Monday, March 02, 2009

WELCOME TO THE U.S. OF AIG

In the latest report from the "Not Even Remotely Surprising Unless You Haven't Been Paying Attention, Or Haven't Wanted To" Files, we learn that the U.S. government (uhhh, that'd be "You & I") will bailout AIG for the 4th time in less than six months. A few "highlights":
The Treasury Department and the Federal Reserve announced jointly early Monday that they will supply another $30 billion on an "as needed" basis to facilitate "the orderly completion of the company's global divestiture program" and "help stabilize the company and in doing so help stabilize the financial system," in light of the "significant challenges" due to the rapid deterioration in certain financial markets in the last two months of the year.
Where to begin? Before even getting into the substance of what a mistake this is, let's examine the actors, shall we? The Treasury Department and the Federal Reserve.

One a division of the executive branch and the other a quasi-governmental, privately-owned bank headed by an unelected chairman. And, since we're doing this lil' Q&A thing, let's ask who heads that division of the executive branch? Only the former head of the completely private NY facility of that quasi-governmental, privately-owned bank. This isn't Democracy. Now let's ask why these unelected thieves are doing what they're doing:
AIG has been unable to find buyers for pieces of its company that it hoped to sell to repay the government on its existing aid package, which totals some $150 billion.
Read that carefully. AIG is Looking for buyers to raise capital to repay the government that already "lent" it over a hundred billion dollars because it couldn't find any buyers the first time around. Before it added an additional $150 billion to its balance sheet.

And why can't AIG can't "find buyers"? Because it had nothing to sell except a rancid mound of rotting garbage. Who the hell buys rotting garbage? The answer is, of course, "no one." Which is why the enablers in D.C. are fostering this deal, laying the bill onto citizens and taxpayers who have no recourse to remove these gentlemen from their positions because they neither hired nor elected them.

And why would these unelected gents do this? I mean, they must have a good reason to engage in such a shameless expropriation of the nation's wealth, no? For whom would they do such a thing? Who benefits from the survival of AIG as a private institution? Why not nationalize it, wipe out its debt, clean out its worthless "assets" and start over, right?
perhaps the biggest concern about AIG is the dizzying array of complex financial instruments it structured for commercial banks, investment banks and hedge funds around the globe.
"The biggest concern." Yet, the question we need to ask is whose biggest concern? I'm not concerned, are you? Any of your neighbors staying up at night worrying about this? Know anyone who knows anyone that shares this concern that "commercial banks, investment banks and hedge funds around the globe" are gonna lose their shirts due to idiotic investments they made in a "dizzying array of complex financial instruments"?

This article from Bloomberg last fall explains why this is really going on. If AIG went into bankrupcy, it's biggest creditors would get the shaft, receiving (literally) pennies on the dollar for what the insurance company owed them. If they were that lucky; they might get zero. And among those creditors: Goldman Sachs, Morgan Stanley, Merrill Lynch (recently acquired by Bank of America).

As I said at the start of the post,
none of this is even remotely surprising unless you haven't been paying attention, or haven't wanted to.

Wake up.

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14 Comments:

Anonymous wfta said...

Okay. I am a complete convert. We are going to have to nationalize the biggest financial companies in the US and we should probably do it sooner rather than later. Screw their shareholders, screw especially their managers and directors and screw their counterparties for all the chicken shit side bets. It just gets more expensive if we put it off.

One thing I can’t understand is why the bond rating companies (S&P, Moody’s) aren’t being sued or maybe even prosecuted. Lots of people who weren’t especially greedy or especially foolhardy are going to lose tons of money because the bond raters were either incompetent or complicit in misrepresenting the risks.

10:22 AM  
Blogger Smitty said...

laying the bill onto citizens and taxpayers who have no recourse to remove these gentlemen from their positions because they neither hired nor elected them

This is the point my brain has been grasping for but has been unable to articulate, perhaps because I lacked the appropriate vocabulary. But that's it: we have no recourse. We can un-elect or at the very least pressure the Congressional "enablers." But we cannot do a damn thing about the quasi-governmental banks and banking system. When they do a shit job, nobody fires them or elects someone else like last November's house cleaning (pun intended).

So the next step is to nationalize this body and make it an elected position! If it is this important to have functional fed reserves and such, then it ought to be an elected position, fully accountable to The People. Imagine not only what that might do for outcomes, but what it would do to advance this understanding and conversation among the electorate! To have people campaigning over the policies in this arena would be fun, and a great learning experience.

11:21 AM  
Blogger Weaseldog said...

If we nationalize the banks, then we'll just take ownership of a big giant pile of crap and we'll pay and pay and pay and pay.

These corporations are international. They'll pull the assets out of the country and dump waste into the country, as soon as they find our that the US Taxpayer will seize them and take ownership of their gambling losses.

Just let them fail. Let the people who made the shitty bets cover them, or go into bankruptcy.

There is no ethical reason to ask the USA to sink into a Greater Depression to cover what is in essence, bad gambling debts into perpetuity.

As long as we're willing to cover the debts and reward the execs for losing gambling and losing, they will continue to gamble away the money lose it.

3:17 PM  
Anonymous Applesaucer said...

I think the very high quality of the comments to this post show that you're making a breakthrough, Mike.

Others want to "wait and see" or give Obama props for playing "smart politics."

I fear that by the time Obama does what he should do, it will be too late...trillions of dollars worth too late.

I concur with the following Weaseldog comment: "Just let them fail. Let the people who made the shitty bets cover them, or go into bankruptcy."

When I speak of "nationalization" I simply mean what you say above, but with perhaps a more orderly resolution to the process and more protection for depositors. I definitely don't mean the government running these places like they're running AIG.

I think Mike means the same, but he can speak for himself.

Applesaucer

3:44 PM  
Anonymous wfta said...

If you can access today's Financial Times take a look at James Baker's essay on zombie banks.

Wall Street has been talking about a liquidity problem. It is time to face the possibility that it is a solvency problem.

4:27 PM  
Blogger Weaseldog said...

Ok, but when the politicians talk about nationalizing, they mean to have the government take ownership and run them.

4:50 PM  
Anonymous Applesaucer said...

"Ok, but when the politicians talk about nationalizing, they mean to have the government take ownership and run them."

If that happens, I'll be screaming that it has has to stop.

The main thing here is that we need the right jockeys (i.e., a Volcker type and not a Summers or Geithner type). If I don't trust the integrity and competence of leadership, I won't trust its plans, no matter how much the details might appeal to me.

Is Volcker too old (he's 81)?

I don't know, but better him than what's there now.

Obama has to stop relying on Wall St.'s bagmen to solve this problem. Maybe he thinks he's relying on the "experts;" but what's he really relying on are people who are conflicted and destroyed more value over the last decade than any other industry in our history.

Applesaucer.

5:07 PM  
Blogger DED said...

When I heard about the 4th AIG bailout this morning (for another $30 billion) I lost it. I figured you would too, Mike.

Not to nitpick but in the 2nd paragraph you mention "millions" when it should be "billions." I only point this out because some idiot might come along and wonder why people are complaining over a "measly" 100+ million.

And for the record, I'm with the "let them fail" crowd.

11:51 PM  
Blogger Mr Furious said...

Apparently most of AIG is actually profitable, it's this one division in London that ran the Credit Default Swaps scam that's dragging the whole thing down...

If the US Govt (you and I) get to take hold of the "good AIG" and have to prop up the fraud AIG to keep the world economy from collapsing, there's probably a heavy price worth paying...

That said, Hank Paulsen should be in irons, and I suspect in a year I'll be saying the same thing about Geithner.

2:19 AM  
Blogger Mr Furious said...

On the whole I fall neatly into wfta's first comment on all of this.

2:21 AM  
Blogger Mike said...

If we nationalize the banks, then we'll just take ownership of a big giant pile of crap and we'll pay and pay and pay and pay.

Just let them fail.

When I speak of "nationalization" I simply mean what you say above, but with perhaps a more orderly resolution to the process and more protection for depositors. I definitely don't mean the government running these places like they're running AIG.

I think Mike means the same, but he can speak for himself.


I'm pretty much saying what WFTA said:

We are going to have to nationalize the biggest financial companies in the US and we should probably do it sooner rather than later. Screw their shareholders, screw especially their managers and directors and screw their counterparties for all the chicken shit side bets. It just gets more expensive if we put it off.

Although I admit I'm open to the exact details, what I'm envisioning is some variation on this theme:

1. Take over the banks (or in AIG's case, the insurer), protecting depositors, etc. through the usual FDIC methods.

2. Wipe out the remaining shareholders.

3. Write down all the debt, "toxic" paper, bad assets, etc.

4. No. 3 will all but wipe out the creditors, since they "own" that bad debt.

5. Evaluate what's left, i.e. put a "price tag" on the assets, on what remains.

6. Sell it to the highest bidder.

And that last part is where I'm open to possibilities. Maybe the government can retain preferred shares in the new company, which I like in theory, but worries me in practice. And by selling to the highest bidder (an IPO in a sense), you get new management. Or if the old management wants back in, they pay for it at market rates.

If there are no buyers at the level the administrator determines the entity is worth, then no sale at that time. We hand on to the company until it garners a buyer.

Anyway, I'm shaky on a few of those details, but I'm more than open to suggestions.

why the bond rating companies (S&P, Moody’s) aren’t being sued or maybe even prosecuted

I know from experience that under the current securities laws, it's very hard to sue them and win. They're well-protected. As to why no prosecutions, see everything that's happened since September.

the next step is to nationalize this body and make it an elected position! If it is this important to have functional fed reserves and such, then it ought to be an elected position, fully accountable to The People.

In theory, yes. But the real purpose of a central bank is to help the bankers. And it always has been, since before 1913 when Senator Nelson Aldrich, who was close to J.P. Morgan & counted as a son-in-law none other than John D. Rockefeller, foisted it upon the unwitting population.

They don't want it to answer to an educated population.

in the 2nd paragraph you mention "millions" when it should be "billions." I only point this out because some idiot might come along and wonder why people are complaining over a "measly" 100+ million.

Fixed. Thanks DED.

Hank Paulsen should be in irons, and I suspect in a year I'll be saying the same thing about Geithner.

Why wait a year?

6:04 AM  
Blogger Mr Furious said...

Why wait a year?

For now, I'll submit to him being out on his ass. Irons can come later...

If Obama had one (major) cabinet post tax evasion mulligan, I'd prefer he used on Daschle and tossed Geithner.

This shit is so insane, I'm actually on the same side of the issue as Lindsay Fucking Graham.

7:51 PM  
Blogger Mike said...

I'm actually on the same side of the issue as Lindsay Fucking Graham.

I understand what you're saying. But the "sides" here are straightforward: are you in favor of looting the treasury to keep rich oligarchs in the money, or are you against it?

It's the Oligarchs & Kleptocrats & Insiders vs. The United States Of America. Which side are you on? Maybe Graham is full-of-shit (and I suspect he is, in that his "Insiders" are just not Wall. St. Insiders, but another breed), but I'll give him temporary credit for not robbing me blind like Barney Frank & Nancy Pelosi & Chuck Schumer.

6:10 AM  
Blogger Mr Furious said...

Oh, believe me, I realize Graham can strike this pose because his constituents are hillbillies and plantation owners, not Wall St...

I also realize he's become the Arlen Spector-in-training—talking a good game when it doesn't matter.

10:23 AM  

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