Will A.I.G Sink Obama?

If you have ben following the AIG scandal closely you will have noticed that we are now at a crucial moment. One that could cause severe political damage to the White House.

For starters here’s the news today from the New York Times: A.I.G. Lists Firms It Paid With Taxpayer Money

Let me lay out the essential history:

AIG was an insurance company. That part of it in normal insurance is profitable. It is one of the world’s largest insurance companies doing business throughout the world. there is no doubt its collapse would put a terrible strain on the world’s financial system.

But that’s not the fun part.

Where AIG gets really interesting is in its London operations where it sold ‘credit default swaps’. These pernicious little pieces of financial trickery are designed to provide insurance against the default of another financial asset. Let me give you an example: bank ‘A’ owns a sub prime mortgage. It goes to AIG and asks to insure itself against the possibility that the sub prime mortgage might go into default. AIG enters into an agreement that says were such a horrible thing to happen it will pay bank ‘A’ and assume said mortgage onto its books [or more likely simply write it off]. Naturally neither bank ‘A’ nor AIG think the mortgage will actually go belly up – who ever heard of such a thing?- so the huge fee the bank forks over to AIG is thought of as buying a sensible, but unlikely to be used, insurance policy. The main objective seems to have been that AIG’s ‘genius’ employees earned vast bonuses at low risk, and the bank’s ‘clever’ risk managers lowered their employers exposure to loss so that it can assume ever more risk elsewhere. Oh … and they earn a fat bonus too for being so clever at managing risk. There seems to be a trend here.

Smart, simple and profitable.

Until 2008. When the world learned that sub prime mortgages do, indeed, carry risks. Duh. Brilliant risk managers these folks. Really.

Wait. It gets worse.

So as the various mortgages melt away the banks line up to be paid. AIG has to liquidate assets to pay off on the insurance. As the pace of defaults gathers AIG is forced to liquidate faster until it reaches a point that it is dumping assets in such volume that asset prices are dropping so quickly it no longer can generate sufficient cash.

And the whole edifice totters to the brink of collapse.

The banks involved are all the usual big names. With Goldman Sachs and Societe Generale, geniuses one and all, in the van.

Urgent calls go out to save AIG because its interconnectedness is so all encompassing that to contemplate the damage is to contemplate the end of our financial system.

AIG has a gun to our heads.

In steps the Federal Reserve Board, and $170 billion later the taxpayer is still held to ransom by the stupidity of a handful of traders.

And I mean stupidity.

Think about this one: amongst the insurance written was a pile of business insuring against the default of US Treasury Bonds. The insanity of this is mind boggling. Does the counter-party here – let’s call it bank ‘B’ – honestly need insurance against the default by the US government? I suppose such a default is within the realm of possibility. But the real question is this: were the US to default on its debt, does bank ‘B’ truly think AIG will be in sufficient financial health ever to deliver on the insurance? But they bought the swaps. They must think that AIG is less likely to fail than the US, which, parenthetically, can print money until the cows come home. Something a tad more difficult for AIG.

What were these idiotic people thinking?

As someone else has said buying that insurance is like buying a policy against the Titanic sinking from someone sitting on the Titanic.

It makes no sense.

Which brings me to the obscenity of the bonuses.

Last week Tim Geithner, who presumably works the phones over at the Treasury Department because he seems not to have any staff around him, gets a call from Edward Liddy, AIG’s CEO. Liddy, given this job by the Paulsen Treasury Department, informs our doughty Geithner that he’s about to pay out about $100 million in bonuses. That’s our cash he’s using since he has none of his own.

Why are these bonuses ‘necessary’?

Keeping talent. AIG fears a ‘brain drain’ if it doesn’t pay out the bonuses that are contractually owed.

So let’s connect the dots.

There are a bunch of yahoo dimwitted lunatic traders who contrive to destroy the world’s largest insurance company by inventing a business model so bad that a child can see through its infantile stupidity. The purpose of the business model seems to have been the generation of bonuses for the dolts on the phones. It was obviously not risk management because it includes the aforesaid insurance against the default of the US Treasury which is now engaged in a heroic effort to save the mess these know-nothings have made so that AIG can pay bonuses to stop the idiots leaving.

Did I miss something? And why can’t we all get jobs like that? Given an opportunity I am sure we all could come up with a truly stupid, brainless, short lived near fraudulent rip off of our employers.

Or is this a monumental farce? The White House is going to look extremely foolish – and that’s being polite – if it continues to cow tow to AIG this way. This is a political land mine of epic proportions.

The taxpayers of America have paid out $170 billion so far to save AIG from its historic incompetency. No one in the history of finance has ever been so stupid as the experts of AIG. They should never be trusted with pennies let alone $100 million of bonuses.

Now. Please will someone in this administration stop this madness. The government has spent enough to own 80% of AIG. They should do nothing, hell they shouldn’t even breathe, without our permission. And they blow off Geithner?

Have some backbone Obama and stop this. Before it stops you.

Oh … and that brain drain. Every single one of those folks is lucky that they are being investigated for fraud. Insurance against US Treasury Bond defaults? By a US based company?

You bought that? Then I have a bridge to sell you.

What jackasses.

Addendum:

Information now emerging suggests these ‘bonuses’ may be more akin to ‘commissions’. Some commentators see this as sufficient difference to walk away: apparently commissions are OK but bonuses are not. I don’t share that opinion. The division of AIG that created this black hole in our economy should not be operating at the moment other than to wind up its book of [toxic] business. There should be no commissions paid for cleaning up the rubbish. The difference between a bonus and a commission is largely semantic. One usually is tied to specific personal goals and the other is usually tied to broader organizational goals. Either way AIG failed. It should not being paying anything other than base salaries. Contracts entered into prior to the debacle should be declared invalid – as they would be in bankruptcy proceedings – and renegotiated or simply eliminated. trying to parse out subtle differences to mollify the raging mob will merely enrage it further. We need strong leadership, and if that means annoying a few failed traders then so be it. Let them sue. That would mean a jury trial here in New York. Does anyone think the government would lose that one? What jury would side with these losers?