AIG
Mar 2, 2009
Posted by Jody Eisenman | Filed under Uncategorized
While reading the reports on the record loss by AIG, I am reminded of the movie Major League. At some point, Charlie Sheen, the pitcher known as “Wild Thing”, is sitting in a bar and has someone request his autograph. He is very excited, until the fan tells him that he made “The Hall of Shame” for setting the record for wild pitches in one inning. AIG reported a staggering loss of $61.7 billion for the final quarter of 2008, the largest in US corporate history.
You’ve got to be really inventive to lose that much money. Figuring on thirteen weeks of five workdays, and subtracting Thanksgiving and Christmas, you’ve got 63 working days for the quarter. Therefore, AIG lost almost one billion per day. Do you think the executives got up early each morning thinking of ways to lose money on their CDO paper? Did they stay up late dreaming of ways to issue creative CDS to counter parties? All told, AIG lost about $100 billion for 2008. The government has reached an agreement to restructure their bailout. The terms are fairly complex, but the essentially, the government is getting a less attractive deal than they had in November, and they are giving AIG another $30 billion. This, despite the fact that CEO Liddy stated at that time that “AIG is on the road to recovery”.Sure pal. Now they must really be on the road to recovery! In Addition, based on the state of the real estate market today (which shows no signs of a bottom), it would seem quite likely that AIG will continue to need more funds going forward.
As bad as all this is, there are actually two other issues that could be even more catastrophic going forward. Both involve the CDS (credit default swaps).
1. As you may recall, AIG first got into major trouble when they underwrote a huge amount of CDS paper, chiefly out of their London office. That unit is currently under investigation by the SEC, as well as the US Dept of Justice and the UK Serious Fraud unit. Its’ safe to say they won’t be underwriting any more of this paper for awhile, probably forever. However, there is still lots of this paper in the marketplace, insuring risky CDOs and corporate paper against default. Now that the government owns almost 80% of the company, does this mean that the US has effectively taken over this risk? Based on all these bailouts, I would have to say yes. Therefore, I could see that in the case of major default of say, a GM, C or BAC, the government could be on the hook for an additional hundreds of billions of dollars, possibly trillions.
2. AIG has lots of corporate debt that other parties have issued CDS on. These CDS were probably issued by the usual parties like C, BAC and GE Capital. Should AIG default, these CDS would immediately come due. Needless to say, there is probably no way that these parties could pay off without massive assistance from the US. The question, is the governments’ 80% ownership of AIG effectively a trigger of a technical default on the CDS? We shall soon find out.
