Goodbye, AIG

[SirNitram]

I'm so glad these sensible, well-run paragons of corporate responsibility and wise judgement are being considered to run social security. Aren't you?

[PeZook]

Of course I'm glad! I mean, it's not like total collapse of the US financial system will fuck over the rest of the world!

Just heard this on the radio here: The Polish Comittee For Banking Oversight will tighten credit restrictions, in order to eradicate the nascent subprime market.

This should bring down housing prices and make people, you know, not bankrupt themselves with stupid consumer credit.

It's funny because it was pretty obvious such measures were needed several years ago - I guess "not lend outrageous amounts of money to people who can't pay" is too complicated a rule for bankers to grasp, so they need the big bad government to step in and save them from themselves.

[K. A. Pital]

The collapse of the US financial system will actually not fuck over the rest of the world - at least not at the level of damage done to itself... because the Second World does not have it's financial and real sector so tightly intervined. The finances will collapse everywhere, but real sectors in the Second world are more resilent precisely due to the un-developed banking systems.

Of course, the pain would still be hard, but the First World will get more of it. Which is only right, considering the bunch of randian lunatics at the helm, who helped to orchestrate this scheme - effectively a global scam.

[PeZook]

The collapse of the US financial system will actually not fuck over the rest of the world - at least not at the level of damage done to itself... because the Second World does not have it's financial and real sector so tightly intervined. The finances will collapse everywhere, but real sectors in the Second world are more resilent precisely due to the un-developed banking systems.

The problem is agricultural production, which depends a lot on financial instruments for insurance. The US is the biggest food exporter: I'm worried that a collapse of their financial system may spiral towards the agricultural sector will cause a spike in food prices - that, compounded with the growing debt problem in Europe (thank the heavens we're five years behind the US in sheer insanity ) will cause...trouble. Especially since my job is pretty surplus to the economy

I'd imagine Russia will be way better off than Europe, though.

Of course, the pain would still be hard, but the First World will get more of it. Which is only right, considering the bunch of randian lunatics at the helm, who helped to orchestrate this scheme - effectively a global scam.

I'm not sure you can even call it a scam, really: more like rampant stupidity amongst the financial elite.

[Admiral Valdemar]

I don't even see what they're trying to achieve. This Ponzi scheme is going to unwind one way or another. All they've done is give us a little more time to consider how stupid the whole financial sector really was.

Japan tried to block these corrections and the US has bigger problems than Japan did when they saw this clusterfuck arise.

[Broomstick]

I don't even see what they're trying to achieve.

They're trying to avoid reality.

This Ponzi scheme is going to unwind one way or another. All they've done is give us a little more time to consider how stupid the whole financial sector really was.

Yet they will try to maintain the illusion as long as possible.

[Edi]

I'm actually pretty optimistic about my own prospects and those of Finland in general. In the early 1990s our banking sector suffered a collapse that looked very much like the current debacle in the US. It ended up with a €40 billion government bailout and nearly 450,000 unemployed people and it took ten years to recover, including the tech bubble (which was a pretty big deal here with Nokia etc). Our banking sector is pretty damned shy about overly big risks as a result, because we still remember a very recent bad crash acutely. Finland is pretty robust with regard top this, but it's still going to hurt.

[cosmicalstorm]

Yes the exact same thing happened here in Sweden around the same time, the banks got bailed out by the goverment and never had to repay any of it later when the profits returned, but in the end the country lived on and it went down in the historybooks as a big mess but nothing more.

[Edi]

The scariest thing is that if shit hits the fan big time in the US and you scale the Finnish numbers up wholesale to the US economy, it looks like a fucking massacre. €40 billion bailout when the national budget per year is ~€30-35 billion translates to a humongous number. So does the unemployment, 450k unemployed out of 5 million people would be somewhere around 30 million for the US, and as a statistic, these would be in the "unemployed and actively looking for work" column, to which you then add all the part time and other stuff. And once you count out the pensioners, children, stay-at-home parents and others who are not counted, that 30 million is going to be a pretty fucking scary looking percentage figure in the U1 column.

[Surlethe]

The scariest thing is that if shit hits the fan big time in the US and you scale the Finnish numbers up wholesale to the US economy, it looks like a fucking massacre. €40 billion bailout when the national budget per year is ~€30-35 million translates to a humongous number.

The US national budget is $3 trillion, so an equivalent bailout would cost $3.5-$4 trillion. That's near 30% of GDP.

So does the unemployment, 450k unemployed out of 5 million people would be somewhere around 30 million for the US, and as a statistic, these would be in the "unemployed and actively looking for work" column, to which you then add all the part time and other stuff. And once you count out the pensioners, children, stay-at-home parents and others who are not counted, that 30 million is going to be a pretty fucking scary looking percentage figure in the U1 column.

Another 30 million unemployed is 10% of the entire population, and just about 15% of the work force (which is about 2/3 of the population). On top of the current 6% unemployment rate -- an undercount of unemployment, since, as you note, it doesn't include part-time and other stuff -- that's over 20% unemployment.

[J]

And another 37.8 billion down the hole..

Fed Gives A.I.G. $37.8 Billion Loan
By BARRY MEIER
Published: October 8, 2008

The Federal Reserve Board said Wednesday that it would provide up to an additional $37.8 billion to the insurance giant, the American International Group, to help the company deal with a continuing liquidity crisis.

The additional funds come atop $85 billon in credit that the Federal Reserve Board extended to A.I.G. about two weeks, just as the current financial crisis was unfolding. At the time, the bailout of A.I.G. was the most radical intervention ever by the central bank in a public company.

Under the latest step, the central bank, working through the Federal Reserve Bank of New York, will provide an additional $37.8 billion to A.I.G.’s regulated life insurance subsidiaries and will receive investment-grade, fixed-income securities in return.

The money will be used to settle existing transactions related to its securities lending business. Under that program, A.I.G. lent out securities to investors and others receiving both the value of such securities and a fee in return. The insurance giant then took the funds and placed them in other investments like mortgage-backed securities.

Now that the value of mortgage-backed securities has plummeted, A.I.G. does not have the money to repay those who are returning borrowed securities. As a result, the central bank is stepping in to take those securities and provide A.I.G. with cash to meet its obligations.

In a statement, the central bank said that the new program would help A.I.G. replenish liquidity used in settling borrowed securities transactions while providing enhanced credit protection to the bank and taxpayers in the form of a security interest in these securities.

At the start of this month, A.I.G. had already drawn down $61 billion of its original $85 billion emergency bridge loan, an announcement that startled credit ratings agencies.

The ratings agency, Moody’s, downgraded A.I.G.’s senior unsecured debt on Friday and said it might downgrade other types of the company’s debt, which could make it more expensive for A.I.G. to borrow money and do business. Standard & Poor’s also changed A.I.G.’s credit watch status to negative, expressing concern about whether A.I.G. would be able to restructure with the help of the Fed.

It was a series of downgrades in A.I.G.’s credit ratings in mid-September that set off certain contractual provisions requiring the insurer to post billions of dollars of collateral with its trading partners, a catastrophic event that led to the huge federal bailout.

Well, we uh, kinda blew the first $85 billion on hookers, blow, and resort spas, so ummm...may we please have another $38 billion or so?

[J]

Bloomberg link

AIG May Double Some Salaries With Retention Payments (Update1)

Dec. 4 (Bloomberg) -- American International Group Inc., whose bonuses and perks drew fire from lawmakers after the insurer accepted a federal bailout, will make special retention payments that more than double the salaries of some senior managers, according to a person familiar with the matter.

Some executives in the group of 130 recipients will get more than $500,000 to stay through 2009, about 200 percent of their salaries, said the person, who declined to be named because the information hasn’t been publicly disclosed. An undetermined number of lower-paid employees will also get cash awards to dissuade them from quitting, the person said.

“It seems like more than what you’d need to pay to get people to stick around,” said David Schmidt, a senior consultant at executive pay firm James F. Reda & Associates. “Nobody’s hiring, so where are you going to go?”

Chief Executive Officer Edward Liddy is encouraging top employees at AIG subsidiaries to remain so the units retain their value while he finds buyers. The New York-based company is selling businesses, including its U.S. life insurance and retirement services operations, to repay loans included in a $152.5 billion government rescue of AIG, whose managers produced a record $37.6 billion loss so far this year.

“The idea is to provide incentives to maintain business continuity during uncertain times so we can pay back taxpayers,” said Nicholas Ashooh, an AIG spokesman who declined to comment on specific details of the retention program. “The insurance business is a function of people and capital, and it’s important to have the right people in the right jobs.”

Installment Plan

AIG disclosed the cash-award plan in a September filing without saying how much most of the recipients would get. The majority of the managers will get the first of two installments at the end of this month, said the person.

The awards may equal 100 percent to 300 percent of an executive’s annual salary, and as much as 100 percent for the next round of payments for lower-paid employees, the person said. The retention payments are several times larger than year- end bonuses, which most of the 130 executives will still get in March, the person said.

AIG said in the filing that the 130 payments included $3 million for retirement services chief Jay Wintrob. His award, almost 400 percent of his 2007 salary of $775,000, was the only one disclosed by AIG. While most recipients will get 60 percent of the money this month and the rest in December 2009, AIG said, Wintrob elected to get his first payment in April.

Bonus Payments

Lawmakers have criticized the retention pay, saying that AIG misled the public and that it’s unnecessary to give so much cash to retain employees when job demand is weak. Finance companies in the U.S. have announced 220,506 job cuts this year through November, employee placement firm Challenger Grey & Christmas Inc. said in a Dec. 3 report.

Liddy, 62, said on Nov. 25 that AIG will freeze salaries and forgo 2008 bonuses for seven top leaders, and his own pay was set at $1 through 2009. The next day, the insurer disclosed that Wintrob will still get the $3 million payout.

AIG also said the next 50 highest-ranked employees wouldn’t get raises through next year, and that it would ensure that bonuses and cash performance awards to the top 60 members of management didn’t come out of taxpayer funds. Their 2008 and 2009 bonuses would be “limited,” AIG said in its statement, without specifying the curbs. AIG said its curbs were stricter than federal rules for companies that accepted Treasury cash.

Congressional Demand

Financial firms that took money from the U.S. Treasury’s $700 billion rescue fund are under pressure to curb executive pay and perks. AIG followed Goldman Sachs Group Inc. in limiting compensation last month after getting commitments of capital from the U.S. AIG’s self-imposed pay curbs don’t forbid retention pay, which is different than bonuses, Ashooh has said. AIG had 116,000 employees at the end of 2007, according to Bloomberg data.

Representative Elijah Cummings, a Maryland Democrat who has called for Liddy’s resignation, said this week that AIG should provide names of those getting retention pay and explain why the awards are needed. Firms accepting taxpayer money shouldn’t enrich employees, he said.

AIG got an expanded government rescue package last month after being overwhelmed by bad bets on U.S. housing that caused four straight quarterly losses of about $43 billion. The insurer sold credit-default swaps, the contracts protecting against losses on mortgage bonds, that plunged in value as the assets they guaranteed declined.

In one of my previous posts regarding the financial industry bailout, I noted that under the terms of the No Bankers Left Behind Act, the executives could grab as many taxpayer dollars as they wanted and funnel it straight into their secret tax-sheltered bank accounts. Lo and behold, the AIG execs are doing just that.