AIG Shows Us The Way Down the Rat Hole

This morning AIG finally provides some value to American taxpayers and policy makers!  The simultaneous headlines of;

**GM Posts $9.6 Billion Loss as Wagoner Seeks More Government Cash.

**AIG Considers Break-Up in Bid to Stay Afloat.

We wrote this on December 10, 2008 when GM and Chrysler came for the first slug of our hard earned dough;

Imagine if you will the following scenario.

1. A company that can cause systemic destruction to the U.S. economy comes hat in hand to Washington.
2. The company tells Washington, "We have a huge cashflow problem.  We need an emergency loan of $85 billion in the next few days otherwise we will have to declare bankruptcy.
3. Washington assesses the risk and realizes that, as distasteful as it is, they have to make the loan.  However, they demand a very high rate of interest and demand an orderly repayment of the loan through an aggressive restructuring plan.
4. Washington lends the company the money, which is almost immediately spent to cover cashflow needs.
5. A few weeks later, the company comes back to Washington and says, "It's worse than we thought.  While we are trying to come up with a restructuring plan to pay you back, we need another $37 billion to plug another cashflow hole or we will have to declare bankruptcy."
6. Washington assesses the risk and now its worse.  Not only will the failure of the company cause great systemic risk, but now they have $85 billion of Washington's money......and it's gone!
7. Washington lends the company another $37 billion.
8. A few weeks later the company comes back to Washington and says, "We've been trying like the dickens to restructure and sell off assets, but the market is just terrible.  Also the rate that you are charging us on the $122 billion is so punitive that it's defeating the purpose of helping us with our cashflow.  Lastly, we need more cash or help to get out of these obligations that are draining more money from us.  We need to restructure our deal or we will have to declare bankruptcy."
9. Washington finds this even MORE distasteful.  However, now they are into the company for $122 billion, the money has been spent and bankruptcy still is not a viable option.  Washington restructures the deal that lowers the spread that the company must pay by sixty-five percent. Washington also reduces the principal of the loan and instead takes an equity position in the company.  Finally Washington pays the breakup costs for those obligations that are draining cash out of the troubled company.
10. Washington now sits, thumb inserted, while the company laughs at them.

Does any of this sound familiar?  It should because that is essentially what we did with AIG.  We gave them money, which they quickly spent, and then led us around by the nose.  Once we lent them the large sum of money we were hooked into that sinking ship in perpetuity.

You really think that when we give GM and Chrysler $15 billion to fund immediate cash needs, with the only collateral being their promise to come up with a real restructuring plan, that; 

1. They are going to come up with anything meaningful in three months when their problems are decades old?
2. If they fail we can clawback $15 billion that has already been spent?  With what cash are they going to pay us back with?

Those who do not heed the mistakes of the past are doomed to repeat them, especially if "the past" is happening right now in front of our eyes!

And now here we are!  AIG is essentially telling us that they can't repay our loans and they can't pay the 10% dividend on our preferred shares.  CEO Edward Liddy is all but handing us the keys to AIG.  This is clearly a "Ghost of Christmas Future" moment!  The ghost is telling us the more money we pour into GM the poorer we get....and the result will be what we tried to avoid in the first place....Bankruptcy and government ownership. 

AIG had to be saved because the stewards of our financial system were fat, drunk and stupid at the switch and failed to see the gigantic systemic risk bubble that AIG had become.  We said here earlier in the week, if they still pose some kind of systemic risk after all we have done....then some very, very senior people like the Secretary of the Treasury and the Chairman of the Federal Reserve need to fall on their swords.....NOW.

GM and Chrysler and soon, probably Ford will be a bottomless cup of need bigger than AIG.  Screw the politics.  Its time for bankruptcy with Treasury providing debtor in possession (DIP) financing (because there's no one else to do it). 

Comments

[Eric Salzman]

Bonzai!!

[williambanzai7]

CRAZY LIDDY AIG EASTER/XMAS BLOWOUT SALE

Video link: http://www.youtube.com/watch?v=4yYGoO5imyY

Hold the mistletoe, because its Crazy Liddy's AIG Easter Xmas Blowout sale.

Crazy Liddy's got everything you could possibly need to run
a global insurance mega juggernaut.

And its all on sale now. Airplane leasing companies, auto insurers, life insurers, casualty insurers, property insurers, reinsurers, financial products, banks, anything and everything in securitised toxic subprime products...And its all on sale a such low prices he's practically giving them away.

Remember we will not be undersold; we cannot be undersold and we mean it...

Santa knows that the best insurance and toxic asset deals in town are at Crazy Liddy's Easter Xmas Blowout blitz.

See Crazy Liddy over at AIG now now, his prices are totally INSAAAAANE!!!!!!!!!!!

[fletch]

Ahh yes.."Those who do not heed the mistakes of the past are doomed to repeat them". With that very sentiment in mind, and the fate of our society unfolding in front of our eyes minute by minute, I have been re-reading Jared Diamond's 1997 synthesis: "Guns, Germs, and Steel - the Fates of Human Societies". A couple quotes I thought worth sharing (from p.276) that seem quite apropos to our current events and provide a glimpse of the bigger picture:

"The difference between a kleptocrat and a wise statesman, between a robber baron and a public benefactor, is merely one of degree: a matter of just how large a percentage of the tribute extracted from producers is retained by the elite, and how much the commoners like the public uses to which the redistributed tribute is put."

"..why do the commoners tolerate the transfer of the fruits of their hard labor to kleptocrats? This question, raised by political theorists from Plato to Marx, is raised anew by voters in every modern election. Kleptocracies with little public support run the risk of being overthrown, either by downtrodden commoners or by upstart would-be replacement kleptocrats seeking public support by promising a higher ratio of services rendered to fruits stolen."

Hmmmm..