Taxpayers are being snookered.
The government has essentially refinanced AIG to the tune of $150 billion dollars on new terms that are more favorable to AIG (than to the taxpayer). That’s right. AIG, which is 80% owned by the government, and with virtually no leverage (except, of course, it’s ability to destroy financial markets and the global economy – but that’s already been established), has actually negotiated a more favorable deal.
How you ask?
Well, that’s a good question. Treasury’s understandable fear that an AIG collapse would wreak havoc is what motivates the continued support. But why the more favorable terms? Whose interest is being served by the government taking on more risk for a smaller return?
As Yves Smith’s must read unpacking of the Wall Street Journal article (linked above) puts it:
AIG should have no rights at this point. Zero. Zip. Nada. The government already on the hook for an open-ended liability. Yet the Fed is treating AIG as a party that has rights and is negotiating with them, as opposed to dictating terms. This is staggering…
…Remember, AIG does NOT has any God-given right to existence. If every significant operation AIG has must be sold to repay the taxpayer, and AIG ceases to exist, that would be a perfectly fine outcome. A systemic collapse would have been avoided, taxpayers would have gotten as much as possible out of a bad situation, and AIG would be liquidated in an orderly fashion. What is wrong with that picture?
Instead, AIG is being coddled for no reason whatsoever…
Indeed, AIG Chairman and CEO Ed Liddy believes it might be possible to get more favorable terms still. From a conference call on the new deal excerpted on Clusterstock:
The setup is that John Levin of Levin Capital asked if there were any way to restructure the new deal, so as to give AIG more upside if the securities they’re transferring to the government improve markedly in value. The response:
Edward M. Liddy – Chairman and Chief Executive Officer
Yes, John right now, the deal is… what the deal is, not fixed in concrete forever (emphasis added). As you can see the movement we made from the first transaction to the second one, is a rather quantum improvement. We’ll continue to do everything we can to put AIG in the best possible position. What these two arrangements do is they stop the cash out flows for the most part.
John Levin – Levin Capital
I agree with you and congratulate you on that. (!)
No one can figure out why this is happening. There are plenty of rumors going around that the fix is in through Paulson to protect Goldman Sachs. Goldman, apparently, has enormous exposure to AIG’s credit default swaps (essentially insurance on debt, of which there are trillions of dollars in “value” outstanding globally; value that exists, in most cases, at a rate that far exceeds the value of the underlying instruments).
In any case, AIG keeps sucking up taxpayer money in an egregious case of corporate welfare.
Pay attention. You’re being shafted, hoodwinked, bamboozled.
But in the end, who really expected anything different?