AIG To Big To Fail?

[Nemont]

When does a company become to big to fail? Freddie Mac and Fannie Mae but not Lehman Bros? I think there is alot of trouble ahead for the financial sector and for our economy, especially if the Fed keeps the printing presses running and debasing/devaluing the dollar while propping up private companies.

AIG forms keystone of financial system
By Andrea Felsted and Kate Burgess in London

Published: September 15 2008 20:26 | Last updated: September 15 2008 20:26

American International Group was until recently the world’s biggest insurer by market capitalisation, but it remains a key part of the US financial system.

“Not every insurance group could approach the Federal Reserve and ask for liquidity. It is the sheer size of AIG. It is colossal. It is definitely the equivalent to, say, Citigroup in the insurance world,” says one person who knows its business well.


“It is much more than an insurance company. They are in so many different financial transactions, some of which got them into trouble,” says Ronald Shelp, who has written a book on AIG.

Allowing AIG to fail would be like “taking the foundation stone out of a skyscraper”, said Trevor Jones, managing director of consultants Insurance Security Services.

AIG is the biggest provider of commercial insurance in the US, one of the biggest writers of life assurance there, and the biggest provider of fixed annuities, a popular retirement savings product. It has enormous global operations.

But it also has a financial products division that acted like an investment bank and has been at the heart of the current problems.

“The key difference here is they were running at AIG a mini investment bank, a mini trading operation,” says the person familiar with AIG’s business.

It is a counterparty in a large number of swap and hedging transactions. It wrote credit default swaps, which insure against corporate default, some protecting against losses on collateralised debt obligations, which sparked the problems.

AIG has total derivative exposures of $441bn (€311bn, £247bn), according to RBS.

John Coffee, law professor at Columbia University, says that if AIG were to fail, a number of other institutions that thought they were insured against default would find themselves “naked and exposed”.

Bank of America chief executive Ken Lewis told CNBC: “I don’t know of a major bank that doesn’t have some significant exposure to AIG. That would be a much bigger problem than most that we’ve looked at.’’

Mr Jones says the picture is also complicated because AIG “lost the one guy who knew how it worked, which is Hank Greenberg”. Mr Greenberg was ousted as chairman and chief executive in 2005 after 40 years with the group.

But while the focus has been on financial products, observers point out AIG’s businesses generating sales and profits, such as general and life insurance.

There are questions about what would happen to AIG policyholders in the event of a failure. But investors and analysts were doubtful on Monday AIG would be allowed to collapse, hence an agreement with New York state to free up $20bn.

The head of equities at one of the UK’s biggest investors said the repercussions should AIG fail were “potentially bigger than Lehmans. It is too big to go bust. If it does, we will be eating baked beans out of a tin.”

Despite the turmoil, the impact on other insurers was seen as limited. A London-based analyst estimated European insurers could face a “couple of hundred million euros” of investment losses each.

Others could be attracted by parts of AIG, for example its Asian operations. Analysts said these could appeal to Prudential, the UK life assurer, as could some of AIG’s US assets.

“There is going to be a bit of damage and debris in terms of the investment losses. The more significant question is going to be who wants to buy what, if it ultimately comes to that,” the London-based analyst says.

 

[smalls]

I think there is alot of trouble ahead for the financial sector and for our economy, especially if the Fed keeps the printing presses running and debasing/devaluing the dollar while propping up private companies.

AIG is a little different than Fannie/Freddie/Lehman because of the value of their assets, but I don't disagree with you Nemo.

The second part of your statement is what confuses me, while the presses have gone into overdrive over the last two weeks providing "capital", the dollar has continued to gain relative strength. Is this an indicator that the health of the global markets, particularly the EU and Asia, are following the US markets much closer than experts have been predicting amidst our “world economy”?

Or, is it an indicator that the price of oil has become the primary function of dollar "value"? A look at the absolute inverse oil/US dollar relationship over the last several years tends to support this, questions of which is the cart and which is the horse not withstanding.

*Sidenote- I heard this afternoon that in the last week AIG patriarch, Hank Greenberg, has lost 6 billion dollars.

 

[JoseCuervo]

*Sidenote- I heard this afternoon that in the last week, AIG patriarch has lost 6 billion dollars.

Was that Hank Greenberg?

I saw him interviewed this morning, still pretty sharp old guy, and not that bitter for someone who has lost that much money.

 

[smalls]

Was that Hank Greenberg?

I saw him interviewed this morning, still pretty sharp old guy, and not that bitter for someone who has lost that much money.

Yeah, I should have proofed my post, I thought I included his name. Mr. Hank Greenberg.

 

[Nemont]

AIG is a little different than Fannie/Freddie/Lehman because of the value of their assets, but I don't disagree with you Nemo.

The second part of your statement is what confuses me, while the presses have gone into overdrive over the last two weeks providing "capital", the dollar has continued to gain relative strength. Is this an indicator that the health of the global markets, particularly the EU and Asia, are following the US markets much closer than experts have been predicting amidst our “world economy”?

Or, is it an indicator that the price of oil has become the primary function of dollar "value"? A look at the absolute inverse oil/US dollar relationship over the last several years tends to support this, questions of which is the cart and which is the horse not withstanding.

Bernanke's has said he will print as much money as needed. This will only fuel higher inflation and a debasing of the dollar. In the long term printing money will make each dollar worth less and cause the price of oil to increase.

There can be short term upticks in the value of the dollar but look at where it was 4 or 5 years ago vs. today. Creating money by fiat is bad monetary policy. The dollar is a flawed currency and store of value right now and it would take years to correct but printing more to inject liquidity is poor economics. We have to start somewhere.

Nemont

 

[cjcj]

--------------------------------------------------------------------------------

When does a company become to big to fail?


When it buys off corrupt Senators& Presidents....banking regulators etc,etc

 

[brymoore]

Bernanke's has said he will print as much money as needed.
Nemont

I've never heard anything mentioned of printing more money. Are you using this term as a metaphor for the Fed backing Bears-Sterns and Fannie?

 

[cjcj]

I've never heard anything mentioned of printing more money. Are you using this term as a metaphor for the Fed backing Bears-Sterns and Fannie?

Brymoore, Nemont is on target... the feds have been Counter-fittting for years... at least the last 4 yrs.

 

[Moosie]

I want to know how Bof A buys Country wide, then turns and spends 50 billion buying other companies. are they truely that big or jsut buying crap for pennies on the dollar rolling the Dice ?

 

[JoseCuervo]

Moosie,

Good question. Keep in mind they bought MBNA and all the credit cards that come with that, including many that are being paid late. They bought US Trust and that has been mentioned as "underperforming", and then they went and paid $50b for Merril when Merril had a market cap of $26b. The next day in trading, Bank of America lost $30b in market cap whilst MER lost nothing in the meltdown.

 

[Nemont]

Brymoore

http://www.opinion-columns.com/praguewriter/2008/03/smash-the-press.html

 

[brymoore]

Do you have a credible source?

 

[Nemont]

Come on Brymoore you got admit that source at least is a little funny.

I loved this quote:

The dollar this administration has contrived to devalue by approximately half during its brief term in office, is now to be further demolished by stimulating, diddling, futzing with and printing their way over the edge of the cliff. The printing press is to monetary policy as Viagra is to maintaining an erection. The one gives you a sore dick, but the other turns the United States into Argentina.

 

[Nemont]

How about this one.

http://www.businessandeconomy.org/29122005/storyd.asp?sid=2947&pageno=1

 

[brymoore]

The first link was funny. I heard thumpthumpthumpthump on my computer. I imagine it was the black helicopter background noise for the web site.

The second link seems like an old article around the time Ben took over the Fed.

I googled looking for evidence that the Fed is printing money (above replacement needs). If they are, it is a huge concern. Inflation could spike to significantly.

 

[Nemont]

Brymoore,

When the Fed "injects" liquidity into the market what do you think they really do? It isn't a black helicopters thing. Basically the Fed creates money out of thin air and "injects" that into the system.

Creating money via fiat debases and devalues the dollar.

Nemont

 

[brymoore]

The Fed can issue debt and inject those funds into the market, which is what I suspect they are doing. I doubt they are printing money to inject into the market.