Saturday, October 4, 2008

A.I.G. Nightmare

Good afternoon folks!

I hope everyone is having a great weekend. I wanted to talk a little about AIG today. According to The New York Times, AIG has already burned through $61 billion of the $85 billion bridge loan given to them by the Fed:

"The American International Group said on Friday that it had already drawn down $61 billion of the $85 billion emergency bridge loan it received from the Federal Reserve two weeks ago, an announcement that startled credit ratings agencies.

The emergency loan was supposed to buy the company time to sell its troubled assets in an orderly manner. But the sell-off has not yet begun, and now the insurer faces the additional pressure of trying to sell the businesses at a time when potential buyers are having trouble borrowing money.

Moody’s downgraded A.I.G.’s senior unsecured debt on Friday and said it might downgrade other types of the company’s debt, which could make it more expensive for A.I.G. to borrow money and do business.

A.I.G.’s chief executive, Edward M. Liddy, told securities analysts on Friday that $53 billion to $54 billion of the Fed’s loan had gone to shore up A.I.G.’s troubled structured-finance unit and its securities lending business. Another big block of the Fed’s money has been used to support A.I.G.’s daily operations, Mr. Liddy said in a conference call, because demand for the company’s commercial paper has dried up as a result of the worldwide credit crisis.

“The $61 billion draw to date on the facility is much larger than we had previously anticipated,” said Rodney A. Clark, an analyst with Standard & Poor’s, explaining the change in outlook.

A.I.G. is required to pay back its borrowings from the Fed within two years. Mr. Clark said that to raise the money, the rapid drawdown of the loan made it likely that A.I.G. would have to sell off more businesses than Standard & Poor’s had expected.

In response to questions, Mr. Liddy said it was impossible to say exactly how much money A.I.G. would have to raise to pay back the Fed and emerge from its crisis as a smaller company with adequate capital.

“It’s kind of a Rubik’s Cube,” he said. “We need to be very flexible” because of the fluid economic environment.

He said that in addition to using the $85 billion Fed loan, A.I.G. would be able to participate in the $700 billion bailout program signed into law by President Bush on Friday. The additional help from the Treasury might ease some of its financial burdens, Mr. Liddy said."

My Take:

This was startling to me. This is a great barometer to measure how bad things really are out there. We all wonder how bad the balance sheets are inside of our financials. The burn rate of AIG through this Fed bailout money is a good indication that they are probably much worse then any of us realize. Whats scary here is AIG isn't even a bank. Its an insurance company. I would guess some of the banks are in worse shape because they are less diversified.

This article also tells me that the taxpayers aren't getting their money back for awhile. I love the stipulation in this loan that AIG is supposed to pay this money back within two years. HA! Yeah right. Like that's gonna happen. Its a good thing Christmas is coming because they need a "Hail Mary" gift from Santa Clause in order to pay this loan back. Do you think Santa can get $85 billion down a chimney and under a Christmas tree?

Folks, there is no way $85 billion is going to be enough money to allow AIG to navigate through this mess. They have pissed away almost all of it in a matter of a few weeks! Expect this to cost the taxpayers much more.

Let me repeat: If things are this bad within AIG, what in the hell do the banks balance sheets look like? This was a frickin insurance company!

This also shows you how pathetic this $700 billion "rescue plan" is. One company has burned through almost $85 billion in a matter of weeks. How can the this rescue plan "save" the financial system when one company has burned through 1/7th of this amount in weeks?

Bottom Line:

You can rest assured that AIG will be heading back to DC with their hands out asking for more money. Expect Paulson to be doing the same after he burns through his $700 billion.

We need to start asking ourselves where does it all end? When do we start saying NO like any good parent does when a child throws a temper tantrum when they want something that makes no sense?

Washington DC needs to wake up and realize they need to get out of the bailout business before they ruin this country.


John Maynes said...

US is already toast. Whatever they do it won't help. We are in a very desperate situation. There is no solution to this problem. The bailout program won't help at all. It will just make the problem more obvious. Up to now all these financials could hide their crap in the level 3 trash bin. Denial period is over. I remember two quarters ago when FNM and FRE hid their crap in level 3 and the stock market was dancing on the tables and those stocks shot up like a rocket. Now it's time to pay the piper.

Jeff said...

Check out Roubini today:

Its a matter of days unless something massive is done accoring to his sources:
It is now clear that the US financial system - and now even the system of financing of the corporate sector - is now in cardiac arrest and at a risk of a systemic financial meltdown. I don’t use these words lightly but at this point we have reached the final 12th step of my February paper on “The Risk of a Systemic Financial Meltdown: 12 Steps to a Financial Disaster” (Step 9 or the collapse of the major broker dealers has already widely occurred).

Yesterday Thursday a senior market practitioner in a major financial institution wrote to me the following:

Situation Report: So far as I can tell by working the telephones this morning:

LIBOR bid only, no offer.
Commercial paper market shut down, little trading and no issuance.
Corporations have no access to long or short term credit markets -- hence they face massive rollover problems.
Brokers are increasingly not dealing with each other.
Even the inter-bank market is ceasing up.
This cannot continue for more than a few days. This is the economic equivalent to cardiac arrest. Then we debated what is necessary to restart the system.

I believe that the government will do another Hail Mary pass, with massive guarantees to the short-term commercial credit system and wide open short-term lending by the Fed (2 or 3 times expansion of the Fed balance sheet). If done on a sufficient scale this action will probably work for a while. But none of these financial measures affects the accelerating recession -- which will in turn place more pressure on the financial sector.

Another senior professional in a major global financial institution wrote to me:

Today, in our trading room, I could see the manifestations of a lending freeze, and the funding hiatus for banks and companies, with libor bid only, the commercial paper market closed in effect, and a scramble for cash - really really scary.

Do you think this is treatable without a) a massive coordinated liquidity boost and easing of monetary policy and b) widespread nationalisation of some banks, gtess to others AND a good bank/bad bank policy where some get wiped along with their investors? The Treasury Tarp plan is an irrelevance if we are at a major funding crisis.

And to confirm the near systemic collapse of the system of financing of both financial firms and corporate firms Warren Buffett declared yesterday, as reported by Bloomberg:

the U.S. economy is ``flat on the floor'' after a cardiac arrest as companies struggle to secure funding and unemployment increases.

``In my adult lifetime I don't think I've ever seen people as fearful, economically, as they are now,'' Buffett said today in an interview with Charlie Rose to be broadcast tonight on PBS. ``The economy is going to be getting worse for a while.' …The credit freeze is ``sucking blood'' from the U.S. economy, Buffett said.

We are indeed at the cardiac arrest stage and at risk of the mother of all bank and non-ban runs.

teddy bear said...

Ron Paul on the passage of the Wall Street bailout


Jeff said...


Great video. Thanks for sharing all of your finds. The more we all learn the better!

Ron Paul is right on.

John Maynes said...

HRE is toast, too. A lot of toast next week to digest. :-)

Anonymous said...

Hi John,

heard that too. Next week will be interesting. Although I think Jeff is too pessimistic.

Jeff said...


At this point, I hope I am too pessimistic.

I hope the world can peacefully navigate through this mess.

John Maynes said...

Hi anonymous,

so far no solution could be found regarding HRE. What I hear is that Peer Steinbrueck is going ballistic and demands managers to pay for their mistakes. A two-year-salary fine is being discussed now. They want to find a solution till the markets open in Asia. HRE is the same gorilla as LEH. More than €500bn are at stake. Wow!

Anonymous said...

John, do you have a link?

John Maynes said...

Latest news is there is a meeting in the morning among finance minister Steinbrueck, BaFin (= SEC), chancelor, German central bank but without any bank reps. Bank reps will join in the afternoon. They will try to find a solution till Monday morning before stock market opens.

John Maynes said...

Ireland doesn't step in to save HRE.xprcbr

John Maynes said...

Hi anonymous,

best link is It's in German but you can use Google to translate it.

John Maynes said...

HRE: Private savings are protected by the government.They are still working on a solution.

Anonymous said...

Unfortunately I don't speak any German. But thanks anyway, John.Please keep us posted.

Jeff said...

Here is a link

Missed the HRE blowup. Whoa this will be interesting.,Authorised=false.html?

John Maynes said...

HRE won't blow up. Would destroy the whole European financial sector. So HRE will be bailed out by the German taxpayer. Government tries to make banks and insurance companies to take their toll but they are naturally very reluctant. Germany got hit by the financial crises full blast.

John Maynes said...

Just got the news they will come out with a bail out plan till midnight (German time). Less than 5h to go.