In between working and trying to get software to work on a laptop that just refuses to cooperate, I am still trying to figure out what happened to AIG. Considering my knowledge of margin calls is limited to overplaying my hand in a few games of Railroad Tycoon II- Platinum several years back, what I gather is the following.
AIG had a large hand in insuring all the bad debt that was packaged and repackaged and sold all over the world. That bad debt was all the sub-prime loans mixed in with good loans, and no one has the first clue who holds what. What we do know, though (I think) is that AIG was the glue holding everything together. As long as AIG was still around insuring all the stuff that we don’t know is there, things were ok.
However, when the shit hit the fan over the weekend, people began to get very nervous about what exactly AIG is insuring, as no one still knows who is holding what and what the what actually is. Thus, it became very expensive in short order for AIG to continue to insure the unknown. Thus, they had to come up with huge amounts of cash to show that they could still back all the things they claim they can, even though they have no idea what they have. Add to this mess, the liquidity problem, in that banks no longer feel comfortable lending money.
Is this right? There are a ton of terms out there that I simply do not understand in either theory or practice, but I am trying to stumble through the basics here. Please use English when commenting.
Dreggas
The Fed and Treasury may need to bail out the FDIC
WHEEEEEEE!
amorphous
You’re not quite right, John. What is actually happening is a slight correction in the market.
Problem solved. Commission please.
Alan
FWIU, AIG is the insurer for most money market accounts. Which was supposed to be a reasonably safe place to park your money short term.
BTW, since the Right is jumping all over Democrats for causing this crisis with the Community Reinvestment Act, here’s Barney Franks response.
The Other Steve
The fundamentals of our economy are strong.
snarkout
That’s basically right, John – it’d be like if your mortgage had a clause in it where if you got your hours cut, you had to pony up an additional down payment. For a variety of reasons (mostly but not entirely AIG’s giant stack of crummy mortgages, which keep getting written down — that’s a non-cash expense, but as an insurance company AIG’s balance sheet really matters), the ratings agencies got nervous about AIG’s creditworthiness. The CDSes that AIG underwrote — which are, as you say, basically like insurance on bonds — had clauses in them that made AIG pony up money if their ratings were cut. The ratings were cut, and AIG couldn’t come up with the $15 billion it needed to come up with by last night.
The idea is that by the Fed guaranteeing this huge loan, the credit agencies will be appeased, AIG won’t have to come up further additional collateral, and things can be unwound in an orderly way by selling the worthwhile pieces of AIG to stronger and more responsible companies.
Dreggas
Oh and John, that’s about right.
fester
Yep, that is about right, and if you make a mention about the New Economic Plan of 1919, you’ll be batting way ahead of the curve.
Justin Slotman
Talk radio was funny yesterday (haven’t listened today yet.) “This is normal! Big companies make bad decisions and they get punished! This happens all the time! That’s capitalism!”
cervantes
But keep in mind that the whole point here is, it is possible that the problem goes beyond just not being certain that AIG can meet its obligations should a sufficient stack of the bonds it insures go south – the bottom line could still be that it really can’t, and that this loan is going to turn into a grant.
Furthermore, there’s a kind of death spiral going on. The credit crunch is causing an actual slowdown in the economy, which means rising unemployment, and meanwhile people’s savings are evaporating along with their creditworthiness, which means they spend less, which means that other workers lose their jobs, etc. The loss of high paying jobs for Wall Street pinstripers means lost work for limo drivers and foreclosed yachts and what not, which means more people out of work or losing income.
All of which means – yup – more people who can’t pay their mortgages and more of that mortgage debt going south and that means . . .
You get the idea.
cervantes
But keep in mind that the whole point here is, it is possible that the problem goes beyond just not being certain that AIG can meet its obligations should a sufficient stack of the bonds it insures go south – the bottom line could still be that it really can’t, and that this loan is going to turn into a grant.
Furthermore, there’s a kind of death spiral going on. The credit crunch is causing an actual slowdown in the economy, which means rising unemployment, and meanwhile people’s savings are evaporating along with their creditworthiness, which means they spend less, which means that other workers lose their jobs, etc. The loss of high paying jobs for Wall Street pinstripers means lost work for limo drivers and foreclosed yachts and what not, which means more people out of work or losing income.
All of which means – yup – more people who can’t pay their mortgages and more of that mortgage debt going south and that means . . .
You get the idea.
Gus
To be fair to McCain, I think he meant that the fundamentals of Cindy’s fortune (beer distributorship) are strong. After all, when times are bad people drink to forget. If times are good, they drink to celebrate. Yes, there’s no question that times will be good for the McCains.
Punchy
As I said in the last thread, the Feds will bailout EVERYONE (except apparently Lehman). Bush will not allow this to crash while he’s in office. I suspect they’ll print money like crazy and just hand that shit out to everyone who asks.
WaMu goes first. Then Morgan Stanley or Wachovia. Then….dunno. Wells Fargo will be asked to buy pretty much everyone still standing. Insanity.
chopper
yeah, a 25% drop in the dow, nasdaq and S&P in 11 months is totally normal.
and three of the five big investment banks going under, and the other two ready to pop, that’s totally normal as well.
james
If AIG is based in Texas, I’d imagine they’re on the hook for the majority of the claims resulting from Ike as well.
They do a little more than just insure bad loans.
chopper
apparently not, tell us again.
TheFountainHead
How I explained it to my sister:
AIG is the pumpkin still sitting on your porch from LAST fall. It’s still holding it’s shape and it’s still orange, kinda, but you KNOW there’s bacteria completely eating out the insides and then one day you trip coming up the steps and you land on the pumpkin and it practically turns to water beneath you and then you have spore-ridden pumpkin flesh all over you. Instead, the men in dark suits and glasses came in and put a wooden crate neatly over the pumpkin so that when you tripped and fell you careened off the crate, but the pumpkin is still rotting under the crate.
Ripley
Hey, there’s no reason to doubt Limbaugh or Hannity. They know things. Things that ordinary people aren’t allowed to know.
So, if you’re looking for financial advice and direction, listen to Limbaugh and Hannity, and don’t sweat it.
Justin Slotman
cervantes, lay that on me one more time, wouldja? I’m not quite getting the idea…..
Dreggas
All you need to know about who is to blame
Punchy
Change “McCain” for “pumpkin” and “voted for” for “tripped and fell” and it makes for a similar story.
montysano
John, you got it right.
What I’ve learned (and almost wish I didn’t know) is that the global value of derivatives (credit default swaps are a type of derivative) is estimated at $500-$800T. Since the definition of a derivative is something that has no inherent value, ie. derives it’s value from elsewhere, and since the global value of real estate (ie. stuff of real value), well you can see the problem.
I learned a new word yesterday. Jim Sinclair thinks the global value of derivatives has passed a quadrillion dollars ($1Q ??).
And this: where in the fuckity fucking fuck is the President of the United States?
LanceThruster
I was hit by a trucker that was insured by AIG. Got ripped off by them and their rep was one of the nastiest SOBs I’ve had to deal with in a long time. My attorney said AIG was a bunch of theiving bastards.
Glad I’m there for them to bail them out in their time of need.
Dr. Squid
It was pointed out that now that Lehman Brothers has to go through bankruptcy, everyone will find out how much those credit default swaps insuring Big Shitpile are really worth. These bailouts are designed to cover that up.
Then an entire hog waste pond’s gonna hit the fan.
montysano
since the global value of real estate (ie. stuff of real value) is about $100T
Sorry; pushed submit too quickly.
TEak111
Apparently, a lot of the insurance (default-swaps) were taken out by European Banks. An AIG failure would mean trouble in Europe and maybe the world markets, which we have seen in the decline of world stocks the last coupla days. The insurance allows the Banks to rate the investments higher. If the insurance is gone, anyone with these types of financial instruments would have to reassess their holdings downward.
From the NYTs:
That situation set the stage for deep losses for all the countless investors and other entities that had entered into A.I.G.’s swap contracts. Of the $441 billion in credit default swaps that A.I.G. listed at midyear, more than three-quarters were held by European banks.”
“Suddenly banks would be holding a lot of bondlike instruments that were no longer insured,” Mr. Sundaresan said. “They would have to mark them down. And when they marked them down, they would require more capital. And then they would have to go out and raise capital in these markets, which is very difficult.”
So the bailout is big daddy stepping in to prevent a world financial crisis.
ThatLeftTurnInABQ
I was going to post this comment on the earlier AIG thread but WordPress didn’t want to let me play, so let’s try it here and see if it goes thru.
The CDS’s are a really important aspect to the larger story of what is going wrong on Wall St., which makes them worth some a detailed (and possibly futile) explanation. Here’s my (non-professional) crack at e’splainin:
Credit Default Swaps were designed to act like a form of risk pooling, like purchasing accident insurance to cover you against unforeseen events which might be very costly but are unlikely to happen, so you can get on with your life without having to factor the cost of weird stuff into your daily budget. But several things have gone very badly wrong with this model, placing the entire global financial system in jeopardy of a systemic meltdown.
1) These hedges against risk were deliberately used to evade regulatory requirements designed to reduce risk and stabilize parts of the financial system, which is why we are in such a dangerous and tricky situation now. It is as if we deliberately disabled the safety features built in to the system because we didn’t think they were needed, and it turns out, opps, those warnings were there for a reason! (i.e. the lessons we learned from the last big deflation in 1930-32)
2) Risk pooling works best when there are lots of people in the pool. But the global market in derivatives is dominated by a relatively small number of financial firms, so the loss of just one of the major players immediately places everyone else in jeopardy.
3) Far too many hedges have been written assuming that risks to both parties are not strongly correlated, so if one of them gets in trouble the other party will still be sound and thus in a position to make good on their obligations under their CDS contracts. This assumption is being destroyed by the collapse of the housing market bubble which is having an impact on just about everyone in the credit market. It is as if you and I wrote each other hurricane insurance on each other’s homes, ignoring the fact that we live on the same block and will both get hit by the same storm at the same time. This was incredibly shortsighted and stupid. It also means that the risk we thought we were making to go away in point #1 above, never really went away at all. We just closed our eyes and pretended that it wasn’t there.
Note: we = Wall St., not you-and-me non-elitist folk.
montysano
@ ThatLeftTurnInABQ: Nicely done. Thanks!
Brick Oven Bill
There was $12 billion in mortgages. Fannie/Freddie had half, for which we are on the hook. AIG insured an unspecified percentage of the rest (e.g. 90%). So, with the takeover of AIG, the federal government now owns most of the downside risk of the housing market.
Say the value of a house falls 20% below the mortgage amount and the buyer walks away. The loss to the government is far more than the 20%, it can be 100%. Say there is a $120k house that is now worth $90k What does the government have to secure their interest?
1. The $90k house; minus
2. Legal fees ($30,000?); minus
3. Damage from the pissed off forclosee ($30,000?); minus
4. Real estate commissions ($6,000?); minus
5. Whatever else.
Meaning the government is out 100% in this case, not 20%. So what percent of the $12 trillion in mortgage debt is being dumped on the taxpayer? I don’t know, maybe 33%, or $4 trillion.
Paulson is the guy who originated many of the CDOs, and he is the guy who has now dumped them on the federal government. I believe that this was done to satisfy a deal with his Goldman Sachs buddies. If Paulson would not have pulled this off, he would be on the hook personally for fraud and his buddies would go after his stuff.
I consider this to be criminal behavior.
ThatLeftTurnInABQ
Hint to those playing at home: if you want WordPress to take your comment, leave in all the typos. Those comments sail right thru. It is the perfectly composed ones with proper grammer which get eaten. Sort of like a spell- and grammer- check, only in reverse.
Napoleon
Are they still at that BS meme – what total lying assholes.
Jason K
Check out this NYT op-ed that has a pretty good explanation of how bad things could get if AIG went down.
http://www.nytimes.com/2008/09/16/opinion/16lewitt.html?_r=1&ref=opinion&oref=slogin
An interesting point is that in trying to post additional collateral to cover the CDSes AIG under wrote, they would have to sell off some of their assets. This would further depress mortgage bonds, and also imperil a lot of hedge funds since AIG was heavily invested in hedge funds. So when AIG starts selling the hedge funds, they in turn have to start selling their assets, driving prices down even further.
Then things start getting really bad due to mark to market. As the sell off begins and the prices of these assets fall, other instructions that are currently solvent have to mark their assets at the currently depressed price, pushing them towards insolvency if they don’t post more capital to meet their obligations, causing further sell offs.
Ideally when you have a downward sell off spiral like this, it would be checked eventually as investors would step in and start buying because the deals were just too good. However since there is a credit crunch right now, instructions that are in relatively good health can’t get loans in order to take advantage of these deals. Everyone is hording capital because they don’t know where the bottom is, and even prudent companies could be in trouble depending on how far down this spirals.
Napoleon
5 years ago I told a colleague that was a fatal flaw with the system and he thought I was crazy. In fact I went one step more, that it was likely there would ever be substantial draws agains the system unless the actual event that arose was one that hit all players hard and about at the same time.
Dave
The other thing is that AIG is big in Asia, particularly China.
Since China holds so much of our public debt, we can’t have their economy dropping so that they try to cash out, can we?
Ned Raggett
I admit I like the Big Picture explanation
gbear
I don’t understand this stuff at all either other that it’s going to really fuck up the pittance of a retirement account that I have. However, watching this guy, Jim Cramer, blow a gasket over this on air makes me think that this is not going to be small potatos. I’m officially nervous.
Dennis - SGMM
Read it and weep. From PBS’ Frontline’s “The Long Decline of Glass-Steagall”:
And:
The piece is not that long and is worth reading.
Michael Brown
I’ve searched the AIG threads here pretty diligently and I can’t believe nobody’s yet sent John to Michael Lewitt’s shortish explanation of the AIG mess (in yesterday’s New York Times, FFS). Best single plain-English explanation of what’s going on that I’ve seen.
gopher2b
Essentially, the U.S. government is now insuring everyone who holds shitty mortgage back securities against defaults. It now officially owns the problem.
bootlegger
I see now. This is the best explanation of what’s happening. Specifically, it’s like protecting your cash and investments only in reverse.
SGEW
Jim Cramer blows a gasket twice a week. He can blow a gasket over untied shoelaces. It’s his schtick. He’s cried wolf far too many times to be taken seriously.
I’m watching to see if Krugman runs out of the NYT building, screams out Alice in Wonderland verses, and then lights himself on fire.
Then I’ll be nervous.
LiberalTarian
What, big daddy couldn’t find out this stuff was happening when he had big brother recording everybody’s financial and telephone information???? Morans.
What a bunch of crazy nutjobs. Bush and the boys are going out with a bang. Have we coined a term for the Bush Economy yet? Nightmare on Wall Street? Liquidityville Horror?
Michael Brown
Ah, Jason K beat me to it by 6 minutes.
MrSnrub
There’s a very good, yet terrifying interview on NPRs Fresh Air with Terry Gross
gopher2b
That’s because people would rather read it, repeat it, and act like they understand it.
Xenos
Bill –
I don’t think Paulson is such a conspirator, although my evidence is pretty anecdotal. A mook in my college dorm who was awfully bright but a committed drinker and hockey player ended up working for Goldman after a cuple decades in the bond trading trenches, and had to talk the board into putting that $ 4 billion put on mortgages last year. Saved the asses of the Golden Slacks upper management, for which he got a 4 million bonus and the two top partners split a $ 150 million bonus.
These guys, again, the smartest around, did not know what a powder keg they were sitting on. The whole system got so confused and complex that it took an outsider to explain to them how badly they had screwed it up. Now, everybody is scrambling to avoid ruination.
Sure, Paulson dumped the shitpile on the government. But it has been clear that only our government, which created the shitpile (See Gramm, Phil), was going to end up cleaning up the mess. We the voters, have been stupid, stupid, and stupid, and we are going to pay. Serves us right.
Breezeblock
Did you know John McCain was a POW?
Gus
Nowhere to be seen, thank god.
ThatLeftTurnInABQ
You’re welcome. Props are always appreciated.
Since this is colorful metaphor day, here’s another one to cover a point I left out. Another problem with the CDS market is that many of those swaps are highly leveraged. You can’t create 500 trillion dollar castles in the sky without using a lot of leverage. [note: in the following allegory the boring solid house* is the old financial system based on depository institutions and protected by post-Great Depression regulation to keep it safe, and the teenage kids** are investment banks and hedge funds.]
On day Uncle Sam was sitting at home in his nice, boring, solid house*, watching TV.
His teenage kids** said “hey Dad, can we play outside?”
“Sure”, he said.
Later he heard them call in: “hey Dad, can we build a fort?”
“Sure”, he said, “you can use those old scraps of lumber laying out in the back yard”.
“Cool!” said the kids.
Uncle Sam went back to watching TV. Sometimes he heard sounds coming from the backyard (hammering, sawing, etc.), so he turned up the volume.
Later he heard a cry for help from the backyard. Rushing out the back door, he was startled to look up and see the entire backyard covered by a gi-normous structure, at least 10 stories tall and dwarfing the house. It appeared to be built out of a loose framework of little bits and scraps of wood, the size of toothpicks and popsicle sticks, glued and tied together with bits of string and duct tape.
“WTF!?” said Uncle Sam.
“Help! Help!” came cries from the top of the giant structure.
Looking up, Uncle Sam saw his kids perched on the top of the rickety structure.
“Are you kids INSANE!”, he shouted. “What have you DONE? Look at this thing!”
“Well Dad, you didn’t give us much wood to work with, and we ummm, wanted to make something really BIG.”
Looking closer, Uncle Same noticed that the “fort” was festooned with torches and kerosene lamps. Woodpeckers were busy drilling into one side of it, and it was swaying dangerously in the wind, looking likely to topple over right on top of the much smaller boring solid house, and probably would set the roof on fire.
Gusts of wind blew. Creeeaaaakkk, creeeeaaaakkk went the fort. It starting leaning over towards the old house even more than before.
“Ummm Dad, I think we have a BIG problem”, said the kids.
The Moar You Know
Quoting myself, here.
Think about it – every man, woman and child on this planet in hock for their total economic output for the next 15 to 20 years.
What the fuck are we supposed to eat?
I’d like to blame all this on Bush but can’t, although he certainly didn’t help. It was that dammned Gramm-Leach-Bliley Act that has well and truly put us all in the shitter. Clinton signed it. Good going, Bubba.
Glass-Steagall, which Gramm-Leach-Bliley recinded, expressly forbade consumer banks (like the one your checking account is in) from making stupid, risky loans, or from acting as insurers. The goddamned Republicans decided that banks should be able to make more money, and that it would be a great idea to allow banks that held yours, Mom’s and Dad’s savings and checking accounts to make investment loans and insure property, financial transactions, and subprime mortgages.
Who could have forseen that those risky investments would go bad and reduce the US dollar to worthlessness? Who could have forseen that by taking this course of action that we’d launch another Great Depression?
Well, the Republicans wanted to recind the New Deal and they did. I’m sure they’ll find a way to blame it on Democrats. I’m sure the Dems will mount a completely ineffectual response and end up tied to this mess in the eyes of the general public. That’s the way this game is played, it seems.
I’m so mad I could shoot somebody, but how do you shoot a system? This was so preventable, but as always, greed has won.
Scrutinizer
The Sternly Worded Letter is in the mail.
Michael Brown
ThatLeftTurnInABQ, FTW!
Commentor provides best single precis in the whole thread, then tops himself in the space of one hour. As my daughter used to say whenever she was watching Saturday morning cartoons: “Bugs Bunny wins again!”
gopher2b: If Lewitt is too hard for you and John, I vote you just stick with ThatLeftTurnInABQ’s explanations.
cleek
OT… while we’re collapsing on the inside, Al-Q is still trying to bring us down from the outside
4tehlulz
Dow shat the bed in the last hour. Closed down 450. Nasdaq did the same, ended down almost 110.
Tomorrow is going to be brutal.
Third Eye Open
This comment is for the King of the Khaki Business school professor who is always bogarding the Economist in the Library:
“When you spent 20 minutes talking down to me about how my generation would end up driving the economy you and yours had spent a career’s worth of time building by ignoring market fundamentals and laying down on the job, did you suspect that it would be your shiny-headed spank-bank denizens who would in fact squirt your meager load upon the stomach of such an obviously diseased frat girl, otherwise known as YOUR ECONOMY?”
BTW, I know for a fact that the graduate assistant you pulled strings to get in your office, was getting it raw from a dread-loc’d DFH, extolling the prescient nature of Noam Chomsky and laughing at guys who wear loafers with gold-painted bling.
Punchy
You’re a fucking idiot. McCane SAID the economy is fine. Said “fundy mentals” are strong. Clearly you’re either deaf or a partisan hack trying to smear lipstick on a bank teller. Just keep using your ATM as normal to buy duct tape and STFU.
Punchy
You’re a fucking idiot. McCane SAID the economy is fine. Said “fundy mentals” are strong. Clearly you’re either deaf or a partisan hack trying to smear lipstick on a bank teller. Just keep using your ATM as normal to buy duct tape and STFU.
Punchy
You’re a fucking idiot. McCane SAID the economy is fine. Said “fundy mentals” are strong. Clearly you’re either deaf or a partisan hack trying to smear lipstick on a bank teller. Just keep using your ATM as normal to buy duct tape and STFU.
PC
WaMu is done.
4tehlulz
NO U
Punchy
God I hate this fucking blogs myriad problems.
montysano
Sean Hannity has it covered: it all happened since the Dems took over Congress in 1/07, and John McCain was the lone voice in the wilderness, crying “Regulation! We must have regulation!”
Moar is correct: the repeal of Glass-Steagall is a big part of the story, as is the Commodities Futures Modernization Act of 2000. This was authored by Gramm and slipped into an omnibus spending bill during the chaos of the Gore/Bush election aftermath.
Yeah, Willie could have vetoed it but didn’t. Biden initially opposed it but caved. To be fair: probably no one, including Phil Gramm, foresaw anything like the current mess. But this mess has been brewing for almost 10 years, in which the Republicans ran everything (well, until 2007). No leadership then; no leadership today.
Roland Charlemagne
AIG was insuring the risky mortgages and as you can imagine some of policies have been called.
Trouble is there is NO regulation at all in insuring mortgages… NONE! yeah deregulation!!!!
4tehlulz
x3
Martin
Well, I think we see two things happening with AIG:
1) Deregulation and general trends over the last decade has encouraged and allowed consolidation of financial and insurance groups to a point that these groups command the same ability to fuck up the market as many nations, even to the degree that we look at some of those nations with distrust and concern, we give equally powerful corporations a free pass to do as they please. Part of a ‘free market’ is having a diverse and broad market and not a half dozen massive companies. A handful of companies can conspire on a level that a hundred or a thousand companies cannot, which is why we distrust nations yet one party of individuals can’t seem to apply that lesson to our own economy.
2) Corporations that recognize their size and power allow themselves to take greater risks because they get a free insurer in the deal – the Fed. So what the Fed is essentially doing with AIG is cutting out the middle man. Why pay AIG to insure you and then have the Fed pay on top of that to secure AIG when the Fed could just take over AIG and handle this directly? And that’s essentially what’s happening.
If we step back to the healthcare situation, we’ve seen a similar argument made by McCain’s people:
So the argument offered there (which is fucking absurd given the Republican position on social services) is that the federal government is the insurer of last resort even for individuals. And here we see admission in a sense that the Fed is the insurer of last resort for large corporations, and even for corporations in the business of insuring. So, given that, why even have an insurance market for critical items? Why not just federalize all insurance that we would deem as ‘necessary’? If we are really that risk adverse, why pretend otherwise and hand a percentage of premiums to investors? It’s not unprecedented, either. The fed offers flood insurance for precisely this reason. If we’re going down that road in practice, why is there such opposition to it in principle?
gopher2b
Way to jump in front of a bullet not intended for you. But, whatever.
PC
lolwut
Caidence (fmr. Chris)
(Oh sure, why not come out of retirement for this notorious event.)
You have it right, John. On top of that, it must be considered that AIG is the Microsoft of insurance. There’s not a single thing it hasn’t gotten its grimy fingers on.
You’re also very right about the “doesn’t know what it’s insuring” part. That’s the issue with CDSs. CDSs are a neat idea where you can repackage debt into digestible pieces, but that repackaging obfuscates solid borrowers from assholes who default at the drop of a hat.
So you end up with the unfortunate situation that AIG couldn’t/didn’t keep up on its paperwork and can’t vouch for who it had covered, and people don’t want to reinforce such lax behavior, but AIG has their hooks into everything. They fail, we bleed to death.
Eric S
How true that is. I’m doing my best to help here in Chicago but far as I know my money’s going to the Wertz and Jackson families.
khead
Once upon a time, I almost screwed up a perfectly good college semester because of Sid Meier.
Caidence (fmr. Chris)
Unlike the Freddy/Fannie stupidity, the gov’t bought substantial equity in AIG so that when they rebound, we’ll get repaid. AIG has some rot, but it also has some pretty nice jewels which will shine sometime after this is over.
This is more a loan-ish than bail-out-ish this time.
HyperIon
AIG was in the news a couple of years ago.
Spitzer went after them for something.
Is there some connection with their wrong-doing then and what got them into this mess?
i mean, besides greed (which used to be a feature but is now evidently a bug).
ThatLeftTurnInABQ
Don’t look now, but Helicopter Ben is running short on cash:
Treasury to Sell Bills to Bolster Fed Balance Sheet
You’ll know we’re in deep doo-doo when they starting auctioning off 37 1/2-day bills and platform 9 3/4-bills.
h/t Yves Smith
Caidence (fmr. Chris)
I second ABQ’s explanation, with a slight correction on #3: the housing collapse is being caused directly by the over-use of CDSs, not in parallel to. The fucktards that kept writing loans to people that didn’t deserve them were offsetting the debt with CDSs.
It’s important to note that in a perfect world, the CDSs would have worked perfectly, because the credit companies would have rated the swaps correctly, and everyone would get an accurate measure on the risk they were assuming by selling the swap. The problem? Credit companies are just guessing. Just because they say “looks solid”, doesn’t mean it’s true.
gopher2b
The U.S. government just bought a $25 billion company for $85 billion. Or better, the U.S. government just paid $85 billion for a company days away from being forced into bankruptcy. And what did it get for this great “business” decision, the right to insure nearly every bank in the world against losses in the sub-prime real estate market.
If it had let AIG fail, this whole mess would have been over by Christmas because every financial institution in the world would have to report the real value of its subprime assets because they could no longer hide behind the veil that their “insured.” Well, now they’re insured, by the U.S. taxpayer.
Oh, right, they also got a loan for $85 billion at 12% interest. Tell you what, start a company, run it into the ground and days before its creditors force it into bankruptcy because you have no cash go ask the bank for a loan three times what its worth (at most) if you could liquidate it tomorrow (which you can’t) in a vacuum (which doesn’t exist) and when they finish laughing at you…tell them you want LIBOR plus 8.5%
dslak
Gopher, I find your posts to be pessimistic and a potential source of depression. Could you please balance them out with a post about something uplifting?
PC
Disappointed that taxpayers are called upon to bailout another one. Certainly AIG though with the construction bonds that they’re holding and with the insurance that they are holding very, very impactful to Americans so you know the shot that has been called by the Feds it’s understandable but very, very disappointing that taxpayers are called upon for another one.
Andrew
Wow, Chris Matthews just ripped Eric Cantor a new asshole for a solid 5 minutes right to his face.
Stuck in the Fun House
Sort of OT.
This is how you beat Mccain. one liner with big teeth
stickler
Dslak:
I don’t mean to speak for Gopher. But: The world economy is sputtering toward Armageddon. The stock market is imploding. The Bush cronies are putting Uncle Sam on the hook for billions, maybe trillions. And my IRA is deflating like a rotten pumpkin.
You want “uplifting”? Go to the Wonderbra site.
Stuck in the Fun House
The first video in favs
Brian J
Have you seen this article in The American Prospect? It says that claims of the CRA being at fault for this mess are nonsense. I don’t really know what to make of it, because some people who are smarter than I am–like Tyler Cowen, who made a similar claim in his column last week–have said something similar. Robert Gordon in the TAP piece makes a convincing case, however.
dslak
YouTube is dead for a few hours, my friend.
PC
Umm, dude. Those are your favs, not ours.
John Cole
Unpossible. Eric Cantor is already 100% asshole. Ripping him a new one would be fatal.
dslak
Oh, and Fox’s shift against McCain continues unabated.
Punchy
I would like to purchase WashMut….just to acquire all the dripping hot blonde tellers with nimble fingers, reasonable addition skills, and a proven ability to be around other people’s money without stealing it, god dammit.
Caidence (fmr. Chris)
dslak
Also, Drudge even linked to this story about Palin’s crazy pastor. My friends, I hope they have blankets in Hell this evening.
Caidence (fmr. Chris)
Crap, let’s try that again:
What you missed is that the gov’t took an 80% equity stake in AIG. 4/5ths of what they make is ours. So taxpayers pull in profit and interest.
This is largely a property that AIG isn’t a failing company, just a cumbersome one. Lehman was worth nothing, so they let that drown. Freddy/Fannie is crap, except they cover lower-middle class Americans instead of wealthy investors, so they saved them.
/if at first you don’t succeed
//ask the gov’t for a bailout
Brian J
Is anyone starting to think that Ralph Wiggum might be a more serious choice to run the country than most Republicans? Aside from minor issues with the English language and stick things up his nose, he seems to have all of the skills of the current bunch without any the penchant for cronyism.
Martin
If you do, could you ask them to stop giving out our phone number which differs only by a transposition of two digits? My wife isn’t sure whether to root for their failure or their success on the possibility that their branch phone number could be picked up by a pimp or drug dealer that maintains less desirable hours.
And for the record, my wife used to be a bank teller and I approve of your reasoning here.
montysano
Upthread I asked “Where the fucking fuckity fuck is the Presdient of the United States?”
As it turns out, I just found out he’s coming to a fundraiser tomorrow night, about 1 mile from my house. I think I shall try to have a word with him. Do any of you have any messages for me to deliver? 8-)
Jess
So…what does this mean for the average Joan? I have a lot of CC debt and no savings at the moment, and I’ve been putting all my extra income towards paying off the debt as fast as possible. Now I’m wondering if I should be saving as much as possible instead (credit union account, natch–not mutual funds!) What would you guys do?
Dennis - SGMM
None that wouldn’t get you sent to Gitmo.
JL
Jess, Interest rates on credit cards are so high, I personally would try to pay it down. Maybe you could do a fifty, fifty type of thing. I’m pretty conservative and although I have a small mortgage, I don’t have other debt. Oh course, my tv is pretty old.
stickler
Jess:
PAY OFF THE CREDIT CARDS!!!1!!*&^!
Do not pass Go, do not collect $200, do not save a damned dime until you end the credit card bleeding. There’s no way a savings account can equal the costs of a 15%, 18%, or 22% credit card balance.
Eat beans for a month, walk to work, do what you can but pay down the credit cards FIRST.
Brian J
Speaking strictly from a personal finance angle, I’d say that you should pay down the debt as soon as possible. I am not entirely sure of how interest rates work–it’s been a few years since I’ve taken economics in college–but it seem as if every company has raised them on consumers since the economy really started to get into trouble. Since your debt isn’t going to go away unless you declare bankruptcy, it might cost you more money in the long term to hold on to the debt. I’d pay it off as fast as possible, especially if you can use a zero interest card credit, and then start saving and/or investing. I’d say this especially true if your job is safe, because you’ll have a source of income and can manage your budget around that.
Emma Anne
Kind of dead down here at the bottom of the thread, but in case anyone is still reading – this isn’t really a bailout. It’s a slow motion bankruptcy. The govt is providing the loan so AIG can sell of its profitable bits and unwind its CDS’s. AIG as we know it is a dead man walking.
gopher2b
Paying off the credit cards first makes the most financial sense: no doubt about it. That being said, here are my only caveats.
(1) What are the rates on the cards? If you have a locked up rate of under 5% and its locked up FOREVER and you have CUT UP THE CARD then pay it off a little slower as long as you are taking the difference and SAVING it.
(2) Are you a disciplined saver? I ask this because its my belief that if people are not disciplined savers by the the time they get their cards paid off they will want to reward themselves which they do by buying something with their, that’s right, credit card. So, if you are not a disciplined saver then you need to get yourself addicted to saving and the best way to do that is by actually saving. Mind you, this is not good short term financial advice because you are probably paying 18% on borrowed money and collecting less than 3% on savings but its good to get habits down. That being the case, I would split you payments 85% to the CC and 15% to the savings. Once they are paid off, do not spend the money, just move it all over to savings.
JGabriel
Caidence:
Maybe. Problem is, in a perfect world, CDS’s wouldn’t be necessary in the first place.
.
Brian J
That’s what some people on television are saying.
I’m curious about something. What would you and everyone else say to this statement? “There have been no significant changes to the financial regulations in the last eight years that might credibly have created this crisis (the one major alteration, Sarbanes-Oxley, moved things in the other direction).”
Caidence (fmr. Chris)
Oh sure they would. Or at least, they’d be very useful.
The brilliant idea was that a fat deal could be made by a company like AIG to cover the risk of, say, a mortgage company covering all of its good and bad debt. AIG could then write up these swaps into smaller pieces that cover the good, not-so-good, and bad debt (“tranches”), and then sell them off to different parties. The good debt could be sold to grandma so she gets a solid payment into retirement, and the bad debt could be sold to some douchebag streeter (sorta like me) who’s less risk-averse. The end result: smaller dudes can help spread out the debt and the market gets a bit of a kick.
The problem is, the underlying debt isn’t static, but the CDSs are. If some of the good debt is handed off to a bad/irresponsible debtor, then the rating of the associated swap needs to go down. If the credit company doesn’t catch it (and you have to be near-omniscient to catch every small deal in the world), you wake up on a wednesday morning to find AIG needing help. Gulp.
JGabriel
Emma Anne:
That’s my interpretation as well, with the proviso that AIG may come out of this a functioning, albeit smaller, company at the end.
I’m not holding out much hope of that. It seems likely the market would have stepped in to resue AIG themselves if there were any profit in it. But it’ll probably be better for the economy overall if AIG doesn’t completely fail, no matter how I dislike them.
.
Jess
Thanks for the advice, people. Most of my debt is on my Working Assets card at just under 10%, and I think they’re less likely than most to jack up the rates. I also have some locked in at about 5%, so I’m just paying the minimum on that for now. At my current rate, it’ll all be paid off in about two years, but that’s if I’m not saving, and I’m nervous about that.
I do have a pretty secure job, with health insurance, though, so I’m luckier than most, but I’d like to have some savings. The debt all accumulated during a break in employment and a move across country. I’m not in the habit of carrying more debt than I can pay off in two months, so I think once I pay it off, I’ll stay in the black.
b-psycho
McCain, in his new ad on the ongoing financial meltdown, referring to Wall Street heads: “I’ve taken on tougher guys than this before”
My first thought: “Um…so you’re going to go around shooting bank execs, & poison any survivors?”
b-psycho
Dammit, forgot the link…
Brian J
If your debt is manageable, use some of the money to establish an emergency fund. Also contribute to any company matches for retirement. But try to pay down debt of any type as quickly as possible, simply because the amount of money you are going to spend paying that debt off over a longer course of time is almost certainly going to be more than anything you’d get in a traditional savings account.
DaveInOz
Perhaps the Subprime Primer should be updated to include AIG’s name?
Sasha
Probably converting his wealth to Euros and transfering it all to an account in a country with non-existent extradition laws.
grumpy realist
1. Looking back on it, am now extremely GLAD that Moody’s took me through three rounds of interviews and then decided to NOT hire me to be a quant doing CDOs back in 2003.
2. Derivatives pose problems because of the ballistic amount of leverage they contain. Being on the right side of leverage (when most of your bets are in the right direction) allows you to make out like a bandit. Being on the wrong side of leverage, however, makes you very very poor very very quickly. (E.g. LTCM when they got on the wrong side of Russian sovereign bond defaults.)
3. Just because you can’t see an immediate link between two things doesn’t mean they’re not correlated.
4. Molecules don’t scream and all run into one corner of the box; humans often do.
Brachiator
Good stuff. Here’s a further irony. Health insurance companies are criticized feebly try to justify excluding people with pre-existing conditions and people who are actually sick, trying to limit themselves to healthy young people who will be less likely to file claims. And yet the mortgage industry did exactly the opposite, clamoring to offer loans to people who were least likely to be able to pay them. And then these wizards of Wall St used smoke and mirrors to convince themselves and the public that there schemes had no flaws.
I heartily second this excellent interview with law professor Michael Greenberger. He explains the issues with great clarity.
Greenberger points out that AIG provides quasi-insurance for some of the risky investment instruments that packaged crappy mortgages. If AIG falls, the banks and other institutions which offered this junk might collapse in turn.
The professor also points out that Congress previously passed laws specifically limiting the government’s ability to regulate this area.
In other words, the Bush Administration and the Republicans set out to make sure that a “free market” unfettered by government “intrusion” would work its mojo and spew out goodies for everyone.
And now they are running for cover, and the shallow business media is busy trying to pretend that “no one could have foreseen the collapse of all these institutions.”
By the way, have McCain/Palin explained exactly how they are going to weed out the bad apples without any regulation?
gopher2b
It’s a bailout for every entity and/or person who holds a subprime mortgage security that is insured by AIG. It’s a bailout for every hedgefund that would have to redeem AIG’s money in the next few months. It’s a bailout for AIG’s shareholders (20 cents on the dollar is better than 0). It’s a bailout.
I have never heard of a bank stepping in with a bridge loan to facilitate a bankruptcy. I’ve never of heard of it because it’s insane. Who would ever give someone a loan like this.
In less than a week AIG went from saying it needed $15 billion to $85 billion. Let that was over you for a second. They have literally no idea how much exposure AIG has to this mess but they are guessing they would need $85 in capital to coverage extra collateral. That’s fucking astonishing.
The American taxpayer will never see a dime. I guarantee you there is another infusion of capital before January 1 (if not November 4). The second bit about Fannie/Freddie doesn’t make sense. They’ve essentially extinguished all the equity in both companies and the “lower-middle class Americans” are going to get booted from homes they never owned in teh first place regardless of who owns the note.
ascap_scab
Remember a couple weeks ago when the FED “nationalized” Freddie Mac and Fannie Mae?? In doing so, the FED took on a shitload of bad loans. To this point, those loans do have some value, perhaps a lot of value if given enough time. AIG issued default insurance on a lot of that shitload. This is a backup for the FED itself. Should those bad loans go belly up and become worthless before the FED can unload them, AIG is on the hook to make the FED whole. If AIG had failed, the FED would have had to eat the entire potential loss to the tune of the entire net worth of the FED itself. In other words, the FED is now at risk of its own demise. Like a dog chasing its tail, the FED had to prop up AIG so that AIG could prop up the FED!! The whole thing is one crazy scheme straight out of a Three Stooges short.
When people talk about “systemic failure” AIG represented that while Lehman didn’t. It’s all a giant house of cards and there is a hurricane of ‘no confidence’ blowing.
Sebastian Dangerfield
gopher2b:
I don’t disagree with your overall point but technically “a bridge loan to facilitate a bankruptcy” is not such a completely silly thing. Lenders not infrequently loan cash to businesses in bankruptcy — usually set up in a series of tranches — but only when what is going on is a true reorganization
. And those lenders get a super-priority over everyone else, and thus undertake little risk.
But that’s not what’s happening here. This is, as you say, akin to a bankruptcy proceeding. But it is, more specifically, akin to a very specific type: a liquidation (although not a slow-motion one; complex bankruptcies involving giant companies go on for aeons, whereas this looks to be over in 2 years).
Thomas Edward Theadore
The folks over in Sadlyno are dreaming bunkers. John, you are an hours drive from farmland and tasty hot skinned roadkill, help them out okay? Its pathetic over there. Goddamn I never seen such whining.
Thomas Edward Theadore
There are a ton of terms out there that I simply do not understand in either theory or practice, but I am trying to stumble through the basics here. Please use English when commenting.
Save this comment. Play it back in the future.
One year from now, when you go to an atm, it will spit out one-hundred bills rather than twenties.
Debt will be paid and it will be paid with your money.
Someone with some small knowledge of economics will say , “But Thom, its a deflationary cycle, DEPRESSION!”
Fuck that idiot, bills will be paid taxes will be raised. Show me deflation anytime in recent history. Don’t be all, “Oh the Great Depression!”. Different times.
Taxes will be raised, bills will be payed back. They will just be paid back with lesser money. This is not a good time to hold debt.
Infaltion baby, inflation.
Here, look, I’ll bet I’m right. And I’ll bet value-
http://tinyurl.com/4cb8gu
One year from now, hundred dollar bills in the atms.
Thomas Edward Theadore
Whow, that (above) was kinda ramblin’ eh?
Here try this-
Taxes will be raised. Politicians can’t do it but there is a tried and true way, inflation. I’ll bet you a sna-on socket wrench that a 20 will be worth a 100 next year.
Come-on, man economics aint that hard to understand.
Thomas Edward Theadore
Of course, in the future mad max world it will be Toecutters driving around in “Sna-on” trucks.