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AIG Downgrades Should Create an Endgame

by: Mike Steinhardt September 16, 2008 | about stocks: AIG    

Mike Steinhardt

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The S&P and Moody’s downgrades of AIG (AIG) have happened and this will rapidly push this situation to an end… either an end that prolongs the drama or The End.

If the government cannot find a way to ignore their lack of authority to lend to AIG and wiggle out of their suggestion that they will not make the loans, I do not expect another situation to arrive fast enough that could save AIG.

It is very surprising to me to see S&P and Moody’s make this decision without acceptance or understanding by the Federal Reserve and Treasury.  Therefore, it would not surprise me to see a last minute bailout program that makes all the past financial creativity exhibited by Bernanke and Paulson look basic.  If something like this happens, it will either be a new facility specifically created using some obscure provision in the Fed’s charter or it will just be a giant money laundering process to shove it through an existing conduit, similar to what they did with Bear Stearns on March 14th.

One extreme idea…have some other Central Bank lend directly to AIG.  Sounds crazy…right!?!  AIG is a global corporation doing business in about 100 countries.  If this is a global problem, maybe it is time for a global solution.   If this is solely a U.S. problem, then we are probably screwed.  But if our government cannot or will not lend to AIG, then I see no other workable deal. 

I am not advocating this or any other solution.  It has not mattered what I think or what I have said.

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This article has 12 comments:

  •  
    Sep 16 03:16 AM
    The real question during this debacle is why did the "short "rule was not extended by SEC.This would have allowed the FED ,Treasury and others involved for rational solution to the to the issues that financial system is facing .The open short interest has reached new high as some "hedge funds" are looking for money making opportunity.
    This systemic "bleeding" should be stopped as it could lead to unpredictable consequences .
    These problems were created over many (operational) years,now as they are being addressed ,decimation of the financial community is allowed .Rumors in the market allude to selling activity in Lehman(prior to the final outcome) and AIG shares by some prop desks -unbelievable.
    Reply
  •  
    Sep 16 04:57 AM
    Gabe the motto of the market is "Greed is good, greed works" and it always has been. You make money anyway you can and damn the consequences. I believe that the shorting of stocks is unhealthy and should never have been premitted. But it is an integral part of this demented casino that passes as a market.
    Reply
  •  
    Sep 16 04:58 AM
    Granted the downgrade requires AIG to provide an additional 14.5 billion of payments to counterparty's, but, it also gives them the right to terminate these contracts with the payment of an additional 4.6 billion (page 101 August 10-Q filing). If so was this the reason behind the 20 billion transfer approved by regulators yesterday as a necessary first step prior to any financing agreement. This removes the Credit default swaps from AIG's books!!


    On Sep 16 03:16 AM gabe borenstein wrote:

    > The real question during this debacle is why did the "short "rule
    > was not extended by SEC.This would have allowed the FED ,Treasury
    > and others involved for rational solution to the to the issues that
    > financial system is facing .The open short interest has reached new
    > high as some "hedge funds" are looking for money making opportunity.
    >
    > This systemic "bleeding" should be stopped as it could lead to unpredictable
    > consequences .
    > These problems were created over many (operational) years,now as
    > they are being addressed ,decimation of the financial community is
    > allowed .Rumors in the market allude to selling activity in Lehman(prior
    > to the final outcome) and AIG shares by some prop desks -unbelievable.
    Reply
  •  
    Sep 16 05:07 AM
    Gabe..with all do respect the short rule is like a fly in ointment with this systemic meltdown. If by the short rule u r referring to threshold securities then I also do not understand why AIG and LEH were not put on this list as was done by the SEC with ABK and MBI. That does help to slow or stop the panic short selling when there is a major crisis occuring. I also agree that there should be no naked short selling allowed. The uptick rule is another story and actually is not good for the market.

    But I didn't want to get hung up talking about short rules when today the the country will be facing a financial catastrophy of unkown proportions that could bring our financial systems and the worlds to a halt if no solution is found today and AIG declares bankrupcy on Wednesday. The $75 billion AIG is looking for as a bridge loan is just small potatos if AIG goes into bankrupcy and their credit rating is downgraded again forcing trillions of dollars of swaps held by AIG to be unwound and virtually bringing the financial system to a halt.

    Kinda sounds like the day the world stood still. Let's hope it doesn't come to that.

    Should be an interesting next couple of days.
    Reply
  •  
    Sep 16 05:42 AM
    S&P in their downgrade announcement notes that the mark to market losses on the insured CDOs and RMBS in the investment portfolio exceed reality, but now they don't think the market will recover under 2009 0r 2010.

    I find it impossible to conceive that these fantasy losses can form the basis of the destruction of a large, strong business, essential to the functioning of our financial system.

    However, a lot of what is happening lately suggests that common sense no longer applies in the market.
    Reply
  •  
    Sep 16 06:15 AM
    Any body buying AIG and if so why?
    Reply
  •  
    Sep 16 06:23 AM
    Tom...The new use of mark to the market accounting on the assets of these financial institutions has probably been a major contributing factor to the rapid disintegration of the valuing of these companies.

    The ineptitude of the CEO's and the Board of Directors should also be looked into. Some of it borders criminal if u ask me.
    Reply
  •  
    Sep 16 06:33 AM
    Sliman...I bought some cheap OTM Sept options yesterday but 4 the most part i'm not interested in playing the market this way. It was more 4 fun than a gamble to make a killing if AIG finds the capital and the stock jumps up
    Reply
  •  
    Sep 16 10:29 AM
    It is trivial to get around the Treasury's boneheaded catering to insane screechers and lend to AIG to save the system. The Fed just allows JP Morgan to access the discount window to any extent, and JP Morgan loans the proceeds to AIG. Or leads a consortium doing so, because it doesn't want to concentrate the risk all on itself. This saves face by giving the Fed a market "cut out", but it is in effect a Fed loan to AIG.

    Incidentally, all the ideologues screaming against bailouts are simply fools who have no idea how the system actually works or what the major responsibilities of its parts are. The decision *not* to give loan guarantees on Lehman mortgage debts to allow the rest of the bank to be sold in an orderly manner, has already cost 30 times what a "bailout" would, any counting. Without stopping any of it, as that would have. Paulson simply listened to the screamers and there is hell to pay in consequence.
    Reply
  •  
    Sep 16 12:29 PM
    I'm with JasonC, it is truly bizarre to see how sincerely some of these "free market" radicals believe in that concepts so implicitly, like God or the tooth fairy, when the evidence for the manipulative nature of corporate capitalism and its reliance on government for its very existence is everywhere evident. Capitalism is not about free markets and is only possible as an interaction of government and corporations at their highest levels. Unless you're naive enough to believe the engines of wealth creation are going to be reconstructed after a crash without a central bank and monetary policies it would be better to use the organs of government to head off the crash. It will be interesting to see if the former chairman of Goldman Sachs could really be such a naive true believer in "free markets" as treasury secretary that he fails to use his powers to save the goose that lays the golden eggs...
    Reply
  •  
    Sep 16 01:45 PM
    All I have to say is that no financial company should recieve any government aid until top financial officers agree to forgo any compensation (cash or other benefits) over $1M per year (IRS "reasonable comp" base). They each have plenty in their bank accounts, retirement accounts, property, insurance to cover their "necessities"... Let them reap what they have sown.
    Reply
  •  
    Sep 16 02:20 PM
    Anybody, and that includes any country, central bank, or whatever, that "lends" money to AIG, at this point, is a damned fool. The AIG philosophy has always been AIG owners/managers first, and to hell with anybody/everybody else, including the United States government and taxpayers. Any money going into AIG at this point will be stolen by the existing rulers of the Awful Insurance Giant. And please do not bore me with some bull ---- about how there will be "safeguards" against having the money pounded down a rathole that leads straight to the AIG muckey-mucks' pockets. I dare any naive soul who has never dealt directly with AIG to sit down for more than five (5) minutes with these bloodsuckers and then claim that their naive selves did not come away from this meeting feeling stained by the experience.
    Reply
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