At what point does the govt have to stop bailing them out. From what I understand the US Govt owns 80% of AIG, which has a market cap of 1.4 billion. And this is after a $150 billion bailout. I'm sure that allowing AIG to fail would have further negative impacts to the economy, but is there a limit to bailout? 150, 200, 500 billion? there has to be some limit where enough is enough. I'm reminded of someone that keeps running to the ATM because they lost another $500 at the craps table. again and again and again.
Your analogy of the craps player is pretty good considering what AIG was doing was basically gambling. They were creating credit default swaps on both sides of a debt but they didn't balance the amounts on each side so now they don't have the money to pay the credit default swaps. AIG was the biggest bookie in the world and also the stupidest. They government will eventually own all of AIG and have to unwind all of its assets.
Just so you know, the AIG bailout is not a bailout of AIG. The AIG bailout is a bailout of a LONG list of other financial institutions that are counter parties to credit default swaps recklessly written by AIG. These financial institutions are currently holding a MASSIVE amount of bonds on their books that have been absolutely KILLED in the secondary market. Luckily for them, they are also holding insurance policies from AIG that would guarantee to make the bond holders whole if the bonds themselves go into default. The problem is that AIG made FAR more promises to pay than AIG's bank account could back up. By all rights, AIG should have been in bankruptcy court long ago. The problem with that however, is that if AIG goes BK, the value of their promise to make bond holders whole becomes worthless. If that happens, a whole bunch of financial institutions will be forced to mark down the value of the bonds they hold to their true market values. The AIG guarantees (which are now basically US taxpayer guarantees) are the only thing propping up the value of the bonds and in turn the value of the balance sheets of the bondholders. Without the guarantees, another painful cycle of de-leveraging will be forced upon these institutions. Maybe there's a list of AIG counter parties floating around. If there is, I haven't seen it. My understanding is that it includes a lot of foreign banks, which raises the question of why the US taxpayer is bailing out foreign banks, but that's a separate issue. Another issue is the role of regulation. The issuance of all these credit guarantees by AIG fell into a no man's land of regulation somewhere between the SEC and the insurance regulators. The regulators weren't watching. AIG's risk managers weren't watching. AIG made a bunch of bets they probably shouldn't be allowed to make. I'm not a big fan of regulation, but sometimes regulation can save you from yourself. Bernard
Yeah, if we don't keep bailing out AIG, then our 401K's will tank because the Dow will collapse down to (eeeeeek) 6700 or so. Oh wait, that already happened. Sorry, but I just don't buy into any more of the fear-mongering that's going on. Seriously though... what would happen if AIG failed? All the companies that made a bet with AIG would have to write down a bunch of worthless investments that they probably knew were more than risky to begin with. How much farther can the stock market drop?
"Without the guarantees, another painful cycle of de-leveraging will be forced upon these institutions. " Bernard, this is what needs to happen unfortunately. The gig is up and it's time to pay the piper. Why does the taxpayer have to burden the load of unsound investment vehicles from unregulated CDS from AIG who didn't do their homework and took full advantage of an unregulated market for these investment vehicles? Yeah, the market will crater some more, but what, it's came down over 50% from the market tops, and if it craters a little more well, I'm okay with that. As a taxpayer, what was the upside for us when AIG was boasting of record profits and huge bonuses? We didn't see any of that and the sooner this mess is purged, the better off we will be.
I'm not saying I'm for it. I'm just explaining the facts to those who might now be aware of the reasons why it's being done. The fact of the matter is that the world financial system is grinding to a halt. Delveraging is a *****. Mark to market is a ***** when markets aren't really functioning. Actions need to be taken to fix the mess. You can't just pretend the mess will fix itself. It won't. There are some in very high positions that worry that AIG's failure could be the straw that turns the Chernobyl type meltdown we already have on our hands into into a full blown nuclear holocaust. That won't be good for anbody. What I do know is this. Someone inside AIG knows the truth about what's really on AIG's books. And those folks have convinced Uncle Sam that some really bad **** is going to hit fan if AIG goes BK. It's impossible to do a cost-benefit analysis with the data that's publicly available. Bernard
I hear you Bernard and didn't mean to imply that you were necessarily for the bailout of AIG. It's just so damn frustrating to see so much money has been thrown at this company and likely more money to be earmarked for "fixing" the problem. It really begs the question of how much collusion between our govt., the regulatory bodies who are supposed to provide oversite, and the investment banks is being perpetrated at the expense of the US public by going to such drastic measures to keep AIGs books from being fully opened for scrutiny. Then you have JP Morgan profiting to the tune of 5.6 billion dollars in 2008 and profiting from AIG's exposure to CDS, no doubt. It makes you truly wonder, WTF. The Link
