Saturday, November 15, 2008

AIG's Bailout

"A number of financial experts now fear that the federal government's $143 billion attempt to rescue troubled insurance giant [AIG] may not work, and some argue that company shareholders and taxpayers would have been better served by a bankruptcy filing. ... Echoing some other experts, Ann Rutledge, a credit derivatives expert, said she is not sure how badly the financial system would have been rocked if the government had let AIG file for bankruptcy protection. 'What we see now are a lot of games by the government to keep these institutions going with a lot of cash,' she said. ... AIG has used the loan money to post collateral demanded by these firms, sources said. 'No one else benefits,' former AIG chief executive and major shareholder Maurice Greenberg wrote to AIG's chief executive on Thursday. 'Unless there is immediate change to the structure of the Federal loan, the American taxpayer will likely suffer a signifcant financial loss'," my emphasis, Carol Leoning at, 3 November 2008.

"The U.S. government reached a deal Sunday night to scrap its original $123 billion bailout of [AIG] and replace it with a new $150 billion package, according to people familiar with the matter. ... Under the terms ironed out late Sunday, the government would give AIG more money, including $40 billion from the U.S. Treasury's $700 billion Troubled Asset Relief Program. ... That plan [$123 billion] also failed to adequately address the main challenge facing the insurer--how it was hemorrhaging billions on credit default swaps and other financial instruments--as it posted collateral to nervous trading partners. ... The revised structure is designed to improve both AIG's ability to sell assets for a decent price and the taxpayer's ability to recoup the money that has been pumped into the insurer. It also transfers to the government many of the risks once absorbed by AIG, potentially exposing the government to billions in future losses", my emphasis, Matthew Karnitschnig, Liam Pleven and Serena Ng (KP&N) at the WSJ, 10 November 2008.

This article was titled, "Some fear AIG bailout not working". I don't fear this. I think it was not designed to "save AIG", but AIG's CDS counterparties. It's working fine. It's protecting GSG at Uncle Sam's expense. I agree with Greenberg and disagree with Henry Paulson.

KP&N are lost. How does extending AIG more money help the US taxpayer?

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