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Monday, March 02, 2009

Throwing Good Money After Bad To AIG

Doing the same thing over and over again and expecting different results could be called insane, yet that is exactly what Barack Obama has done.


The federal government agreed Sunday night to provide an additional $30 billion in taxpayer money to the American International Group and loosen the terms of its huge loan to the insurer, which is preparing to report a $62 billion loss on Monday, the biggest quarterly loss in history, people involved in the discussions said.

The intervention would be the fourth time that the United States has had to step in to help A.I.G., the giant insurer, avert bankruptcy. The government already owns nearly 80 percent of the insurer’s holding company as a result of the earlier interventions, which included a $60 billion loan, a $40 billion purchase of preferred shares and $50 billion to soak up the company’s toxic assets.

Federal officials, who worked feverishly over the weekend to complete the restructuring, said they thought they had no choice but to prop up A.I.G., because its business and trading activities are so intricately woven through the world’s banking system.

But the deal also presents more financial risks to taxpayers at a time when the public and Congress have been sharply questioning the wisdom of risking federal money to bail out private enterprises.

Insanity with tax payer money. AIG will continue to suck everything they are given right down a black hole without it doing anything to help the economy.

Commentary Magazine:

One wonders when the populist outrage over bailouts for wayward homeowners, GM, Chrysler, Citibank, and AIG (again) will impact the administration. It seems to be operating without Congressional authorization in the new imperial presidency of unilateral appropriation. (George W. Bush started down this road when Congress had the nerve to rebuff his auto bailout proposal in the waning days of his administration.)

In normal times, when Congress was in charge of appropriations, popular opinion would register with congressmen and senators and slow down or block legislation. But what and who is to stop a president who acts without Congress and is impervious to polling or popular protest? When money is no longer an object (what’s another $30B in debt, after all?) and the legislative branch is removed from the process there isn’t much to slow down the train. If Congress remains too timid to intervene, the public has little recourse — until the next election.

More details on this from LA Times:

The additional federal money is simply one part of the restructuring approved Sunday by AIG's board of directors.

As part of an effort to pay back its outstanding Federal Reserve loan, AIG would give the government equity stakes in two of the company's crown jewels, American International Assurance Co. in Asia and American Life Insurance Co., which operates in more than 50 countries.

Each subsidiary would be placed in a separate trust to remove them from AIG's books, and the government would have direct ownership. AIG would continue to operate the companies, however, and eventually could sell them or take them public.

The revamped deal allows AIG to free itself from the 10% dividend it previously had to pay the government on its preferred shares, a move certain to save billions annually.

The government also has agreed to buy a sizable chunk of, or securitize, AIG's domestic life insurance business for $7 billion to $10 billion, sources said. The government could then sell that business or simply take in the steady income that business provides.

Corrente's headline pretty much says it all here, with "Somehow, I don't think FDR would have distributed wealth upward."

This is like a bad nightmare, one that many won't be able to awaken from until the 2012 presidential elections.

Naked Capitalism points to the original Bloomberg article which points out some of the beneficiaries:

Goldman Sachs Group Inc., Societe Generale SA, Deutsche Bank AG and Merrill Lynch & Co. are among the largest banks that bought swaps from AIG, according to a person familiar with the situation. The insurer handed over about $18.7 billion to financial firms in the three weeks after the September bailout, said the person, who declined to be named because the information hasn’t been made public.

Reactions from this are starting to come in pretty fast, so head over to memorandum and see them.

More at Wall Street Journal.