So much for "No more Bailouts"

[dvcgirl]

My fellow Americans, we now are the proud owners of AIG, the largest insurance company in the world. What's another 85 Billion between friends. Oh, we don't actually *have* that money, but no worries....we'll just print some more.

Wonder what we'll take over next? I mean, wouldn't it be nice if we could nationalize McDonald's or something like that....maybe have a "taxpayer dividend day" occasionally when Happy Meals are free. You know, some kind of return on my investment.

Well.....keep on saving my friends.....our government is leading us down a very dangerous road.....

 

[TheRatPack]

LOL, ooooo can we own WaMu next. I have an account there....or how about Target? Atleast I'd be paying myself to shop there Wait...how would that work? The government bought it with money I don't have, and I shop there with money that I do have....does that mean I'm still negative?

 

[eliza61]

My fellow Americans, we now are the proud owners of AIG, the largest insurance company in the world. What's another 85 Billion between friends. Oh, we don't actually *have* that money, but no worries....we'll just print some more.

Wonder what we'll take over next? I mean, wouldn't it be nice if we could nationalize McDonald's or something like that....maybe have a "taxpayer dividend day" occasionally when Happy Meals are free. You know, some kind of return on my investment.

Well.....keep on saving my friends.....our government is leading us down a very dangerous road.....

LOL, ooooo can we own WaMu next. I have an account there....or how about Target? Atleast I'd be paying myself to shop there Wait...how would that work? The government bought it with money I don't have, and I shop there with money that I do have....does that mean I'm still negative?

Ok DVCgirl,
Careful you are going to become my resident financial "go-to" girl on the dis.
Since this entire mess started I'm trying to become a least a little "smarter"

Ok now my question of the day. If they didn't bail out AIG what would happen? Would thousands upon thousands of people and business lose their insurance along with all that money pump into it?

 

[PlutoPony]

My guess is we'll own part of the domestic auto industry next. They've already been pressuring (oh - I mean lobbying) Congress for some $$, now we are hearing how their many suppliers are in jeopardy not just the auto companies themselves.

 

[bridget]

I think AIG has TONS of loans that a covering mtgs that are going to forclose. If the US didn't cover them, more banks would be in more trouble!! I think- someone correct me, if I'm not understanding this right

According to CNN- Its troubles stem from its sales of credit default swaps and from its subprime mortgage-backed securities holdings.

This makes me so mad!!!! So many people were so irrisponsible- the people borrowing the money, people loaning the money and people insuring the loans!!!!!! I'm blaming all three on this one!!!! If you couldn't afford the loan, you shouldn't have bought a house. If they credit was lousy and the customer was a high risk, you shouldn't loan them money and insure the loan!!!!! It is common sense.

 

[j's m]

Ok DVCgirl,
Careful you are going to become my resident financial "go-to" girl on the dis.
Since this entire mess started I'm trying to become a least a little "smarter"

Ok now my question of the day. If they didn't bail out AIG what would happen? Would thousands upon thousands of people and business lose their insurance along with all that money pump into it?

She's already my go-to girl.

I can answer the question about some of the insurance. My DH has a whole life policy with them, and I just mailed the annual payment last Friday. I called the NJ Insurance Commissioner and what they told me is that most states have an Insurance Guaranty Fund to cover this. In NJ cash value is protected to $ 100,000 and life face value is covered to $ 500,000. I would assume most other insurances are also covered in some way. I know we have had several insurance companies (both life and commercial liability) go belly up and they were sold to another company.

My question: since I now own AIG, do I get a discount?

 

[janey99]

Snark all you want, but the collapse of AIG would have had both global and granular implications that the failure of Lehman or any other IB would not have. Too many losers in that scenario to count.

The US government really had no other choice.

Jane

 

[dvcgirl]

Ok DVCgirl,
Careful you are going to become my resident financial "go-to" girl on the dis.
Since this entire mess started I'm trying to become a least a little "smarter"

Ok now my question of the day. If they didn't bail out AIG what would happen? Would thousands upon thousands of people and business lose their insurance along with all that money pump into it?

I have to tell you, the Fed jumped in to buy this thing for one reason.....and it wasn't because of their insurance business. It was because they have a 400 Billion dollar Derivatives Book, or "Credit Default Swaps". This is the scary "meltdown" scenario....all connected with the Shadow Banking System.

Credit Default Swaps (CDS) are essentially insurance policies sold to protect some kind of security that I purchased. If my investment drops too much, well, the insurance company will pay face value of the CDS that they sold to me.

So, say I run a Hedge Fund, and I go out and purchase a large chunk of mortgage debt (Collateralized Mortgage Obligation or CDO) that has been bundled together and sold by yet another hedge fund or investment bank. I'm a hedge fund owner, and so I like to "hedge" my bets a bit. So I go to AIG and buy that Credit Default Swap on my newly purchased CDO.

Believe it or not, these credit default swaps were sold like candy, and they were sold on every type of debt imagineable, but linked to securitized mortgages in unprecedented numbers. The models put together by the financial geniuses at these companies were built on the idea that housing prices never fall. I kid you not. That's the honest truth.

And so, when you're a hedge fund heavily invested securitzed mortgages, and you're leveraged 30:1 or *more*, (meaning that you're holding about 3% in cash), and housing drops 20%, well your creditors now require that you put up more collateral (cash) because your credit to debt ratio has dropped considerably. You're in trouble.....this is called a "Margin call".

Well, no problem you think.....I'll go over to my friends at AIG with my handy dandy Credit Default Swap and I'll be all good. But all of *their* models also showed that housing prices would never drop. So they sold so many CDS, well, it was like free money wasn't it? Except housing prices fell, and they fell bigtime.

So, what it comes down to is that AIG needed 80 Billion dollars by today to meet Credit Default Swap obligations. If they didn't get that money, and that 80 Billion didn't get paid, then it could "in theory" spiral out of control because all of these banks, investment banks, insurance companies are so interconnected. The problem is....everyone is soooooo overleveraged, that one relatively minor money wrench in the derivatives market is enough to set off a chain reaction and a resulting market crash until cooler heads prevail.

I think we'll read very long novels in the coming years about how close we came to that yesterday. A sort of Chernobyl of the financial world if you will.

So, don't let them fool you that this was about "protecting the policy holders". That a huge load of BS.

I hope all of this makes sense.....lol!

 

[dvcgirl]

Snark all you want, but the collapse of AIG would have had both global and granular implications that the failure of Lehman or any other IB would not have. Too many losers in that scenario to count.

The US government really had no other choice.

Jane

I understand both sides of the argument, but how many bailouts like this can we afford? Seriously, let's test the system. This is an insurance company for pete's sake, one that leveraged itself like a drunken sailor on a 48 hour leave in Vegas. It's deplorable. Where are the freaking regulators!!! This never should have been allowed to get so bad.

I'll tell you what, the government needs to seriously unwind the derivatives market in this world......

 

[NancyIL]

I'm comparing prices/coverage of trip insurance at www.insuremytrip.com. I see that AIG is the parent company of Travel Guard. I think I WON'T be choosing that company!

 

[janey99]

I understand both sides of the argument, but how many bailouts like this can we afford? Seriously, let's test the system. This is an insurance company for pete's sake, one that leveraged itself like a drunken sailor on a 48 hour leave in Vegas. It's deplorable. Where are the freaking regulators!!! This never should have been allowed to get so bad.

I'll tell you what, the government needs to seriously unwind the derivatives market in this world......

I share your disgust at the bailout mentality, both for the little guy (I bought a weird mortgage I couldn't really afford - boohoo) and the big guy (I have a portfolio of worthless CDOs cubed - wahwah), but if the government was saving a coffee can full of money for anything, the AIG bailout was it. AIG's tentacles reach everywhere, from $1000 pet insurance policies to the situations you describe above in your post to Eliza, to esoteric insurance covers bought by sovereign nations - there is NO ONE who wouldn't have been touched in some negative way by a failure of AIG.

They'll regroup. I suspect they will "repurchase" themselves back from the government on some schedule to be determined, as they consolidate assets, shed unprofitable and non-core lines of business, revamp their business plan and get back to where they should have been all along - an INSURANCE company (not some overly diversified, too slow to be responsive, insurance reinsurance IB financial services wannabe).

The Evil Empire abides . . .

To your derivatives comments - I know plenty of specialty shop derivatives lawyers who are squirming right now. Their day is coming. It's not going to be particularly visible to those outside the financial services industry - it will be quiet but very meaningful.

Jane

 

[coopscs]

I just got a mailer yesterday from AIG talking about switching to them, they are the best. OKKKK

I am so not feeling all these buyouts, I love how when your a huge company with huge profits, you have all these nets to catch you when you fall. A small business like mine, no one cares if we are here tomorrow or not. No govt. handouts unless you are a billionare. That's the rule I guess.

 

[dvcgirl]

I share your disgust at the bailout mentality, both for the little guy (I bought a weird mortgage I couldn't really afford - boohoo) and the big guy (I have a portfolio of worthless CDOs cubed - wahwah), but if the government was saving a coffee can full of money for anything, the AIG bailout was it. AIG's tentacles reach everywhere, from $1000 pet insurance policies to the situations you describe above in your post to Eliza, to esoteric insurance covers bought by sovereign nations - there is NO ONE who wouldn't have been touched in some negative way by a failure of AIG.

They'll regroup. I suspect they will "repurchase" themselves back from the government on some schedule to be determined, as they consolidate assets, shed unprofitable and non-core lines of business, revamp their business plan and get back to where they should have been all along - an INSURANCE company (not some overly diversified, too slow to be responsive, insurance reinsurance IB financial services wannabe).

The Evil Empire abides . . .

To your derivatives comments - I know plenty of specialty shop derivatives lawyers who are squirming right now. Their day is coming. It's not going to be particularly visible to those outside the financial services industry - it will be quiet but very meaningful.

Jane

Yes, I get that AIG's tentacles reach everywhere. But let's make no mistake about it, they were saved because of their derivatives book of business and the not for the little old lady and her annuity. They were worried about systemic risk. That's all that I'm saying.

And boy are you right.....they've become a bloated behemoth with too many irons in the fire. Time to downsize.....

I say, get busy selling assets AIG....and like *now*, pay the taxpayers back and let the chips fall where they may. If I was a policy holder in any form, I'd be on the phone this morning moving my business elsewhere.

 

[beavismom]

Yes, I get that AIG's tentacles reach everywhere. But let's make no mistake about it, they were saved because of their derivatives book of business and the not for the little old lady and her annuity. They were worried about systemic risk. That's all that I'm saying.

And boy are you right.....they've become a bloated behemoth with too many irons in the fire. Time to downsize.....

I say, get busy selling assets AIG....and like *now*, pay the taxpayers back and let the chips fall where they may. If I was a policy holder in any form, I'd be on the phone this morning moving my business elsewhere.

You are completely correct about this. They bailed them out because the financial market implications of not doing it would have been catastrophic. Even more disgusting I am betting would be the amount these companies (Freddie, Fannie, AIG, Lehman, etc.) have paid out in executive "bonuses" in the last few years. I think they should all have to pay it back with interest to the government or go to prison.

I am not normally a person who favors too much regulation, but corporate greed has clearly gotten out of hand. DH and I were discussing this last night and our proposed solution was that these bonuses should go into a sort of escrow account for a period of time, 2-3 years maybe), and if the company goes belly up and/or has to get bailed out then the bonus is forfeited. I know this is probably not a viable solution, but there needs to be some way to keep these guys from running these places into the ground and then leaving us taxpayers to clean up the mess.

 

[eliza61]

Yes, I get that AIG's tentacles reach everywhere. But let's make no mistake about it, they were saved because of their derivatives book of business and the not for the little old lady and her annuity. They were worried about systemic risk. That's all that I'm saying.

And boy are you right.....they've become a bloated behemoth with too many irons in the fire. Time to downsize.....

I say, get busy selling assets AIG....and like *now*, pay the taxpayers back and let the chips fall where they may. If I was a policy holder in any form, I'd be on the phone this morning moving my business elsewhere.

Hey I'm actually following this. My ADD medicine must really be firing this morning.
My concern as "Suzy Q, over weight middle aged taxpayer" is this.

1) Is this how normal financial industry is running. Aren't there regulations (I'm probably sounding really naive right now) saying you have to have a % of income to cover all these bloated policies.

2) I generally hate saying "let them fall" because I was in Pittsburgh when the steel industry fell and saw how it devestated that region, so I think I have a natural adversion to lots of folks losing their jobs but can't these solution of "bailouts" get out of control? Whats the incentive for AIG to come up with better business practices?

I apologize if I'm trying to get an easy explanation for probably a complex situation.

Now on top of that the market is down because of fears from AIG...

 

[the Fidge]

Novel idea or just plain crazy....maybe had we not outsourced all jobs in the US to countries that do in fact harbor and invite terroists and kept work here maybe this would not be happening.

Remember the days when we EXPORTED GOODS, such as grain etc. The days when we actually thrived on the backs of the farmers of the USA. This country was founded on the "wheat" crops. Oddly enough more people, higher demand for grain and we are selling what?? As a child I recall the many miles of cotton fields and many textile mills cross country and they went where???

SO our government credits corporations that outsource our jobs??? Hmmm. See crazy me would think we would encourage the employment of our own tax paying residents of the US.

So next time you are in a department store, try to find a shirt, shoes or pants made here in the good old USA and tell me what you find. Please do read your shirt labels and then ask yourself .....AIG???

 

[StillPinballFamily]

Even more disgusting I am betting would be the amount these companies (Freddie, Fannie, AIG, Lehman, etc.) have paid out in executive "bonuses" in the last few years. I think they should all have to pay it back with interest to the government or go to prison.

I am not normally a person who favors too much regulation, but corporate greed has clearly gotten out of hand. DH and I were discussing this last night and our proposed solution was that these bonuses should go into a sort of escrow account for a period of time, 2-3 years maybe), and if the company goes belly up and/or has to get bailed out then the bonus is forfeited. I know this is probably not a viable solution, but there needs to be some way to keep these guys from running these places into the ground and then leaving us taxpayers to clean up the mess.

I agree! My husband and I have been talking about the same thing. These morons run things into the ground and walk away with their golden parachute $$$, their Lears or Gulfstreams, the house in the Hamptons, and so on in nauseating detail while stockholders and tax payers get the shaft.

When will "The American Family" be deemed "too big/important to let fail?" Everyone has seen company after company get tax break welfare and now obscenely expensive buyouts, and those of us down here on Main Street get scraps.

My guess is that things are gonna get ugly (uglier?) fast and that the airlines, automakers, etc. will soon start fighting for their place in the "Bailout - Ten Companies or Less Express Lane." This country seems to always find a way to fund something (wars, corporate bailouts, tax schemes, pork projects up the wazoo, whatever) when it WANTS to. Is there an interplanetary ATM I hadn't heard about that we've been tapping, or are we (now, literally) mortgaging our children's future world? (Sadly, I know the answer to this one...)

Hmmmm...I wonder now that we've nationalized AIGs umbrella of car, auto, life, and health insurance if FINALLY all Americans might be able to get health insurance?

Sad... But thanks to you, dvcgirl, I feel like I've got a kindred spirit and source of valuable insights out there.

 

[harleyquinn]

Great thread you guys!!

I'm just enjoying your perspectives. I don't have much to add.

I do have a very small 457 through AIG that I had been thinking about not contributing to anymore and putting the funds elsewhere. I guess this is my sign to move forward with that.

 

[a1tinkfans]

While I understand (the best I can) the "buyout" the Fed made of AIG, I wonder about our Constitution that says Gov't does NOT have the power/right to do this very thing, take over (80% in this case) a company that "shareholders" own.
According to some, "it" should had failed (due to THEIR poor investments,etc) so that some one else picks up/buys the pieces and makes money.
How many other "failures" will the gov't "feel they have too bailout?
Wait till the "legal eagles" eventually start suing the gov't for "NOT taking over failing companies, or "taking over failing companies that STILL fail", a CAN of worms indeed
I realize that AIG's "reach" was very wide and something had to be done, I hope this eventually works out!
How come we don't hear about the people "fired" at the Top who made the DECISIONS in the first place and sunk them?????

 

[roadtripper]

While I understand (the best I can) the "buyout" the Fed made of AIG, I wonder about our Constitution that says Gov't does NOT have the power/right to do this very thing, take over (80% in this case) a company that "shareholders" own.

I did a lot of reading on this today in order to try to explain it to my seniors, and my head is still spinning. You mentioned the Constitution, and it is, ironically, Constitution Day today--the day that teachers MUST teach the Constitution or their schools will be at risk of losing federal funding...(a little rider that Sen Robert Byrd got added to an appropriations bill a few years back). Glad I had such a relevant topic to address.

ANYWHO- This idea of whether or not it was even proper for the govt to do what it did yesterday has been around as long as the Constitution--and especially when talk of the First National Bank began. So it was the mostly public/ quasi private Fed Reserve of NY (or a branch of the Third National Bank) that put up the cash. I think we willl have to wait and see if it was the right decision in this case, but I too resent the hysteria that makes grandma worry about her annuity. She is insured. My question is, what makes us think these companies will learn their lesson? The lesson for them seems to be that if they get over their heads, as long as they are important enough, the govt will protect them--with our money. How about some tighter regulations first, folks?