US May Spend Another $30B to Prop Up AIG

Discussion in 'Politics and Religion' started by arthurracoon, Mar 1, 2009.

  1. arthurracoon

    arthurracoon The Cardinal Smiles

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    http://www.boston.com/business/articles/2009/03/02/us_may_spend_another_30b_to_prop_up_aig/

    The federal government agreed last night to loosen the terms of its huge loan to American International Group and provide another $30 billion as the insurer prepares to report a $62 billion loss today, the biggest quarterly loss in history, people involved in the discussions said last night.


    The intervention marks the fourth time the federal government has had to step in to help AIG avert bankruptcy. The government already owns nearly 80 percent of the insurer's holding company; earlier interventions included a $60 billion loan, a $40 billion purchase of preferred shares, and $50 billion to soak up the company's toxic assets.

    The government will commit another $30 billion in cash to AIG from the Troubled Assets Relief Fund, should the company need it, said people involved in the talks. AIG is not expected to draw down the money immediately.

    Federal officials, who worked feverishly over the weekend to complete the restructuring, felt they had no choice but to prop up AIG because its activities are so intricately woven through the world's banking system.

    But the deal presents more financial risks to taxpayers at a time when the public and Congress have been sharply questioning the wisdom of risking federal money to bail out private enterprises.

    AIG's businesses continue to hemorrhage and competitors have been poaching its executives and customers and submitting lowball bids for AIG's profitable operating units

    Credit-rating agencies had been preparing to sharply downgrade AIG because of the record quarterly loss. That would have forced AIG to default on its debt, threatening to set off shock waves throughout the financial system.

    In the banking sphere, AIG has used derivatives contracts to guarantee complex debt securities on the books of many other financial institutions. If AIG were downgraded, some of those financial institutions had the right to demand collateral from AIG. If AIG had failed to pay, those institutions would bear losses and their capital would be eroded.

    AIG reported in November that counterparties to some $48 billion of trades also had the option of terminating their contracts if it was downgraded. That raised the possibility of more large cash outflows - a possible run on the bank - but AIG said it was unable to project how large.

    Credit-rating agencies were briefed on the pending deal between AIG and the government, the people involved in the talks said, and they have committed not to downgrade the company's debt as a result.

    Another part of the deal would let AIG exchange some preferred nonvoting shares, which paid a 10 percent dividend, for new preferred shares that do not require a dividend, to save AIG $4 billion annually.

    To further ease AIG's debt burden, some of its other debt to the government would be converted into equity in two subsidiaries in Asia. Both units are performing well. This would give the government direct ownership in those subsidiaries and provide sellable assets to taxpayers, even if the AIG holding company were to default on loans.

    Also, the government would agree to lower the interest rate on all remaining AIG debt to match the London Interbank Offered Rate. That would replace the previous rate, which was 3 points higher than LIBOR. That move would save AIG another $1 billion in interest payments.
     
  2. arthurracoon

    arthurracoon The Cardinal Smiles

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    :bang:
     
  3. conraddobler

    conraddobler I want my 2$

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    Sigh.
     
  4. Ryanwb

    Ryanwb Banned

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    I have heard that AIG is an important company to the infrastructure of the United States. They are the primary insurance company to the incoming cargo ships that import goods into the country. My understanding is there are regulations on either the internation side or the domestic side (I don't recall which) that says container ships cannot transport goods into US waters without insurance. Hence the importance of AIG to the economy.
     
  5. conraddobler

    conraddobler I want my 2$

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    Well if I was pouring other peoples money into a dark pit I'd come up with stuff like this for an excuse too.

    Truth is if they go out of business, tomorrow someone will start up doing that kind of insurance or you could simply sell the profitable units off.

    The reason they are propped up is because they are a giant ticking derivitive bomb, ie if they go belly up, a good deal of other names we all would recognize are techinically or literally insolvent instantly, ie AIG goes the insurance backing some of these derivitives goes poof and entities all over the globe start going poof because of it.

    I'll give you an example, XYZ has written option contracts that state if zzz goes belly up they owe 50 billion dollars, well zzz is looking mighty peckish but XYZ also laid off that bet to AIG as cover, but if AIG goes under XYZ is back on a extremely hot griddle..... and that is exactly what's going on.

    The whole thing is a blatant ponzi scheme cover up at our expense, the truth is getting tortured to death nowdays.
     
  6. Avondale Red Rage

    Avondale Red Rage Just wondering...

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    Question.

    If they lost 60 billion last quarter, where was the 60 billion gained?
     
  7. LVG

    LVG Who?! Contributor

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    ARR - My understanding is that part of the problem comes in the form of revised accounting rules that state that if you can't find a buyer for an asset, you must evaluate that asset at zero.

    For example, if I owned 50 houses, and I couldn't find a buyer for any of them, I would have to list those houses asset value at zero dollars. Now we all know that's not the true value, however, because no one is willing to buy, I have to record that at a loss with the overall property value at zero.

    We need to change this rule (it was recently enacted - several years ago IIRC) so that the assets can be properly listed at a reduced value.
     
  8. Avondale Red Rage

    Avondale Red Rage Just wondering...

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    So back to my original question rephrased; what do they need the bailout for? Are they required to insure assets that have a net value of zero?

    Is this bailout required for the credit swap derivitive swindle that they ran from there London office?

    Are we bailing out there foriegn offices?(China, Pakistan, Hong Kong,.....)

    Why is not one media source asking these questions, and why arent we madder than hell!?
     
  9. LVG

    LVG Who?! Contributor

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    I think they need the bailout because they are in danger of becoming insolvent, which is different than going bankrupt.

    Example - if I have to pay bills totaling $1,000 now, and get my paycheck in a week for $2,000, I am making money, but am insolvent until I receive that paycheck.

    The bailout is probably going to pay for all of the CDS, CDOs, and their overseas offices.

    Why not just let them collapse? Again, because of the CDOs and CDSs, to let them collapse would probably lead to the collapse of the global banking industry.

    That has been a line that this Administration is not willing to cross.
     
  10. arthurracoon

    arthurracoon The Cardinal Smiles

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    because the global banking industry has been SOOO good to us.

    :sarcasm:
     
  11. conraddobler

    conraddobler I want my 2$

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    Both the old administration and the new administration get F's for failure on addressing this issue.

    No sane person is advocating just failing things and destroying the financial universe but what is needed is the truth.

    They need to stop beating around the bush here and get to it.

    We need some answers, a heap of truth and a realistic well thought out plan no matter how dire it is because this money pump into the abyss with no plan behind it other than we're bailing so we don't die approach is going to scorch the financial world to the ground over time, and probably not over a whole lot of time at that.

    To me it just looks like they're putting their fingers into holes as they pop up, well whatever they're going to do it needs to be comprehensive and it needs to seal off the damage once and for all at whatever level they feel they can defend.

    This slapdash stuff makes it look like a bunch of rookies is on the field, get some heavy hitters a ton of them, sit them down, crunch the damn numbers then tell the world what you figured out, present the bill and fix it.

    It's not that hard to do the plan, the hard part is on all of us in paying the bill but every minute they dick around they're making it worse.

    BTW

    As an editorial aside, the reason they haven't done this IMO is that they're buying time for some connected folks to extricate themselves on the cheap before we all are finally made aware of the truth to our horror. In other words this present plan is optimized for the crooks not the people of the United States or the world, and as such it's very much more painfull and expensive than it would have been had they just been honest from the get go.

    Whatever the final bill is, it's going to have a huge premium attached to it, and that line item would read if they're honest, fee to bail out people that count.

    That IMO is a human tragedy and a national disgrace that will sit on both Bush's and Obama's legacy if they're honest.
     
    Last edited: Mar 2, 2009
  12. LVG

    LVG Who?! Contributor

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    I was listening in to NPR's ATC, and they had a pretty good explanation as to what was happening.

    In brief, due to the accounting rule (in part) I described above and massive losses, AIG was about to under go a serious credit devaluation. This would have required them to put up billions more in capital to secure loans that AIG didn't have.

    The Fed Gov't stepped in to infuse cash for two reasons: 1) To allow AIG to continue operations without becoming insolvent; 2) To show the credit market that the Fed Gov't stands behind AIG to prevent a credit devaluation.
     
  13. Avondale Red Rage

    Avondale Red Rage Just wondering...

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    http://www.bloomberg.com/apps/news?pid=20601087&sid=aHx9vZa0IJAo&refer=home

    Bernanke Says Insurer AIG Operated Like a Hedge Fund (Update3)
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    By Craig Torres and Hugh Son
    [​IMG]

    March 3 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke said American International Group Inc. operated like a hedge fund and having to rescue the insurer made him “more angry” than any other episode during the financial crisis.
    “If there is a single episode in this entire 18 months that has made me more angry, I can’t think of one other than AIG,” Bernanke told lawmakers today. “AIG exploited a huge gap in the regulatory system, there was no oversight of the financial- products division, this was a hedge fund basically that was attached to a large and stable insurance company.”
    Bernanke’s comments foreshadow tougher oversight of systemically important financial firms, and come as President Barack Obama seeks legislative proposals within weeks for a regulatory overhaul. The U.S. government has had to deepen its commitment to prevent AIG’s collapse three times since September as the company accumulated the worst losses of any U.S. company.
    The company “made huge numbers of irresponsible bets, took huge losses, there was no regulatory oversight because there was a gap in the system,” Bernanke said. At the same time, officials “had no choice but to try and stabilize the system” by aiding the firm.
    AIG is getting as much as $30 billion in new government capital and relaxed terms on its bailout announced yesterday.
    In another sign of tighter regulation to come, Bernanke said supervisors should have authority to bar new financial products that may be destabilizing to markets.
    Bernanke made the AIG comments in response to a question from Senator Ron Wyden, an Oregon Democrat, at a Senate Budget Committee hearing today in Washington.
    ‘Adult Supervision’
    “AIG is a huge, complex, global insurance company attached to a very complicated investment bank, hedge fund that was allowed to build up without any adult supervision,” U.S. Treasury Secretary Timothy Geithner said today during testimony to the House Ways and Means Committee. Because of “the risks AIG poses to the economy,” he said, “the most effective thing to do is to make sure the firm can be restructured over time.”
    In his testimony, the Fed chief said that policy makers may need to expand aid to the banking system beyond the $700 billion already approved, and take other aggressive measures even at the cost of soaring fiscal deficits.
    “Without a reasonable degree of financial stability, a sustainable recovery will not occur,” Bernanke said. “Although progress has been made on the financial front since last fall, more needs to be done.”
    The Obama administration last week unveiled a budget blueprint that included standby authority for as much as $750 billion in new aid to the financial industry.
    Bank Tests
    Whether those funds will be needed “depends on the results of the current supervisory assessment of banks” and the evolution of the economy, Bernanke said today.
    He also said that while Obama’s $787 billion fiscal stimulus should boost the economy over the next two years and alleviate the slide in payrolls, the size of the impact is “subject to considerable uncertainty.” Consumers may decide to pay down debt or save their cash rather than spend it, he noted.
    U.S. policy makers face headwinds from equity markets, with the Standard and Poor’s 500 Index falling this year by 22.5 percent and the S&P Financials Index tumbling 44.2 percent.
    The government is still trying to stabilize large financial institutions such as Citigroup Inc. and AIG. Shares of Citigroup traded at $1.25 at 12:19 p.m., and AIG was at $0.45.
    New Credit
    AIG’s fourth-quarter loss widened to $61.7 billion, the New York-based insurer said yesterday. The results brought its annual loss to almost $100 billion, prompting the U.S. to offer a package of equity, new credit and lower interest rates on existing loans designed to keep it in business and prevent a new shock to the world’s financial system.
    The first rescue of the insurer came in September the day after officials couldn’t find a buyer for Lehman Brothers Holdings Inc., leaving the investment bank to file for bankruptcy. AIG also marked a turning point in the relationship between the U.S. Treasury and the Fed, with the central bank pushing then Treasury Secretary Henry Paulson to seek cash from Congress for additional bailouts.
    “Whether we like it or not, America’s federal policy is now driven by the need to avoid another Lehman,” said David Kotok, chairman and chief investment officer of Cumberland Advisors Inc., in Vineland, New Jersey.
    Bailout Package
    The insurer’s first bailout package grew to $150 billion last year. After failing to sell enough subsidiaries to repay the government, the company had to turn to the government again. The company may need more support if financial markets don’t improve, the Treasury and Federal Reserve said in a joint statement yesterday.
    Bernanke said the revised bailout gives taxpayers “the best chance” of eventually recovering “most or all of the investments” the public has.
    Critics including former AIG Chief Executive Officer Maurice “Hank” Greenberg said the strategy of breaking apart the insurer and selling units wouldn’t reap enough to repay AIG loans.
    Banks relied on AIG’s financial products unit to back about $298 billion of assets through derivative contracts at year-end, making the firm a “systemically significant failing institution” that has to be propped up, the Treasury said.
    “We’re doing our absolute best in partnership with the Fed and Treasury to unwind the very issues that Chairman Bernanke is talking about in a way that preserves systemic stability and pays back taxpayers,” said Christina Pretto, an AIG spokeswoman.
    AIG has reduced the number of bets made by the financial products unit that sold credit-default swaps by more than 25 percent since October and cut expenses by “ hundreds of millions” of dollars, she said.
    To contact the reporters on this story: Craig Torres in Washington at [email protected]Hugh Son in New York at [email protected];
    Last Updated: March 3, 2009 14:42 EST
     
  14. Avondale Red Rage

    Avondale Red Rage Just wondering...

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    http://www.reuters.com/article/governmentFilingsNews/idUSN0349765020090303

    UPDATE 1-U.S. senator wants Fed to name loan recipients

    Tue Mar 3, 2009 3:29pm EST


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    (Adds details on proposed legislation)
    WASHINGTON, March 3 (Reuters) - A U.S. senator berated Federal Reserve Chairman Ben Bernanke on Tuesday for refusing to name banks that borrow from the central bank and introduced legislation that would require public disclosure.
    In a testy exchange at a hearing before the Senate Budget Committee, Vermont Sen. Bernie Sanders, an independent who usually votes with the Democrats, said he found it "unacceptable" that the central bank risked taxpayer money without detailing where the funds went.
    "My question to you is, will you tell the American people to whom you lent $2.2 trillion of their dollars?" Sanders asked, referring to the size of the Fed's balance sheet.
    Bernanke responded that the Fed explains the various lending programs on its website, and details the terms and collateral requirements.
    When Sanders pressed on whether Bernanke would name the firms that borrowed from the Fed, the central bank chairman replied, "No," and started to say that doing so risked stigmatizing banks and discouraging them from borrowing from the central bank.
    "Isn't that too bad," Sanders interrupted, cutting him off. "They took the money but they don't want to be public about the fact that they received it."
    According to the text of the proposed legislation, e-mailed by Sanders' staff, he wants the central bank to identify any firm that has received financial assistance since March 24, 2008, including details on the type of borrowing, amount, date, terms and the Fed's rationale for lending.
    Sanders wants the Fed to publish those details on its website and update them at least every 30 days.
    At the hearing, the senator said businesses in his state were in trouble and needed loans, but were not permitted to borrow from the Fed.
    "Do you have to be a large, greedy, reckless financial institution to apply for this money?" he asked.
    Bernanke said the Fed's lending programs were not gifts or subsidies but rather over-collateralized loans. He said the law restricted the types of firms to which the central bank can lend.
    "We have never lost a penny doing it," he said.
    Sanders responded: "Let me just say this, Mr. Chairman. I have a hard time understanding how you have put $2.2 trillion at risk without making those names available, those institutions public."
    "It is unacceptable to me that that this goes on," he added. (Reporting by Emily Kaiser, Editing by Dan Grebler)




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