Irrational Hatred...

I've been so livid, so many times this year, and each time I calm myself hoping that our politicians might somehow marginally redeem themselves.  And they never fail... to make me even angrier.

Yesterday, many many bloggers wrote about the travesty that is the "renegotiation" of the AIG bailout.  Now it seems that all of our worst fears are confirmed by that bastion of pro-business reporting, the Wall Street Journal.  Via Naked Capitalism (b/c I don't have the friggin' money to subscribe to the WSJ online) (emphasis mine).

Banks in the U.S. and abroad are among the biggest winners in the federal government's revamped $150 billion bailout of American International Group Inc.

Many banks that previously bought protection from the insurer on securities backed by now-troubled mortgage assets stand to recoup the bulk of their investments under a plan by AIG and the Federal Reserve Bank of New York to buy around $70 billion of those securities via a new company. These securities are collateralized debt obligations backed by subprime-mortgage bonds, commercial-mortgage loans and other assets.

Banks in the U.S., Europe and Canada bought credit-default swaps on these securities from AIG, which in turn promised to compensate them if the securities defaulted. Defaults haven't been a major problem, but the market values of these CDOs fell sharply over the past year or so.

That enabled the banks to pry roughly $35 billion in collateral from AIG as a result of those declines and downgrades in AIG's own credit ratings. The banks that have sought and received collateral from AIG include Goldman Sachs Group Inc., Merrill Lynch & Co., UBS AG, Deutsche Bank AG and others.

Throughout its AIG rescue efforts during the past two months, the government has had the banks in its sights; it made its initial bailout of AIG in part to avoid potential bank losses that might have threatened the broader financial system.

Under the plan announced Monday, the banks will get to keep the collateral they received from AIG, much of which came when the government made funds available to AIG in September. The banks also will sell the CDOs to the new facility at market prices averaging 50 cents on the dollar. The banks that participate will be compensated for the securities' full, or par, value in exchange for allowing AIG to unwind the credit-default swaps it wrote.

"It's like a home run for some of the banks," says Carlos Mendez, a senior managing director at ICP Capital, a fixed-income investment firm in New York. "They bought insurance from a company that ran into trouble and still managed to get all, or most, of their money back."...

And once again, in Mom-speak, this is what's going on.  A bunch of banks, including Goldman Saches (the birthplace or va ja ja from which sprang the unholy duo that is frakin' Paulson and his little lapdog Kashkari) bought a bunch of crap securities.  The banks then bought guarantees (or insurance) on those securities from AIG so that if the crap securities fail, AIG would have to pay the original full (par) amount.  Now these crap securities are about to fail.  You might say that - hey - the banks paid for the insurance, they should collect on it.  Yeah, but at taxpayer's expense?  No, tks, bai. 

If the crap seurities fail, then AIG would have to make good on its insurance, which it can't, which would cause it to fail.  If AIG fails, then they can't make good on the guarantees, then the banks would have to take ginormous write downs.

So the government is going to buy the crap securities from the banks.  Seriously.  At 50 cents to the dollar (and though the language in the article is a bit confusing, it looks like some will get full par value - I'm trying to figure this out).  Which sounds like a deep discount until you realize - hey - aren't we afraid that these crap securities are going to FAIL?  As in go to zero? 

So the banks will get 50 cents on the dollar, government will get crap securities going towards zero, AIG gets to not fail, until, as Yves points out, it has to face the OTHER $300 BILLION WORTH OF ASSETS THAT IT HAS GUARANTEED.

Frakin' America #FAILWHALE.

Comments

[Scott]

I think the key to understanding the "why" of this specific bailout (and bailout II) is the first part of the first sentence:

"Banks in the U.S. and abroad..."

Banks in Europe were some of the biggest customers of AIG's insurance. I suspect the US Govt wanted to do everything in its power to make sure that problems at AIG would not be the cause of problems at European banks. The European banks may have ended up with problems, but at least no one can point the finger at AIG as the direct cause -- as many folks are doing with LEH.

Of course, since US banks were involved in this process with AIG, they also benefit from any help AIG gets. The nature of the beast.

[Scott]

Just to add, keep in mind that part of the rationale behind these rescues is to re-instill confidence in the financial system. I think the last thing the US Govt wants is for other countries to doubt that we will honor our obligations -- even if they were made irresponsibly by a private company. In this case, since many of the key counterparties to AIGs derivatives were significant European financial institutions, no doubt that weighed heavily on the US Govt's decision to intervene.