"AIG is really no longer with us"

Posted by: Diane Brady on March 02, 2009

To the average U.S. taxpayer, the math may not sound right: After pumping in about $150 billion of federal money, American International Group posts a quarterly loss of almost $62 billion—the largest in history. And now it will have access to $30 billion in new cash from Washington.

American International Group is being broken up in exchange for getting yet get another lifeline from the government. The former insurance giant posted a staggering $61.7 billion loss for the fourth quarter (about $22.95 per diluted share). Now, AIG is putting what are considered to be its most valuable insurance assets—American International Assurance (AIA) and its Asian operations—under direct government control. Once the businesses are sold, taxpayers will reap the benefits.

I was struck by what Hugh Hendry, Chief Investment Officer at Eclectica, told CNBC this morning: “AIG is really no longer with us … I think the reality is (a lot of financial companies) left the business last year.”

This is the fourth iteration of government support. Its goals in stepping up yet again are likely three-fold:

1/ Avoid a downgrade in AIG’s credit rating, which would make it even tougher for the insurer to sustain its businesses and could prompt collateral calls, forcing it to default on its debt. (Many contracts require a company to post additional collateral if its credit rating drops.)

2/ Avoid the specter of AIG going bankrupt, which could cause even wider panic in the market. (That said, the value of its stock—still hovering below 50 cents when I last checked—would suggest that few shareholders are optimistic that anyone is going to save them.)

3/ Preserve as much of the assets of AIG in the hope that taxpayers can recover at least some money when they’re sold off. That seems to be the toughest task, given how commercial clients are already starting to defect to other players and few are lining up to buy AIG’s prized holdings. That could mean bargain-basement prices for assets such as AIG’s marquee building in Tokyo—the loss of which could also be a big blow to the insurer’s reputation in that country.

A move to further boost the ailing company is perhaps inevitable and necessary, but Treasury Secretary Timothy Geithner should be prepared for a burst of public anger. AIG has become a potent symbol for anyone who thinks the bailout has thrust taxpayers into quicksand, with commitments that seem to rise with every passing week.

This time, at least, no one is pretending that AIG might return to its glory days anytime soon. The former $100 billion-a-year giant will be smaller, humbler and less of a force in the marketplace.


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Reader Comments

Hugo van Randwyck

March 2, 2009 11:52 AM

Is there anybody who can honestly say the American economy is better for pumping billions into AIG, instead of those billions being used to install renewable energy systems into schools and other public buildings? AIG, BoA, Citi and others failed because of bad management, while others fared better because of good management. AIG, Citi and BoA customers could save the American taxpayers $billions/trillions by switching to other financial businesses. Any good managers in AIG, would have left by now or are already looking for another job - let it go bankrupt, and be sold off. They made gambles, why do taxpayers need to pay off their gambling debts?

Brook

March 2, 2009 11:59 AM

The issue is the bomb that would go off all over the world for those holding AIG derivatives -- and there are many major banks involved. So, AIG goes down -- their derivatives are worthless, you pull down many other banks with it. It would also set unemployment in NY through the roof. Obama's not about to take the political risk of letting AIG fail.

heather

March 2, 2009 12:00 PM

i worked for aig for 3 years. it was the worst 3 years of my life.
a recent former co-worker just committed suicide. -yeah, thats how bad it is. their bad management goes all the way down to the bottom level. its horrible. they need to go bankrupt. they dont deserve to be in business anymore.

Mike

March 2, 2009 12:03 PM

We can not stop helping those who are already dead because the unthinking herd Einstein spoke of cannot think. Anyone with any sense can see that these bailouts will not do anything but prolong the inevitable anyway. And enrich those who are already rich. But so goes our politicans ... We will learn after we have given them trillions and they still go broke anyway.

Mike

Ryan

March 2, 2009 12:03 PM

Let it die already! Unbelievable that Americans are paying out more money to save bad business plans... GM, AIG, Freddy Mac and Fannie May, etc. I am disgusted that the Obama administration is following this socialist agenda. We need to let the market work. Let us take our lumps now for a better tomorrow.

Chris

March 2, 2009 12:04 PM

HVR is right. If I make a bad investment I have to reap the consequences same as I reap benefits with good investments. Accountability went out the window long ago - anyone who jumped on the high yield bandwagon with bogus investments should pay the price. First good move would be to stop insuring anything but CDs - the lesson of accountability needs to be relearned.

AnneMarie

March 2, 2009 12:05 PM

can I get an AMEN to that?!?!?! I don't know why Washington is enabling these institutions from feeling the natural consequenses of their actions. Isn't that preventing them, and others, from learning their lessons? This is addiction recovery 101. If the addict doesn't hit 'bottom', they'll take handouts from anyone, promise the world and then keep on using.

vs

March 2, 2009 12:06 PM

there is a total of 55 Trillion dollars written in CDS. So AIG gambled and lost. It created a "insurance policy" guaranteed that upon reaching a certain threshold it would indemnify (cover losses) of creditworthlessness of a company. So they collect a relatively small premium and if the company doesn't have problems, everything is ok. The actuaries were wrong. They should have stayed in the business of insurance, not guarantor of debt. Most of the CDS were written by lyin' cheatin' lawyers and their account buddies. So the only solution ... cancel all CDS contracts, return premium "earned" and flush the debt. Only the government can force this to happen, otherwise the market will be down to 5,000 mid July.

Elias

March 2, 2009 12:06 PM

This is just one of the many failures to come of the US policy of bailing them out because they are too big to fail. They fail anyway and they are too big to be saved. GM, Citibank, Bank of America - who's next? Stop the madness! Stop the bailouts!

Peter

March 2, 2009 12:08 PM

What would the ramifications of AIG going bankrupt have on their clients who hold annuities with them? My assumption is that they would lose their savings.

Jason

March 2, 2009 12:09 PM

Socialist Agenda? you people make me sick. We have aserious crisies going on here and capitalist greed caused it....backed by corruption from the BushCo....who, by the way, also approved of so called "socialist" bailouts.. But it only socialist if you are a Dem, right GOP idiots? when its Bush its all "good for the economy" or "we can't let them fail" blah blah blah. You hypocrits

Bob

March 2, 2009 12:11 PM

I am disgusted that the Obama administration is following this socialist agenda.
Um, wasn't it Bush who started this? I'm no fan of the bailout BS either but let's give credit/blame where's it's due.

BCR

March 2, 2009 12:11 PM

I cannot believe we are getting ready to pump another $30 billion into this black hole. We're turning our backs on the entire American auto industry, one that employs far more people both directly and indirectly for the sake of saving this sick company. The worry is that its failure will cause "wider panic in the market". Open your eyes. Panic has struck. The market is at its lowest point in 30 years. How much worse can it get?

rj

March 2, 2009 12:11 PM

ryan you are a idiot - your beloved republicans started the bailouts under Bush.

Paul

March 2, 2009 12:11 PM

The STREET WANTS BLOOD! Let AIG and the others close their doors and go away, just as anyone else would have after makinig such poor business decisions.

Chris

March 2, 2009 12:12 PM

to Brook: True - the repercussions of bogus investments include (especially) derivatives, but what good is $180B going to do against $10-20T of losses from bad derivatives? An analogy for (some) derivatives is like selling fire insurance cheap assuming the fire will never happen - but it has now and they didn't collect enough premiums to cover it. If investments are insured, there is no risk and no accountability - THAT's the problem and it's still going on - no wonder banks are afraid to lend money.

Patrick

March 2, 2009 12:12 PM

" I am disgusted that the Obama administration is following this socialist agenda"

An agenda started under Bush... sir so go blame him please.

marco

March 2, 2009 12:12 PM

The governement hands over our tax dollars like nothing but expects its citizens to be responsible with our own debt...great example. How about lets stop paying taxes to a government that is steeped in coruption and corporate bailout. The greedy reep rewards while we go bankrupt...

Corey

March 2, 2009 12:14 PM

I hate this bailout. I really, really do. However, without it we send the European banks into a steep tailspin and by virtue, our own failing domestic ones. Even more so than at present, I mean.

AIG has several profitable sectors- the aircraft leasing business, the Asian life business, etc. Those must be torn free and set up as either independent companies (via IPO) or bought by a larger and more stable organization. That would leave the ugliness of the remaining hundreds of billions in bad debt still not accounted for.

Two problems there- 1) no one has the credit/cash to buy those profitable or healthy pieces of the company, or they are waiting around for the price to drop even more, and 2) the last time those individual portions of AIG tried to go solo (via IPO) they failed miserably.

This is personal to me, btw. Each night I look into the eyes of my partner who has been with AIG for many years (in one of the profitable ones) since AIG tanked. Each night she comes home not knowing if she'll have a job tomorrow. Each night she looks at the company stock she bought over time which is now worthless. And each night she learns of another group within AIG that she worked with either being idled or laid-off. Morale in the organization is rock-bottom and no one, NO ONE outside the board room knows what will happen next or when their job will be cut.

Why the former executives responsible for this arent under serious prosecution is beyond me. We put kids in jail for years for selling $40 worth of pot, but these crooked, irresponsible 'white collar' criminals loose hundreds of billions of dollars and they walk free. Tell me how that makes sense...

Martyman

March 2, 2009 12:15 PM

Obama sould treat AIG the same way he is treating the Auto Companies!They need a bank bailout team to tell them how and when to spend the money.Why treat the banks better?

Jon

March 2, 2009 12:16 PM

The government must keep them afloat. What people dont realize is what the fed/treasury call "seismic risk" is really stopping a run on banks. The FDIC doesnt have enough money for a run on banks, sure it could have the fed print it up. Only 3% is in circulation and the rest (97%) is digital money. However, hyperinflation is what would come next and a total collapse of social services.

Diane Brady

March 2, 2009 12:16 PM

Peter, you raise a point that's on the minds of many people -- from annuity holders to those who purchase AIG insurance.

The reality is that AIG's insurance subsidiaries are governed by state laws that protect policy-holders.
They have to keep a certain amount of money in reserve to pay claims and maintain operations. If they can't, there are state guaranty associations that are required to cover claims.

One issue with annuity withdrawals is that you could face tax implications. That said, it's no surprise to hear that AIG has been losing business to rivals during this crisis -- especially on the property/casualty side of its operations.

Alfonso

March 2, 2009 12:18 PM

I worked for AIU, part of AIG, at 70 Pine Street. I was hired by in 1981 at $11,000 a year. In 1983, AIU Premium Receivables fired most of us without any reason. They gave me a month or so to find another job. Luckily I was able to get another job paying much more. My division was taken over by a punch of chinese and their friends. I am glad that I was able to find employment with the time allowed. There have been a few stories about this international corp. Read the press, some of the news has not been very good. This corp has business in Nigeria, etc.

Citizen Y

March 2, 2009 12:20 PM

We have to stop being Republicans and Democrats, idealogs! Both Political parties bare responsibility. I had no faith in John McCain's ability to lead the country (because he couldn't decide which way he was going) and I had little faith in Barack Obama because he quite simply he lacks accountability and responsibility in his background. Today those friends of mine that were violently Pro-Obama are questioning why he is signing bills with Earmarks in them. Simply put he is well intentioned, he talks, he trust but does not VERIFY what he is being told.

Joe

March 2, 2009 12:21 PM

Funny that those companies that own AIG derivatives aren't ponying up the cash to save AIG, or being forced to do so. If they don't care about their investments why should we? The bad management starts with our government.

Gus

March 2, 2009 12:21 PM

"We need to let the market work. Let us take our lumps now for a better tomorrow."

Would you still feel that way if the result of AIG failing was:

2 additional major banks and 50 regional banks all shut their doors tomorrow because their money was invested at AIG?

The FDIC would be on the hook for hundreds of billions of dollars in insured assets at AIG and the other failed banks?

Unemployment jumped in the next six months to 15%?

The remaining functioning credit facilities that are lending would cease lending?

People who had bought life / health/ property insurance with AIG would lose their coverage and any asset value that they have pumped into life insurance policies?

Employee pensions invested at AIG would be wiped to pennies on the dollar?

116,000 AIG employees would be unemployed the next day. (not including the thousands of employees from the other companies that would go down)?

Listen, i don't like the bail out any more than you do, and of course all my points are speculative. But, we never should have been in this position. Any company that is "too big to fail" needs to be broken up or so heavily regulated to ensure that it will never need to be bailed out.

Everything that i read is that the number of institutions that would fail if AIG failed would put this country / world into a devastating tailspin.

I have no idea if the bail out is just delaying the inevitable, perhaps, in which case lets get it over with. But if this has the chance of being avoided... We sure as hell should try.

Craig

March 2, 2009 12:22 PM

AIG's losses are all tied to bank guarantees. If AIG fails so goes the many hundreds of banks that these guarantees support. In other respects AIG has been an extraordinary performer in the insurance industry that I have been associated with for 30 years. The bank guarantee product has been their glaring mistake but its place in the fabric of our financial markets must not be allowed to unravel. Obama knows this and is going to have to go against the PR boys on this one.

jamie33

March 2, 2009 12:22 PM

The reality of what diminished daily extraction of petroleum energy means for a growth based economy hasn't yet really sunken in. What has sunk in is how fragile the financial system is and how long it has attempted to fake real growth with Derivatives that in actuality have no hard assets backing them up.

Wondering

March 2, 2009 12:23 PM

AIG was doing something. However, it is "no longer" with us, and the US government, in effect, has taken over AIG: How many more firms does the US government plan to take over when AIG fully evaporates?

Larry

March 2, 2009 12:24 PM

Hey Ryan...
"Socialist" agenda? Who the hell are we bailing out? I see taxpayer money bailing big business. The proletariat are NOT coming out ahead in this!

Bob

March 2, 2009 12:25 PM

Pay now or pay later, why should our kids have to pay for our screw ups. Own up, take your losses now, and move forward. I agree, let capitalism run it's course.

mwf

March 2, 2009 12:26 PM

Just one question:

When companies such as Northwest and Delta announced last fall they were to merge, why isn't someone stepping up and saying:

"Sorry, but 'too big to fail' is no longer an option"?

Perhaps Washington Mutual should be broken up back into Seafirst, Home Savings, Great Western Bank, etc.

And Citicorp can give back Travelers and all the companies it swallowed.

And Wachovia should be divested of the multitudes of companies IT bought so we have smaller companies that aren't "too big to fail".

vs

March 2, 2009 12:26 PM

an annuity is a sum certain, date certain instrument. if the annuity amounts were considered as collateral for other obligations (on AIG's books), then I assume one would become a unsecured creditor ... probably now is time to get out and forget sales pitches of how "solid" AIG is. It is no longer a "cash cow" insurance company ... It is a dinosaur, which has a date with evolution :-)

AspenFreePress

March 2, 2009 12:27 PM

Pouring billions of bucks repeatedly into a financial institution that is not self-sustaining seems ludicrous. Sterling Greenwood/Aspen Free Press

BKM

March 2, 2009 12:27 PM

It's not about preserving AIG per se, but saving AIG's *customers* - the ones holding CDS where AIG is the counterparty. If those CDS evaporate, trillions in debt will become uninsured, exposing the financial system to frightening risk. If AIG falls, many dominos will follow. Nobody cares about AIG's equity holders -- they're wiped out. But if their clients are left in the wind, the whole *system* is exposed to collapse.

joe

March 2, 2009 12:28 PM

Don't waste my money! I don't give you my permission! Who is AIG to me? I can't even pay my bills, let alone someone else's.

Steve

March 2, 2009 12:29 PM

I agree with the posting of "Vs." It's time to acknowledge the obvious, AIG was so mismanaged that it is absolutely impossible that it can survive. It's present and future obligations are hopelessly mimatched against its assets. It's time for the US government to step in, remove all present managers, put the company into receivership, and liquidate the company. Many contracts have the "force majeure" clause that allows a company to escape from a situation that is absolutely hopeless. It's long since time to declare force majeure, and liquidate all the idiotic "guarantees" AIG so foolishly created.

vs

March 2, 2009 12:29 PM

an annuity is a sum certain, date certain instrument. if the annuity amounts were considered as collateral for other obligations (on AIG's books), then I assume one would become a unsecured creditor ... probably now is time to get out and forget sales pitches of how "solid" AIG is. It is no longer a "cash cow" insurance company ... It is a dinosaur, which has a date with evolution :-)

sam

March 2, 2009 12:30 PM

the thing that surprises me the most is that any one is surprised that it turned out this way!

Thomas Jefferson

March 2, 2009 12:30 PM

The reason AIG is getting so much help is because all of the politicians retirement (if you want to call it that)money is tied up with them. So as the average American loses they will make damn sure they are ok on both sides of the aisle. Every Generation needs a new revolution and the Obama administration is not "change" its the same old garbage...lawyers, actors and comics do not make for good government. Wake UP

Kim

March 2, 2009 12:30 PM

If only Washington applied the idealogy to the individual that they applied to corporations, everyone would be better off. AIG is too big to fail - yet, in the same breath, good luck to the tiny individual holding three jobs with a mortgage where they owe more than the house is worth. If Washington spent their time and money on these people - perhaps things would start to turn around. At which point the trillion dollars + would start to finally do some good and land where it belongs.

I'd like to recall Congress. Thinking what they have done with our monies makes my blood boil. These companies like AIG dont care about failing. They care about getting more govt money for their golden parachutes. At the end of the day, they will fail and the govt will have sponsored some of the largest vacation packages in the history of man.

Sleeping

March 2, 2009 12:31 PM

Vs,

What makes you think that there is support at the 5000 range? Lower my friend, lower.

USguy

March 2, 2009 12:34 PM

Does anyone know if China has a big stake in these bad mortgages. China is doing a lot of business with US and I think they would have investments in these multitrillion dollar bad mortgages. If the above is true, China ship is going to sink with the US.

Yacko

March 2, 2009 12:35 PM

"They made gambles, why do taxpayers need to pay off their gambling debts?"

The most recent prop up is to preserve assets so they have some sale value. Would you like everything priced at zero? Would you like another Lehmans debacle? The Dow is hovering at 7000 and a 1997 economy. Why don't we allow everything to deteriorate, send the Dow to the low 3 digits and we all can enjoy a late 1800/early 1900s economy. Get ready to tie your horse to your employers hitching post, assuming you still have a job and/or can afford a horse. This is about staving off crazy ass self fulfilling panic. The only entity that can borrow is government. Traders are happy to hand their money to Uncle Sam at approx 0% interest. When you have irrationality then no asset can be priced and the best bet the government can take is to put a floor under the panic, which has not yet happened. See: http://money.cnn.com/2008/12/15/news/economy/monday.meltdown.fortune/index.htm

Aaron

March 2, 2009 12:37 PM

"We need to let the market work. Let us take our lumps now for a better tomorrow."

Would you still feel that way if the result of AIG failing was: (...many bad things...)

Yes, if:

Laws would be written to curtail and stop default credit swaps.

Investors would actually research companies, boards, and executives before dumping their money in them.

People would realize that index funds reward incompetence and name recognition above performance and responsibility.

Voters would question why corporations are allowed to twist legislative agendas with millions in lobbying.

The U.S. could rebuild its economy around a sustainable manufacturing base.

We could correct our crippling trade imbalances.

Vladimir

March 2, 2009 12:39 PM

Seeing the US government buying all bankrupt companies (like it was in socialist countries), it is running into a serious trouble!

Jay Baren

March 2, 2009 12:39 PM

If the market cap for AIG is now

Scott in TX

March 2, 2009 12:39 PM

Can we at LEAST state the obvious that part ownership of these companies should require the REMOVAL of some/all of the C-level exec's and Board of Directors who still sit at the tops of these companies?

Robert

March 2, 2009 12:40 PM

Let the multinational banks fail and have the strong regional banks step in. The regionals have been responsible and avoided getting caught up in the "sophisticated" CDO's, insurances, and other abstract financial vehicles.

I agree with the other commentators on this post who say we should take the lumps. I also think we should let the fatally flawed institutions die quickly and humanely, so we can let the market reward the deserving institutions; the ones played it straight.


Bobby

March 2, 2009 12:42 PM

Heather, you're so right. My wife worked for AIG for a couple years and we could never figure out where the money was coming from. AFAIK AIG insurance, life et al, is just a big pyramid scheme and it's going to be a sad, sad day when we find out that all the billions that we pumped into this crooked operation just went in to the pockets of a few of the crooks. I say let em fall and screw em all.

Jay

March 2, 2009 12:43 PM

Why is because they insure congress's pensions that's why. You do the math.

Kathleen

March 2, 2009 12:46 PM

I think many of the negative comments against pumping anymore money into AIG is that the average 45,000 pay per year citizen has lost total confidence in its government...and then today with our huge layoffs and financial issues it is announced that 900 MILLION dollars will go to help the Gaza strip.
HOW CAN WE CONTINUE SAVING THIS COMPANY, THAT COMPANY, SENDING MONEY OVERSEAS????

BCR

March 2, 2009 12:46 PM

This is the price paid for allowing big companies grow to the size of AIG. Consolidation, buyouts, and a lack of regulation spells mushroom cloud when they unravel. Writing checks to these companies is not even slowing the bleeding. It's time for a citizens march on DC.

Matt

March 2, 2009 12:46 PM

I predicted 5,000 to 5,000 Dow back in October last year. Go ahead investors, ride what's left of this bubble. Obama does not know how to flush debt and start fresh. His I.Q. is only 125.

Paul Namie

March 2, 2009 12:47 PM

Let them sink... we should have let fail a long time ago, and it's not too late to do that now! AIG is a worthless company that will only continue to devour USD's.

Rachel

March 2, 2009 12:47 PM

MWF raises a good point. Clearly, these goliath mega-corporations that dominate a field and are 'too big to be allowed to fail' are not working. Sure, they're too big to be allowed to fail -- everyone will suffer if they do -- but that's not a /good/ thing. No one company should dominate in that way.

Part of the correction here should be to break them into smaller companies again (as is apparently being done in part with AIG), so that if one fails it doesn't set up a cascade effect that can take the entire economy down.

vs

March 2, 2009 12:47 PM

counterparty agreements? So, AIG goes belly up and their shareholders loose both equity and investment capital. So, a bank is expecting to collect if the guarantor no longer exists? Ah, yes, the instrument is still valid. Mr. Bank, get in line -- as a unsecured creditor -- for the CDS money you expected to get, no longer exists. So, how is the bank's portfolio affected? Did the bank really loose money? Mr. Bank did not lend money out for the purchase of the CDS. Mr. Bank paid a "premium" for the CDS. Mr. Bank you were making a good spread, but gambled and lost. Aw, too bad, Mr Bank, you will have to book a loss on the loan you made, and the directors will be pissed they can't get something for (little) of nothing. Amazing!!!

Roger

March 2, 2009 12:48 PM

Do think the government would bail me out if I lost a load of money gambling it away at Las Vegas? This bailout of AIG for making derivative bets is so proposertous I have no choice but to think there is a evil genius somewhere pulling the strings ...

Gus

March 2, 2009 12:48 PM

Sleeping-

I see support levels at 6700, 6200 and then nothing again until 4700.

I don't think that 6700 is going to hold, but am hoping that 6200 has a chance.

I went 100% to cash in November of 2006 and have been sitting on crappy money market rates of return since. I might test the waters at 6200 but wont put the bulk of my money back to work in the markets until i see some type of base.

UrMawm

March 2, 2009 12:51 PM

@CitizenY - Bingo. Republicrats. This is not a football game. Stop the group-think blame game.

Fractional Reserve Banking system means ALL BANKS ARE INSOLVENT. Failures are coming despite the government.

The Federal Reserve Board and it's price fixing of money are the source.

Chris

March 2, 2009 12:52 PM

I work for an AIG competitor...we are much smaller and very conservative. We have quoted P&C Insurance for some larger commercial customers who chose not to come to us from AIG because the "governement" is there to back them for now. Our "government" is insulting the responsible and well run companies in the country by treating AIG as too big to fail. We can and are willing to take on much, if not all of the AIG customers in the Commercial P&C world. Same goes for the banks...contrary to BHO's opinion "Only government can fix the problem", the free market is ready to go to work to fix the problem.

Kathleen

March 2, 2009 12:53 PM

Robert...you are absolutely right..let these crooked institutions die quickly.
I do all my banking at a community bank who is going strong, does not sell ANY of their loans, and has a superior annual report....Could this possibly be due to sound management, no crooked lending, etc?...The answer is of course obvious. I would never put my money in any of the giants of the industry.

Buster Bunns

March 2, 2009 12:56 PM

I am really getting angry at our feckless government. Yet again our government is deciding to spend another $30 billion to bail out AIG. Let me say up front, it won’t work.

As Henry Blodget so aptly put it today:

"We're throwing another $30 billion into the black hole.

AIG is abandoning its plan to pay us back and is instead giving us equity stakes in two businesses it has been unable to sell.

No details yet on the imputed value placed on those unsalable businesses, but safe to assume it's astronomical. "

Taxpayers, equity owners, and the credit standing of the US government are being ruined by financial shysters such as those at AIG who are manipulating to their own advantage the government’s commitment to bailouts. It is becoming quite apparent that multi-billion dollar “bailouts” and equity positions are the result of the government’s inability to respond intelligently.

Get the government out of this tar pit dammit! Let them go to Chapter 11.

Gus

March 2, 2009 12:58 PM

Aaron

When i read your post, i started thinking about drug addicts entering a 12 step program. They wont start doing what is best until they hit rock bottom.

Honestly you might be right, but the problem is those that are against the changes that you recommend are using this crisis to increase their commitment to fighting against that.

They are addicts who are totally in denial.

You give the American people too much credit. After all- a very substantial portion of this country vote for their political representatives not for their positions on the economy, but on whether two men should be allowed to get married or if prayers should be suported or banned from our schools.

So, "Yes... if"?

What do you think the likelihood of the "if" is?

escaswv cupko

March 2, 2009 12:58 PM

@ VS & Steve --

thank you for bringing facts into the discussion.

is there any way to roll back the third-party CDS's alone? i understand my lender taking out a policy on whether i will repay my loan. that makes plenty of sense.

what i can't understand is how unrelated third parties can take out the same insurance.

when the "street" demanded blood and leyman brothers filed for bankruptcy, wasn't it all the third-party CDS's that crippled AIG?

the rest of you, sit and listen. this is a crisis, not a blanking game.

Chris

March 2, 2009 12:59 PM

to Gus: You probably wrote what will happen anyway. There are too many unknowns - results might be better propping up those affected by AIG instead of AIG. AIG is a middleman like Enron - they made money but produced nothing. The only thing bailouts do is buy time to allow markets to work. I'd rather bail out GM than AIG - at least the money will end up in circulation (by paying workers) instead of in a safe somewhere propping up a balance sheet (or paying off losses). The government could probably airdrop $180B over a big city and get better results than trying to stop AIG from failing. BIG problem is no one really knows the extent of the losses. AIG took a $62B hit, but that probably just covered part of last quarter's loss. In any case, the government should halt trading of CDS "investments" otherwise the problem continues.

Dave

March 2, 2009 01:02 PM

Not sure why we keep throwing good money after bad. This only makes it harder for companies who aren't crippled to compete w/ AIG and their "free" govt. money.

Instead of bailouts, wouldn't it make more sense to give money to the survivors who were doing things right and ask for their help.

Bailouts help no one except the people who got us into this mess.

vs

March 2, 2009 01:04 PM

banks don't (not cant) want to lend money in times of capital uncertainty. Ask yourself, if you loan a friend money at 5%, just to find out that if you had waited a couple of months you could get 6%, why would you do that? Alternately, if you loaned out the money long term at 5% only to find out later you have to borrow money at 8%, you are upsidedown. Borrow at 8% but get paid at 5%. Disintermediation already happened to the S&L's in the 70's. will we never learn? but, oh wait, the discount rate is .05%, so I guess I can lend at 5% and pick up 4% on the spread. But no, the gov't is running out of money ... uh oh ...

JustA401K

March 2, 2009 01:06 PM

We are not in a capitalist society if we are beholden to only one company for all financial services. I would rather fund two startups to do what AIG does than continue to give AIG money. If there is no competition, AIG can say whatever, much like enron, and no one can dispute it. internal improvement is non-existent, as they have a monopoly, if you suggest alternative strategies, you are suggesting your own dismissal. May we please have competition between companies, rather than bailing out a incompetent monopoly.

Waldo

March 2, 2009 01:06 PM

I don't think some of you people crying "socialist" know what socialism is.

Did you hear Glenn Beck say it in a menacing tone or something?

Larry Linn

March 2, 2009 01:07 PM

Where will the Republican-Bush depression bottom out? Thank God that the last election "cleaned house", and kicked most of the greedy Robber Barons out. Our loss is that there is nothing left in the vault.

Gus

March 2, 2009 01:07 PM

"Part of the correction here should be to break them into smaller companies.. "

I 100% agree. If we allow companies to become "too-big-to-fail" (TBTF) then we are no longer Capitalist. A TBTF company can take risks that smaller companies can't.

They can invest in crappy CDOs and use excessive leverage all the time knowing that if they are wrong. The governement will have to bail them out.

Good luck starting an insurance company up to compete with AIG.. They will squash you. Because they can take risks you cannot.

Electricity companies in the US are TBTF. As such they are regulated to ensure that they don't.

ATT used to be TBTF and they broke it up.


Sleeping

March 2, 2009 01:09 PM

Gus,

I pulled everything when DOW was at 12,400. Sitting in GNMA's mostly.

I am not an expert with finances. However, your first two numbers make a lot of sense to me. I would change the third to a ?.

Kathleen

March 2, 2009 01:13 PM

Sleeping...You may not be a financial expert, but I wish you would have been my financial adviser.

otherhand

March 2, 2009 01:15 PM

This bailout is just to buy time for significant restructuring and sell off. It is unfortunate that the financial reality is not in line with our overly simplistic need for justice. I want companies that make bad decisions to fail as well but an orderly failure is better than outright collapse. It’s like cutting a dead tree down systematically instead of just letting it fall over...

vs

March 2, 2009 01:21 PM

just how did a CDS become a securitized instrument? should ask some analysts. its probably analysts, like Moodys, that are cause for much of this BS market anyway. Risk adverse insurance underwriting took a back seat. I wonder though, how the CDS were graded ... AAA, AA, plus minus, in order to "sell" them to banks so they could become a line item to their statements. Perhaps they are held as owned securities. There are banking regulations covering the purchase of securities, but these are these "securities", or are they loan "swaps". What was swapped? My debt for a guarantee? Whats the real collateral? Paper? So, phoney deals are made all the time. Whats so different?

Ravan

March 2, 2009 01:21 PM

Let AIG fail. They need to go bankrupt, get restructured and pared down to a reasonable size.

Half of the problem that we are having is that deregulation allowed companies to get too big, stifled competition and new entries into the market, encouraged market oligopolies, and rewarded foolish decisions.

My 401(k)s are in shambles, and have lost money for the last two years. They are worthless now. I'd have done better sticking the cash in a mattress. Let these "too big to fail" companies pay for their greed.

Put bailout money into the pockets of people who are really hurt by this - small businesses, the unemployed, people whose principle residences are now devalued. The pigopolies like AIG need to be shoved off a cliff.

Krassimir

March 2, 2009 01:22 PM

I used to live in a socialist country - and I still remember the corruption on the upper layers of the society - helping enriching only rich, friends, relatives, etc. Let the troubled banks go away and let better, younger, uncorrupted, highly ethical managers step in. Oh and BTW, when you put these managers do not forget to remind often that they are highly paid not to expose the jobs/lifes of the thousands workers below them at risk.

Remember: government is not mantra! Besides the same corrupted and lousy managers from all failed banks most probably will find their way tomorrow at government positions. Really, Obama, no hard feelings, but be aware of socialism!

Diane

March 2, 2009 01:26 PM

One question on everyone's mind: If AIG can suck up almost $200 billion of taxpayer money and appear to be no farther ahead, how much will we ultimately end up putting into the banks?

C. Insight

March 2, 2009 01:28 PM

It's crystal clear that big business runs our government. And they do it with with smoke and mirrors. Top executives at AIG continue making $millions. While one executive hockey dad makes $1 million per year for a job he is unfit to hold without being propped up by his staff that despises him. There are far too many dead layers of bad management and this is part of the problem. But why change what doesn't work? Club AIG continues to broker new backroom weekend deals with the Treasury Dept., while American taxpayers struggle to pay the mortgage on a house whose value erodes daily. Between the wars and the so called "bailout" the cost to our society and economy will be felt for generations. Our citizens deserve better than this: Where is the outrage people?

Kathleen

March 2, 2009 01:29 PM

simple but true adage.

Every choice made has a consequence, with the consequences sometimes good and sometimes bad.

Bottom line bad choices should never rewarded

Yacko

March 2, 2009 01:35 PM

For an illustration of how panic destroys asset value see:
http://www.reuters.com/article/topNews/idUSTRE4BS2ZQ20081229

You can also Google the phrase "$75 billion of Lehman Brothers" for many many more stories written about the same time with differing analysis on the report.

Larry

March 2, 2009 01:37 PM

Hell, I'm outraged, but nothing will change until we literally take to the streets to protest. General Strike? March on Congress? A little interaction with the National Guard in our state capitals?

FClub

March 2, 2009 02:32 PM

Let Project Mayhem begins.

BCR

March 2, 2009 02:37 PM

Where's the "vote"? When were the congressional meetings? Congress made the automobile bigwigs drive to DC for a good ole grilling in front of congress TWICE before they would give them a dime. This whole fiasco came down SUNDAY night, and on Monday morning, the feds are writing a $30 billion check... WHERE AND WHEN WAS THIS APPROVED?

Kathleen

March 2, 2009 03:05 PM

"deriving their just powers from the CONSENT of the governed"

Part of the preamble of The Declaration of Independence. We all remember why this document was drawn up...but it does appear we have forgotten these words.

totally fed up

March 2, 2009 03:21 PM

AIG is failing because of special deals made which were all basically time bombs with time running out.
all it took was one bomb to bring AIG down and now the goverment is trying to preserve the wealth of politians.
this is not good for america it is for those wealthy individual who gambled and now goverment is trying to tell us again that it is good for america to pick up their gambling tab.
talk about a welfare program I have some swamp land in Mexico you Americans might be interesed in.

Hugo van Randwyck

March 2, 2009 03:21 PM

The government could reward good management - use the $30 billion for a tax holiday, maybe 3 years for well run insurance businesses. This will help these businesses expand and hire people.
The government is incapable of doing a simple thing like split AIG into smaller manageable pieces to be sold off - where is their sales forecast to show it is a viable business? A business is something that has more money going in than going out!
What will accelerate the economic recovery is when house prices fall to 2.5 to 3 times earnings, AIG going bankrupt will help speed the fall -then buyers will step in and start spending, and hiring will accelerate.

The government could spend the money more wisely, expanding the 'solaramerciacities' programme to hundreds of cities, up from the current 25. Also increase the tax rebate on installing renewables, from 30% to 60%.

C. Insight

March 2, 2009 03:33 PM

Larry, FClub, BCR, We, the American public, are being played. There isn't any need for a vote because our elected officials in DC can count on the American public's laziness. It seems we are more outraged when our Blackberry and iPhones stop working. Our collective consciousness has been driven deep into the dirt by our government and it's paid media talking heads. During the 1960s people had passion in their beliefs and convictions and weren't afraid to take to the streets by the thousands and protest. Have we become so complacent that we're willing to take our governments word, again, that they know what they're doing? We need to stop talking and start acting or it will never change.

Mark Herpel

March 2, 2009 03:37 PM

Gold....buy it now while you can.
Bring back honest money.

Mark

Sam

March 2, 2009 04:22 PM

"We, the American public, are being played"

We have been played for the last 20 years. We have been told and believed that "governement was the problem". So we put people in charge who wanted to destroy government.

They took funding from the lobiest and stripped the funding of reglatory agencies, passed legislation that allowed these companies to buy risky investments like CDOs and turned a blind eye to anti trust and allowed these companies to buy and merge so they could get so big they could do anything they wanted.

And they did... They paid obscene salaries to their C level executives and took incredible, irresponsible risks with shareholder value but more importantly the world economy.

This isn't a demonstration of the effects of "big government" this is a demonstration of when Capitalism overshadows Democracy.

We live in a democracy with a captialist economic structure. Governements roll in this situation is to protect us from these massive corporations who will do whatever they can to make a quick buck.

Government is the problem... MY A&%!!!

Putting people into government, who believe that government is bad... That is the problem.

Imagine going to work at McDonalds with the fundamental belief that junk food is bad and people shouln't eat it. What do you think your odds of being employeed would be after 1 year?

Yet we continue allow people like Chris Cox, who believes that we do not need government regulation, to run the financial services regulation entity (SEC).

No wonder he didn't catch- AIG, MER, LEH, Madoff or Stanford.

Neil Raden

March 2, 2009 04:44 PM

I worked as a property and casualty actuary at AIG a long time ago. At the time, AIG was a $3 billion company growing steadily 20% per year. We did this by taking a gross lines underwriting stance - instead of spreading big risks around, we took the whole thing and used the reinsurance markets to fuel our growth. Greenberg was a genius. He turned the sleepy, clubby commercial P&C business into a creative, money-making machine.

It wasn't always fun. We worked hard and weren't rewarded that well until, having survived, we reached a certain level.

I believe that AIG's domestic and foreign commercial P&C businesses were sound, but this ill-advised foray into the credit markets was its undoing. Greenberg now tries to stay above the fray by saying he left 3 years ago, but he put the whole thing in motion. My friend Christian Milton is facing jail time and deportation for the GeneralRe reinsurance transaction to bolster AIG's balance sheet, but the real criminal is Hank.

-Neil Raden

patricia

March 2, 2009 06:18 PM

Playing golf at Morefar this Spring would be a very appropriate act of civil disobedience. I just saying.

http://thegolfgirl.blogspot.com/2009/03/golf-girl-to-play-mysterious-morefar.html

Paul G

March 2, 2009 06:38 PM

I'm not sure everybody fully understands what it means to let these companies fail. Yes, the taxpayer will, in one form or another, bear the brunt of these extremely expensive bailouts. But has anyone considered what would happen if your paycheck were to bounce? When your company can suddenly no longer get access to the capital needed to run their day-to-day operations? Or when you go to see a mutual fund and you get stock or some other form of non-liquid collateral? As painful as this process is, it's an ecosystem, which means that when you allow one part to fail, the rest of is system is subject to increasing instability, which affects each and every one of us (unless you're not invested in the stock market and have all of your money stuffed in your mattress). Gripe all you want, but be careful what you wish for.

Mark Moran

March 2, 2009 06:38 PM

I agree with Gus; as much as I hate giving AIG another penny, if it went down, it would take the world financial system with it. The US is supporting AIG because it is supporting the dollar. An AIG failure would be the end of the world looking at the US as a safe haven. The Europeans may get over it some day, the Asians would not. It's like Buffett said in his stockholder letter; if you want to be protected by the Feds, you need to screw up in a big way, small screw ups are not worthy. Here's an article from June 2008 about laying the blame at AIG, and saying "get your scorecard ready." Well I hope you still have it out, 9 months later.

http://tinyurl.com/cy6ng8

Chui Tey

March 2, 2009 07:37 PM

AIG is being bailed out because US cannot afford for AIG to fail.

In doing so, US is increasing it's debt to such extent that the world cannot afford for the US to default.

There is no decoupling. For decoupling is easier said than done.

Larry

March 2, 2009 08:34 PM

Hate to be a pessimist, but I think the "world financial system" as we know it is going down no matter what blue smoke and mirrors the world's governments attempt. We are simply delaying the inevitable and spending 100s of billions of our grandchildren's money on the way. Maybe this is what everyone meant by "a new world order." Our Democracy is in serious trouble, thanks to an elite few. Hold on tight! It's gonna be bumpy.

Thomas Huynh

March 2, 2009 09:39 PM

Quite a passionate debate going on here. I like it! One thing's for sure: no one seems to be completely happy with the latest solution much less what has happened since the initial aid given to AIG. Food for thought: if there are some here who think AIG is too big to fail, why should this gigantic snowball be stopped by taxpayers, most of whom have little to no interest in AIG? This was Hugh Hendry's point. AIG is too big and it has failed. When you think about all the large companies that have expired before AIG, one should question whether it is indeed too big/important to fail. Thomas

Tom

March 2, 2009 10:46 PM

Larry, there are far more pessimistic views. Read "World of Slums" to get an image of where we are, and where all of this could be headed for uncounted millions. Our democracy may already be gone as it seems so many here are either narcotized by too many soft years, or justifiably too busy just surviving to expend the required energy to organize against the decline. It is going to take a very swift kick in the behind to get most people out of their dens and into the streets.

Kathleen

March 3, 2009 12:09 AM

Just read that the Nikkei is approaching 26 year low in response to the AIG losses...when will it end?

Hockeyboy

March 3, 2009 03:30 PM

You should all get a copy of the "Bankers Manifesto of 1892" and educate yourselves, as to the "schemes" that have been going on in this country for some 80 plus years. No conversation on this thread of the Federal Reserve or US Treasury involvement in these matters. If you read the manifesto, you will understand the thinking behind the "grandest of schemes". Regardless of ones political leanings (republican or democrat) politicians are both actually "green". At least, I should say they all like "green" or "spending green". It apperas most of them accept graft in one form or another and do not like to do as the serfs do, which is pay income taxes. The only way to really rid yourself of rats, is to burn down the structure and start over with better protections against rat intrusion. If you take the time to read the words of our esteemed Founding Fathers you will find, they knew more than we did. Why do you think they left the English empire to begin with? Why are american tax payers being held hostage for the sins of AIG management, who are backing bonds for all of the major European banks? And as always, remember, "Give blood, play hockey"!

larry r

March 15, 2009 07:47 PM

screw them and do what a lot of us small fries have been doing for years. work for cash and don't report it.

Earthdreams

March 18, 2009 01:57 AM

Fidel was right! Wall St. is just one big casino, and many of the executives at these giant financial institutions seem to fit the description of an addicted gambler, except, the casino gambler usually gambles away his own money, not the money of unsuspecting strangers and large foundations. Then, real taxpayers, who mostly have no investments in places like AIG, are forced to pay up to keep it solvent, or have the economy collapse, so we are told. There is a term for this situation; I think it’s called, um, extortion. The actions of these NEOCONvicts, and their ilk, who know not one day of the struggle that most Americans face, have revealed the real face of feral capitalism. Just think, first-rate world economies and the emerging economies of hopeful nations are held as hostages by these AIG-criminals. Come to think of it, I am in favor of giving bonuses -- to the prison guards who, for 20+ years, will watch over all of these AIG, aka ENRON, felons. Let’s tear up their floor plans. Let’s rip to shreds their schemes and scatter them to the wind. Let’s start again with a new plan that favors the hopes and dreams that our Forefathers had for us. Earthdreams

tt

March 18, 2009 08:53 PM

what will happen to the employees in the loan division will they close the offices

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How can you manage smarter? BusinessWeek writers Nanette Byrnes, Patricia O’Connell, Emily Thornton, Matthew Boyle, Michelle Conlin and Diane Brady synthesize insights from the brightest business thinkers, critique the latest management trends, and comment on leaders in the news.

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