old fashioned society — before TARP and Hyper Inflation.
Is this a call for financialSeppuku?
YS:
I read the WSJ piece about Citigroup when it appeared and thought it was a Citigroup PR department set piece. The AIG bailout was and is a bailout of its counterparties. Goldman Sachs (GSG) rules! Republican, Democrat, it makes no difference. They are both branches of the GSG party!
Re: “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”
Also See: liquidation-only
Daniel Dicker, a former oil trader writing at TheStreet.com, contends that there is a way to test the hypothesis that speculation is influencing oil prices (a view that Dicker supports). Exchanges could impost a “liquidiation only” requirement, which was last used to break the Hunt brothers’ attempted corner of the silver market in the early 1980s (hat tip reader Michael).
In one instance, however, the speculation premium was “successfully” tested – in the silver markets in 1980 when the Hunt brothers attempted to corner the market. As silver approached $50 an ounce in January 1980, the commercial participants asked for relief from the enormous margin calls from ever-rising prices. The CFTC and the Comex (the predecessor to the Nymex) responded effectively by imposing “liquidation-only” trading — traders were allowed only to close existing positions and not permitted to initiate new positions.
This forced purely speculative positions to be closed rapidly, as they could no longer be “rolled” into future months at expiration. This caused the price of silver to drop by $12 the day after it was imposed, a decrease of over 20%! Over the course of the next three months, as contract months expired, the price dropped over 50%.
Swedish,
Jim Baker’s article in the FT is a good example of self-sourcing, without saying “I think that we should…,” or, “I believe that we should..”
thx
…even after they done so much damage.
Now that you mention it, life is getting more and more like a country song every day.
Goddamnit how much money is enough for these slimy Jewish financiers, executives, and insurance frauds?
There will be no stock market left to manipulate in a year, but I doubt if Obama understands that yet; probably will take him a year to put two and two together and add up that more corruption equals less and less confidence!
FYI: Japan’s Nikkei stock average fell more than 4 percent on Monday, with Mitsubishi UFJ Financial Group (8306.T) and other banks extending losses on growing worry about the international financial system.
So AIG is now up to $180 Billion and counting!
JP Morgan is, let’s see up to $25 Billion TARP + $139 Billion under the table during Lehman BK and another $30 Billion plus Bear Stearns. Total To Date $194 Billion Dollars!
And we still have “NO EXPLANATION” AS TO WHERE THE MISSING $78 BILLION WAS GIVEN TO. IF WE KNOW WE WERE SHOETED $78 BILLION WHY HAVEN’T WE BEEN TOLD WHICH BANKS SHORTED US? WHY HASN’T THE GOVERNMENT DEMANDED THE SHORT FALL TO BE PAID?
IS IT ONLY ME OR DOES ANYONE ELSE OUT THERE FEEL LIKE OUR GOVERNMENT IS F-CKING US BLIND!
Yves:
Why not investigate Lehmans and see if the court granted their motion to set aside CDS liabilties? If they did and drove the CDS speculators into bankruptcy, you know the story. Don’t block the escape doors.
If such did happen, it is time to drive AIG CDS holders into bankruptcy. It is interesting how we will layer $billions on CDS to protect Sachs and Chase; but, we can not save GM? Any chance 401k holders are into this?
DON’T BUY THE AIG LIDDYWORST
(Shticks of One Kind and Half Dozen of the Other, Allen Sherman)
WilliamBanzai7
He wheels his AIG wheelbarrow
Through downtown streets that are so narrow,
The barrow is narrow, but the losses are too wide.
So wherever he wheels it,
The markets flee it,
This AIG dog keeps scraping the bottom on all sides.
In New York’s fair city,
Where the banks are such a pity,
That AIG folly stands out ’cause its Uncle Sams $180 billion bailout jolly.
I dont mind the bailout fat–but,
It’s not only that–but,
It’s Hank Greenberg’s rotten systemic risk baloney.
I know a man, his name is Liddy,
And he has a neon for sale sign.
And Mister Liddy is gettin very old,
So they call it Old Liddy’s Sign.
Oh what have you done, Willumstead, Willumstead.
Oh what have you done, charming Willy.
They took almost every TARP cent
From the U.S. Government,
Which you’re company spent on subprime fertilizer, which is silly.
All day, all night, you can hear Greenberg rant.
That’s all we hear is the Greenberg rant.
What follishness can he do that Martin Sullivan can’t?
Big deal, big Starr, the Greenberg rant .
Oh the moon is bright tonight upon Timmy Geithner’s bailout car wash.
So AIG’s getting washed again.
But the way things are going, with, the way their luck is,
Just as soon as they’re finished, it will rain more toxic losses.
On top of Old Smoky,
All covered with hair,
Of course I’m referring
To Smoky The Market Bear.
Every time you take Geithner’s bailout vaccine,
Take it orally.
As you know the other way
Is more painfully.
My grandma’s portfolio was the best ever made
By the Madoff company.
Just like the 2009 outlook Martin Sullivan displayed
One night on CNBC.
Oh our models work so perfectly,
They make a ticking sound.
Ya just like a time fused derivative bomb,
And that’s how AIG drowned.
Do not make a stingy bailout sandwich.
Pile the dodgy assets high.
Customers should see stale subprime salami,
Coming through the moldy CDS rye.
Oh we can diet all day and we can diet all night,
It’s enough to drive us bats.
Got no financial gravy or potatoes,
‘Cause the whole refrigerator’s
Fulla securitised subprime chazer (note:yiddish for pig remains).
Fare thee well, Goldman, Lehman, Bear Stearns, Merrill
And the others of that ilk.
Let the financial diet start tomorrow,
‘Cause today we drown in our sorrows
In a triple malted bailout milk.
When you go to the AIG bailout store,
Don’t buy the Liddyworst.
Don’t buy the Liddyworst.
Don’t buy the Liddyworst.
I repeat what I just said before,
Don’t buy the Liddyworst.
Don’t buy the Liddyworst.
Oh buy the AIA beef if you must,
The Alico herring you can trust,
And the IFLC lox puts you in orbit AOK.
But that big hunk of Liddywurst
Has been there since last October First,
And today is FEBRUARY 28.
So when you go to the AIG bailout store,
Don’t buy the Liddyworst.
Don’t buy the Liddyworst.
Don’t buy the Liddyworst.
It’ll make your insides awful sore.
Don’t buy the Liddyworst.
Don’t buy the Liddyworst.
The solution is really quite simple.
(1)Install Volcker at Treasury.
(2)Enforce current laws. Quit exempting AIG, Citi, BAC, etc. from Chapter 11 for the holding company/FDIC conservatorship of the commercial banking subsidiary/guaranty fund ward for the insurer subsidiaries (Patterson & the NY Supt. of Ins. will have to suck it up and do their job).
(3)Move Treasury/Fed monies up in the seniority structure to its true position as DIP financing–rather than down to common equity as with CAP. In particular, the loans are senior to all deferred comp./bonus pools and unsecured debt.
(4)The DIP loan finance is callable after 3 months, forcing BK, if bond covenants on profitability are not met but can be extended an additional 3 months at governmental whim. This provision allows the staggering of the BKs of the institutions.
(5)Cut the bull about assets being valued at distressed prices. Of course they look distressed if you compare them to bubble values that will never return.
(6)Perform all moves over a weekend, announcing the return of the rule of law at the same time.
(7)Internationally coordinate. E.g., let AIG go, then RBS, then Citi.
It’s better to have a messy year or two, than a lost decade and a half.
I would love to see the list of recipients of the cash flying out of AIG. This is one time when for sure the adage “follow the money” would show the government is making good on trades that otherwise should be losers. You’ve to hand it to these guys – by allowing AIG to be the single biggest counterparty on these lethal instruments they can keep shoveling cash in (and then back out to themselves) and basically avoid scrutiny. This is stealing on a massive scale that is not even being noticed by 99% of the American public, distracted by bread and circuses.
Anonymous:
There never was an AIG bailout. It was an AIG counterparty bailout from the start. Read the Fund my Mututal Fund piece linked to YS’s post. It summarizies my thinking.
There was news released Friday after the market close that AIG was suing the US gov’t to recover $306 million in 1997 taxes from transactions by the Financial Products division. Thank goodness AIG is working to protect the interests of its shareholders!
http://online.wsj.com/article/SB123595759968105885.html?mod=article-outset-box
What’s interesting about AIG’s financial statements is also that their losses are basically everywhere: It’s apparently not about a “black hole” in the holding as opposed to wonderful crown-jewel-like insurance subsidiaries: They lost money just about everywhere, including a 6 bn $ loss in Asian life-insurance.
Next, expect another wave of million-dollar AIG executive parties to be unleashed on fancy resorts across the world. Caviar, Dom Perignon, Rolls Royce limos, and high class hookers are likely to remain in high demand throughout this downturn…
Vinny Goldberg
AIG is an impediment to our economic recovery, let this stinking corpse finally be buried.
I don’t. I’m not sure, but I’m starting to think this one dying insurance company is the thread holding what’s left of the entire banking sector together. How deep is this hole? Forget about bank balance sheets, how much is AIG potentially on the hook for? I’m starting to believe the whole thing is going to come down, and the only issue is whether it takes the US Government down with it.
GREENBURG SUES AIG, FRAUD
Skippy