Well, as I suspected, AIG was deemed "too big to fail" in that a potential bankruptcy filing on the part of AIG would have brought into question the stability of the entire global financial system itself.
So, last night, Treasury Secretary Paulson, Ben Bernanke and select Congress members authorized the Federal Reserve to float a bridge loan to the tune of some 90 billion of our tax dollars to keep AIG afloat in the short term. What will happen in the long term is a bit murky at this point as details are still coming out on precisely the nature of the deal that was struck. In my view, this problem could have been avoided entirely, had the credit rating agencies done their jobs and downgraded AIG's credit ratings several months ago, instead of doing so on the same day that one of the largest investment banks in our history, Lehman Brothers, filed for chapter 11 bankruptcy protection. The simple truth is that we have known for some time that the mark to market values of the complex securities and derivative insurance contracts held by AIG weren't worth nearly what the company's management wants to believe they are worth. Had the credit agencies downgraded AIG's creditworthiness 6-9 months ago, it is very likely that we the taxpayers would not have had to bail out AIG in the first place. Unfortunately, the credit rating agencies waited until the entire U.S. financial system was in much more dire straits before taking action. Therefore any ability for the private sector to generate an additional 70-90 billion in financial backing for AIG was all but impossible given even the commercial banks themselves are hesitant to lend to one another right now, as the interbank LIBOR rate spreads clearly demonstrate, and most certainly will not lend to investment houses or insurance companies as a result. This would not have been the case 6-9 months ago when capital was still more readily available as compared to current circumstances.
As I said, the AIG bailout should be more of a short term problem. The bridge loan should be temporary in nature given AIG has over a trillion dollars in assets, most of which is tied up in AIG's very profitable insurance subsidiaries. The short term financing is necessary due to AIG's credit rating downgrades which, almost overnight, required tens of billions of dollars in additional collateral. Let's be clear here, AIG as a company isn't insolvent, they are simply short on cash, hence the bridge loan. This situation, while certainly much more complex from an AIG perspective, is much the same as a bridge loan used when a consumer purchases a new home before selling their old home, and when the old home sells, the bridge loan is paid back with interest. Over the next several months, AIG will need to liquidate some of their assets to repay the bridge loan and generate the additional collateral monies required due to the actions of the credit ratings agencies. Personally, I see this as an excellent time to buy into AIG stock if you have monies that you can afford to lose, given AIG will most likely not fail, and eventually the government will be out of the AIG business altogether, hopefully within the next year or so, and at a paltry 3.xx dollars per share, this stock has fallen over 95% from it's 52 week highs. I see a lot of upside here long term.
Keep a watch out on WaMu, quite possibly the next financial company on the perverbial chopping block. It will be interesting to see, if WaMu takes a turn for the worse, whether or not the guv'mint will step in. I've maintained to date that the decision point on guv'mint intervention has to do with CDS market exposure. To the best of my understanding, WaMu does not have much exposure to the CDS markets, meaning that the potential failure of one of the nation's largest S&L's will not result in a crisis of confidence on credit default swaps. The failure of WaMu has more to do with bad mortgage lending and mortgage investment practices that have brought on major mark to market write downs over the past year, and write downs will most likely continue over the next 12-15 months at least given WaMu does have exposure to Alt-A mortgage securities which are currently seeing 16% 60-day delinquency rates on mortgage payments, coupled with the fact that many of these same Alt-A mortgages are due to experience rate resets to prevailing market rates over the next 1-2 years. This means that 16% delinquency number is going to rise quite a bit since people already cannot afford their current "discounted" teaser rate mortgage payments. In many cases the monthly mortgage payments increase by a factor of 50-100% when the introductory discount rate period comes to an end. Could you afford that today? Yeah, neither could I. :-)
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You touch on an issue that is more fundamental to todays debacle than I think many realize: the failure of credit rating agencies to perform due diligence before issuing a rating. It seems to me that at some point, they are or should collectively or individually, wind up on the defending end of some governmental or class action litigation or both. The derivatives which figure so prominanently in this mess would not have existed in the light of day for more than a few seconds had they carried an honest credit rating and they would certainly not have become popular enough to perpetuate the overlending to unqualified borrowers which also plays a leaing role. Finally, the individual banks making such loans must share some responsability because they were making loans that they would not have made apart from the capability to package and resell them in derivative forms.
The whole mess is a disheartening saga where any individual to stand up and say, "What I did was wrong" would be a welcome slice of character and integrity, the lack of which is our American culture in which this kind of mess can thrive.
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