AIG is a bailout fund.
It’s a slightly more sophisticated Tarp. Which is why nobody should really be surprised by this morning’s news.
The US government is to extend its existing credit line to AIG to a staggering $150bn. Not, though, to save the ailing insurer.
As is typical of bailout funds, the money will be put towards supporting asset prices and keeping bank balance sheets stable. Also paying AIG staff bonuses, hunting trips, etc.
Taxpayers capital will continue to go towards meeting collateral calls on CDS contracts: these calls will be direct liquidity-like cash infusions into the banking system. Meeting such calls will also allow the CDS contracts to remain in place, which will allow banks to pretend they don’t own any risky assets, as far as regulatory risk-weighting and capital requirements are concerned.
With the extension of the taxpayer funds to AIG, a second Tarp-like element will be added. Because now AIG is proposing outright buying the highly-levered structured bonds the group insurers:
AIG and FRBNY will create a second financing entity that will purchase up to approximately $70 billion of Multi-Sector CDO exposure on which AIG has written CDS contracts. Approximately 95% of the write-downs AIG Financial Products has taken to date in its CDS portfolio were related to Multi-Sector CDOs. In connection with this transaction, CDS contracts on purchased Multi-Sector CDOs will be terminated. AIG will provide up to $5 billion in subordinated funding and FRBNY will provide up to $30 billion in senior funding to the financing entity. As a result of this transaction, AIG’s remaining exposure to losses on the Multi-Sector CDOs underlying the terminated CDS’s will be limited to declines in market value prior to closing and its up to $5 billion funding to the financing entity. As with the securities lending program, FRBNY and AIG will share in any recoveries in the market prices of assets.
Around 50 cents on the dollar - what AIG is proposing to pay for those multi-sector CDOs - is probably above what those securities are worth. So that should be another good prop to the banking system: AIG will bury your dead.
Taking big losses on those won’t matter too much AIG either though because they’re no longer in the business of making money, but in the government of losing it. Or rather, providing it, as should be clear.
To wit:
AIG Q3 adjusted loss was $3.42 a share
AIG Q3 loss $9.05 vs $1.19 profit
AIG Q3 adjusted net loss $9.24B vs $3.49B profit
AIG Q3 net loss $24.47B vs $3.09B profit
Full results here.
A dry run for the Tarp’s results, perhaps.
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