AIG Must Fail
It has been said over and over that AIG represents a “systemic risk” to the global economy. This has been used not only for AIG but for Citigroup, and many others.
What is it that the U.S. Government is so afraid of? What is systemic risk anyway?
When we hear the term ’systemic’ we often think of medical conditions which are very severe. A ’systemic infection’ to the financial sector is the equivalent of a lymphatic cancer. But is the diagnosis of a systemic risk as it pertains to these individual companies really warranted? Or is is simply an ‘excuse’ to garner public support for actions that actually have other objectives?
Today AIG released its counterparty obligations. Those obligations were essentially obligatory payments that AIG was responsible to make good on to other companies, governments, and states that were for the most part linked to losses on securities linked to U.S. mortgages and were sold by AIG.
So who was it that a failure of AIG would have resulted in severe losses to?
From AIG Counterparty disclosure statement:
AIG Chairman and Chief Executive Officer Edward M. Liddy said that the counterparty and collateral information show that billions in government assistance flowed to dozens of financial counterparties and municipalities during a time of acute stress in the economy.
Mr. Liddy emphasized that AIG’s disclosure of the counterparties does not change AIG’s commitment to maintaining the confidentiality of its business transactions. “Our decision to disclose these transactions was made following conversations with the counterparties and the recognition of the extraordinary nature of these transactions,†Mr. Liddy said.
Payments made by AIG after September 16, 2008, the date on which AIG began receiving government assistance:
- Societe General (FRANCE)Â – $11.9Â Billion
- Deutsche Bank (GERMANY)Â – $11.8 Billion
- Goldman Sachs  – $12.9 Billion
- Merrill Lynch – $6.8 Billion
- Calyon (FRANCE)Â – $2.3 Billion
- Barclays (U.K.)Â – $8.5 Billion
- UBS (Switzerland)Â – $5.0 Billion
- DZ Bank (GERMANY)Â – $700 Million
- Wachovia – $1.5 Billion
- Rabobank (HOLLAND)Â – $800 Million
- KFW (GERMANY)Â – $500 Million
- JP Morgan – $400 Million
- Banco Santander (SPAIN)Â – $300 Million
- Danske (DENMARK)Â – $200 Million
- HSBC Bank (U.K.)Â – $3.5 Billion
- Morgan Stanley  – $1.2 Billion
- Bank of America – $5.2 Billion
- Bank of Montreal (CANADA)Â – $1.1 Billion
- Royal Bank of Scotland – $700 Million
- BNP Paribas (FRANCE)Â – $4.9 Billion
- Credit Suise (SWITZERLAND)Â – $400 Million
- INGÂ (HOLLAND)Â – $1.5 Billion
- Deutsche Zentral (GERMANY)Â – $1.0 billion
- Dresdner Bank (GERMANY)Â – $2.6 Billion
- Citigroup – $2.3 Billion
There is what the Government claims is a ’systemic risk’. The failure of AIG would have resulted in many billions of of dollars in losses for numerous other banks and financial institutions, but none of them should have been anything near a ’systemic’ collapse. Instead the U.S. taxpayer money was immediately transferred to bailout and protect the losses in other institutions and countries.
So the bailouts of AIG amounted to nothing more than a conduit for distributing tax payer funds around the world in this authors view with the threat of ’systemic failure’ only to gain public support, to ‘justify’ their bailouts.
Is AIG a systemic risk capable of bringing the entire financial system to a ‘crashing’ halt… not in my view.
But what the U.S. Government is doing by providing bailout after bailout IS a systemic risk to the entire financial system.
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In other news tonight AIG announced they will be paying nearly $1.2 Billion in bonus and retention payments to employees. Many of which are those who were directly responsible for the catastrophic failure and reckless risks that AIG put themselves in.
Mr. Liddy, AIG CEO, said in a statement that it was important to retain the top talent needed to unravel the mess the company was in. And to be able to continue attracting top talent.
Why are those who had their hands in creating the largest financial disaster since the Great Depression being considered ‘top talent’? And why is it important to keep them?
I say that AIG must fail. This company is an embarrassment to the United States, the tax payers, and to the financial community. AIG is ‘too big to be allowed to survive‘. It is time for this company to be put out of ‘our misery‘.
What you are really seeing is that AIG is paying out risks that were implicitly insured by the US government. This is similar to the Fannie and Freddie failure where their obligations were picked up by the federal government.
The real problem in this systemic worldwide collapse is that all of the US government obligations are off balance sheet, just like Enron.
This is ghastly, and presages collapse of the US treasury and government, just as it presaged the collapse of Enron.
Yep Chuck, the AIG bailout is/was a distribution of USA taxpayer money to USA & European banksters, who are the ones really calling the shots. “Follow the money” – the USA banksters are huge contributors to USA politicians. The fix is on big time to protect the benefactors of USA politicians, and it’s not us – we are the fools the IRS leans on to get more money! http://www.OpenSecrets.org
Whew! And Pee Yew!
The real driver of AIG bail outs is sovereign risk. No doubt the amateurs in the White House are getting lots of late night calls from overseas demanding that they be made good on the mortgage backed securities they hold.
China is publicly demanding guarantees before they buy more Treasuries. How well will the new “up-sized” government get along if they can’t float treasuries?
The pressures on Obama to protect foreign investors (Both banks and sovereign funds) is greater than us mere taxpayers can exert.
It is obvious things are about to get much much worse.
Maybe I’ll short MU today!
I believe that we are not being told the whole story.
What if the US gov was investing in Bond-CDS Negative Basis trades that were marketed as “a risk-free way to lock-in 5-10% to maturity”. AIG the guarantor.
http://www.acredittrader.com/?p=24
I want to hear about all the details of the whole mess.
I think the reason AIG is a systemic risk is because they insure a lot more than mortgage backed securities. If they became insolvent then the more legitimate parts of the company (life insurance, etc) would also go under, which could cause a systemic risk to the global economy.
@dc-student,
I think this is what the author was trying to say, AIG being a systemic risk was the “sky is falling” argument AIG used for government funding. In actuality, AIG could have chopped off their CDS arm of the business and kept their more profitable businesses in tact. There remaining businesses such as life insurance weren’t doing badly, but like the author points towards, many banks were set to lose out if the CDS arm died. AIG as a whole could either sell off the bad unit or write it off and continue operating their other business units.
Hi Chuck,
Great entry.
One comment: for the sake of completeness, could you label the Royal Bank of Scotland as a UK bank? Or even better, label it as the UK government since the the Royal Bank of Scotland was nationalized last year.
Thanks
Chuck,
You put the following sentence fragment in your written piece. You should avoid sentence fragments. They make you look like you do not know how to write using correct English.
“Many of which are those who were directly responsible for the catastrophic failure and reckless risks that AIG put themselves in.”
Let AIG fail. They provide nothing of real value to the economy – just insurance. People live without insurance everyday. No health insurance, no life insurance, even without earthquake insurance on their homes (if you live in California). Life is riskier without insurance but is the world going to fall over and die because there is more risk out there?
Let the debt unwinding go forward so we can get to the bottom of this mess.
TsoyYeshchoZhivyot,
I don’t think that is a sentence fragment. It’s pretty similar to “They are dumb.”
Better English ???
They make you look AS THOUGH you do not know … etc
is closer to the mark. Y f RW.
I know, AIG is not exactly a laughing matter, but sometimes humor is the most
effective way to deal with a problem of such magnitude, that it defies human
understanding. I have written a spoof that requires some input from knowledgeable
people. I don’t know, if Hank Greenberg is the culprit, but you can change the characters.
This document is on Google and can be viewed, if you provide an e-mail address.
Please feel free to send me your own version plus suggestions what to do with it.