I, too, am a ‘non-finance’ type, and therefore I’d defer to anyone who is.
But it seems to me (CONJECTURE ALERT!) that the problem here is not that AIG flat-out can’t afford to insure the risk; it’s that AIG doesn’t have the liquid capital to post as collateral on this risk. In other words, it’s not that AIG doesn’t have the assets to sell to raise the money needed to cover its risks. It’s that the lack of liquidity in the market does not enable AIG to post the collateral. Thus the need for cash infusion.
Once AIG owns those risks itself, it is directly liable for them, and therefore there is no counterparty with which AIG needs to post its collateral.
Furthermore, my understanding is that the posting of collateral on these risks is only there for a worst-case scenario.
Again, this is just my understanding. Anyone who has a better understanding, please chime in.
You got it..they borrowed $150 billion, lost $24 billion the next month and now they purchased $16 billion of toxic cdos which it’s a safe bet they will try to sell to the feds down the road. I’m not a finance guru, but I can see another request for a handout coming.
Citizen is on the right track. Someone has identified that it is better for aig to ‘own’ the business than ‘insure’ the business given the state of the underlying balance sheet of whatever entity did this deal. Now subsititute “US Taxpayer” for “aig” in the 2nd sentence above and the picture becomes clear for everyone. Isn’t it peachy for us chickens when the foxes are running coop?
Jeff…everyone, I was out of the loop! I was busy Christmas shopping while Maiden Lane III ie Aig and the Fed Resv of Ny actually purchased over 60 b of these cdo’s in December….this little batch is nothing!
Based on the AIG/Fed agreement in which Aig’s exposure to paying for these cdo’s is limited to 5B, yes, the “assets” are being transferred to the Fed. The foreclosure bleed will end at some point.
I’m not a democrat, but I wonder if that isn’t really where these liabilities lie??? No, I’m not a fan of AIG. But, the government has been asleep at the wheel!!!! NO SEC, NO Insurance Regulation that applies/Fannie Mae/Freddie Mac/Barney Frank loan loan loan to everyone……one sure thing about capitalism is that people/businesses WILL TRY to make money…AIG did..lots of it….but AIG’s doors should close in respectful admission of their own failures.
So far, Adrock has the most intelligent comments posted here. For a “non-finance type”, Adrock, you certainly are on the money. But others are correct, too; you have to substitute “US Taxpayers” for “AIG” in these sentences. If AIG’s new management can use this move to alleviate their liquidity problems and begin to pay back the US Taxpayers, I’m all for it. And it looks like that’s exactly what they’re doing.
Hey trying to understand, when you get this figured out see if someone can explain how A M Best, Moody’s and S&P all rated the CDO’s AAA in the first place. If these CDO’s had the proper ratings they could have never been sold and we would not be trying to figure this out. After the Enron collapse, Arthur Anderson went out of business as no one would accept their work. Why do we still accept the work of the rating agencies?
Hold on a minute. The plan is either working or compounding the problem. Remember, aig was insuring these deals when it got stung, not financing them. Now, with our money, they are financing them by relieving the former insured party of any risk to the underlying asset’s risk. Now, we know cdo’s aren’t AAA-rated assets. aig has basically ‘bought the loss’ at full contract value, before we know there is a loss, how much that loss would have been, or if the loss were legit under the contract. The only way we, the taxpayers, have a chance to ‘have the loan paid back’ is if the cdo matures to its full value. As a class, cdos don’t perform at this level.
One thing is for sure, this stench will continue for untold years. The rotting corpse that was aig should have been burried, not preserved.
All too typical of the lobbiest-run government business model.
Pyrrus is right. This article is about a “physical settlement” of a credit default swap. AIG sold protection via a CDS. The protection buyer used the CDS once the CDOs defaulted. Thus AIG bought the CDOs to settle a swap contract, and AIG may recoup some part of that over time with the CDO asset. Google it. AIG probably had little choice in the matter per swap contract.
As I understand it, the intent is to place the CDOs into a special purpose vehicle, off balance sheet (sound familiar?), to clean up the mess and allow AIG and the Fed to recover funds from the SPV over time (best read through rose-colored glasses).
Transferring the significant potential liabilities of one corporation (AIG..still AIG, just 80% owned by the gov) to “someone else” usually is good for the balance sheet. This is especially true when the AIG can’t keep the cash register closed long enough to refill the petty cash.
I think if you are under the belief that the taxpayer is “better off” when AIG improves their liquidity that is short term thinking…..the reason that “their” liquidity is being “improved” is because “we are giving it to them”. It’s still costing the taxpayer, either today or tomorrow.
While we’re at it, let’s buy all of that old crummy office furniture at aig NY. We can buy it for full price and then own it for 80 cents on the dollar tomorrow. Such a deal!
We, the taxpayers, are getting bent over one of those crappy desks at 70 Pine Street and taking up the rear without benefit of lube. And not just by AIG. Can any of the financial institutions that also benefited from our largess tell us where the first half of the money we gave them went, other than in mergers & acquistions? Our great-grandchildren will be paying for this mess long after we’re gone.
I don’t think this deal saved AIG any money. In your example using $100 I think they ended up paying the $100–just did it in two pieces one for $25 (buying the security) and aseparate on for $75 that they don’t talk about (and hope people miss).
If AIG didn’t kick in the other $75 there would have been no reason for the security holder to sell for $25 since AIG would have already had to post more than $25 in collateral. I could be wrong and maybe they made a small savings, but I don’t think it is anywhere near what you indicated.
CDO original value $100 insured by AIG.
Current value $25 because both the assets and AIG’s insurance are not worth very much.
In this scenario, AIG has a liability of $75 (original value less current value).
If they pay $25 for the CDO they can eliminate $75 from their liabilities.
So for $25 of cash they’ve cleaned up their liabilities by $75 for a net gain to its balance sheet of $50.
This is a good thing for AIG to do and saves the taxpayer money.
I’m not saying they made that rate of return. It was merely a simple math way of showing how they may have cleaned up their balance sheet. Pick any number you want – even $45 to clear $55 would work.
In my example, AIG would owe the $75 to themselves as they just bought the financial instrument – so yes they would be better off.
Am i confused???? it seems to me that if they can’t afford to insure the risk, then they are not likely to be able to withstand the risk. ???
I, too, am a ‘non-finance’ type, and therefore I’d defer to anyone who is.
But it seems to me (CONJECTURE ALERT!) that the problem here is not that AIG flat-out can’t afford to insure the risk; it’s that AIG doesn’t have the liquid capital to post as collateral on this risk. In other words, it’s not that AIG doesn’t have the assets to sell to raise the money needed to cover its risks. It’s that the lack of liquidity in the market does not enable AIG to post the collateral. Thus the need for cash infusion.
Once AIG owns those risks itself, it is directly liable for them, and therefore there is no counterparty with which AIG needs to post its collateral.
Furthermore, my understanding is that the posting of collateral on these risks is only there for a worst-case scenario.
Again, this is just my understanding. Anyone who has a better understanding, please chime in.
You got it..they borrowed $150 billion, lost $24 billion the next month and now they purchased $16 billion of toxic cdos which it’s a safe bet they will try to sell to the feds down the road. I’m not a finance guru, but I can see another request for a handout coming.
You either die a hero or you live long enough to see yourself become the villan.
Citizen is on the right track. Someone has identified that it is better for aig to ‘own’ the business than ‘insure’ the business given the state of the underlying balance sheet of whatever entity did this deal. Now subsititute “US Taxpayer” for “aig” in the 2nd sentence above and the picture becomes clear for everyone. Isn’t it peachy for us chickens when the foxes are running coop?
Jeff…everyone, I was out of the loop! I was busy Christmas shopping while Maiden Lane III ie Aig and the Fed Resv of Ny actually purchased over 60 b of these cdo’s in December….this little batch is nothing!
Based on the AIG/Fed agreement in which Aig’s exposure to paying for these cdo’s is limited to 5B, yes, the “assets” are being transferred to the Fed. The foreclosure bleed will end at some point.
I’m not a democrat, but I wonder if that isn’t really where these liabilities lie??? No, I’m not a fan of AIG. But, the government has been asleep at the wheel!!!! NO SEC, NO Insurance Regulation that applies/Fannie Mae/Freddie Mac/Barney Frank loan loan loan to everyone……one sure thing about capitalism is that people/businesses WILL TRY to make money…AIG did..lots of it….but AIG’s doors should close in respectful admission of their own failures.
So far, Adrock has the most intelligent comments posted here. For a “non-finance type”, Adrock, you certainly are on the money. But others are correct, too; you have to substitute “US Taxpayers” for “AIG” in these sentences. If AIG’s new management can use this move to alleviate their liquidity problems and begin to pay back the US Taxpayers, I’m all for it. And it looks like that’s exactly what they’re doing.
I’m losing track of everything.
AIG and the Fed created this new entity called Maiden Lane. How does Maiden Lane fit in with the $150 billion bailout?
Is Maiden Lane involved in this $16 billion? What about the other $60 billion in CDO’s?
For CDO’s purchased by Maiden Lane, who gets any profits?
And, who has to come up with the cash if there are losses?
Can anyone help me out? This isn’t my area of expertise and I can use all the help I can get.
Hey trying to understand, when you get this figured out see if someone can explain how A M Best, Moody’s and S&P all rated the CDO’s AAA in the first place. If these CDO’s had the proper ratings they could have never been sold and we would not be trying to figure this out. After the Enron collapse, Arthur Anderson went out of business as no one would accept their work. Why do we still accept the work of the rating agencies?
Hold on a minute. The plan is either working or compounding the problem. Remember, aig was insuring these deals when it got stung, not financing them. Now, with our money, they are financing them by relieving the former insured party of any risk to the underlying asset’s risk. Now, we know cdo’s aren’t AAA-rated assets. aig has basically ‘bought the loss’ at full contract value, before we know there is a loss, how much that loss would have been, or if the loss were legit under the contract. The only way we, the taxpayers, have a chance to ‘have the loan paid back’ is if the cdo matures to its full value. As a class, cdos don’t perform at this level.
One thing is for sure, this stench will continue for untold years. The rotting corpse that was aig should have been burried, not preserved.
All too typical of the lobbiest-run government business model.
Pyrrus is right. This article is about a “physical settlement” of a credit default swap. AIG sold protection via a CDS. The protection buyer used the CDS once the CDOs defaulted. Thus AIG bought the CDOs to settle a swap contract, and AIG may recoup some part of that over time with the CDO asset. Google it. AIG probably had little choice in the matter per swap contract.
As I understand it, the intent is to place the CDOs into a special purpose vehicle, off balance sheet (sound familiar?), to clean up the mess and allow AIG and the Fed to recover funds from the SPV over time (best read through rose-colored glasses).
What you are saying makes sense, but that’s not what this article states vis-a-vis the underlying CDOs being in default.
Thanks for your source.
Transferring the significant potential liabilities of one corporation (AIG..still AIG, just 80% owned by the gov) to “someone else” usually is good for the balance sheet. This is especially true when the AIG can’t keep the cash register closed long enough to refill the petty cash.
I think if you are under the belief that the taxpayer is “better off” when AIG improves their liquidity that is short term thinking…..the reason that “their” liquidity is being “improved” is because “we are giving it to them”. It’s still costing the taxpayer, either today or tomorrow.
So, is anyone buying stock?
I don’t understand any of this crap anymore.
While we’re at it, let’s buy all of that old crummy office furniture at aig NY. We can buy it for full price and then own it for 80 cents on the dollar tomorrow. Such a deal!
We, the taxpayers, are getting bent over one of those crappy desks at 70 Pine Street and taking up the rear without benefit of lube. And not just by AIG. Can any of the financial institutions that also benefited from our largess tell us where the first half of the money we gave them went, other than in mergers & acquistions? Our great-grandchildren will be paying for this mess long after we’re gone.
That pretty much summed it up, to my understanding as well.
I don’t think this deal saved AIG any money. In your example using $100 I think they ended up paying the $100–just did it in two pieces one for $25 (buying the security) and aseparate on for $75 that they don’t talk about (and hope people miss).
If AIG didn’t kick in the other $75 there would have been no reason for the security holder to sell for $25 since AIG would have already had to post more than $25 in collateral. I could be wrong and maybe they made a small savings, but I don’t think it is anywhere near what you indicated.
CDO original value $100 insured by AIG.
Current value $25 because both the assets and AIG’s insurance are not worth very much.
In this scenario, AIG has a liability of $75 (original value less current value).
If they pay $25 for the CDO they can eliminate $75 from their liabilities.
So for $25 of cash they’ve cleaned up their liabilities by $75 for a net gain to its balance sheet of $50.
This is a good thing for AIG to do and saves the taxpayer money.
I’m not saying they made that rate of return. It was merely a simple math way of showing how they may have cleaned up their balance sheet. Pick any number you want – even $45 to clear $55 would work.
In my example, AIG would owe the $75 to themselves as they just bought the financial instrument – so yes they would be better off.