The AIG Gopher Hole
Mar 03, 2009
Yesterday the stock market dropped 300 points, mostly on concerns about AIG. My question is why did it take so long for these "experts" to discover that AIG had a problem? The recent $30 billion bailout, on top of previous $150 billion bailouts last September and November, did not even cover half of its fourth quarter losses ($61.7 billion).
Furthermore, these losses are from insuring bad mortgages that the rating companies flippantly stamped as AAA when in fact they knew that there were a lot of dung mixed in with the chocolates.
Bloomberg reports that AIG has insured $300 such outhouse commodities.
AIG serves businesses and individuals in more than 130 countries and jurisdictions. Its operations extend beyond providing life and retirement insurance, to financial services and asset management, and protection against terrorist attacks. Banks relied on AIG to back more than $300 billion in assets through derivative contracts as of Sept. 30, according to Bloomberg News.
Those derivatives essentially serve as a kind of insurance against losses on other financial assets or agreements. Were AIG to fail, the fallout would be widespread.
A commentator on PBS last evening said that AIG was on the hook for "half a trillion dollars worth." That's $500 billion, not $300 billion. But who's counting?
So the $180 billion means that the bailouts are only just getting started.
These bailouts are being used to pay off the insurance claims by the financial companies and banks who are on the hook for the toxic mortgages. Every time someone walks away from a home or declares bankruptcy, it is not the bank itself that is first liable, but the insurance company that insured those mortgages.
So all the bailout money given to AIG does not stay there. It goes to pay off the insurance claims submitted by those who were left holding worthless paper mortgages.
I suspect that the $500 billion worth of insured toxic mortgages is JUST THE TIP OF THE ICEBERG. When the reports use the term "derivatives," I get nervous. The insurance policy is just the first-level derivative. There are derivatives on top of derivatives on top of derivatives. That means more speculation based upon an earlier speculation, and most of these are leveraged, sometimes 400:1.
In other words, for every dollar lost, the company actually loses $400.
Did AIG play the derivatives game. Bloomberg says so in the quotation above. We just have not yet been told how far AIG took this in the mad gambles on the housing bubble.
The good news is that you, the taxpayers, now own 85% of AIG and its liabilities. I'm sure glad we got something in return for our bailout money. I would hate to throw money down a gopher hole.
Dr. Stephen Jones