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Wednesday, September 17, 2008

Fun With Numbers: The AIG Debacle (UPDATED)

Some people are mad. Some people are frustrated, and others are scared. Before you make your final determination about the AIG debacle, here are some numbers to consider.


One trillion is roughly how much in assets that AIG currently has. If anyone wants to know why the Fed stepped in with a lifeline for AIG but not Merrill Lynch and Lehman, that number is at the center of that question. Both Lehman and Merrill each had about half that much. I don't believe that there was any doubt that because of the sheer size of AIG's holdings that the Fed could risk just letting it fail. Beyond this, unlike Merrill and Lehman, which were centered mostly in investments (as well as their doomed mortgage holdings), AIG has a very varied financial services business. Everything from people's car insurance, home insurance, and mutual fund portfolio would be threatened. Unlike Merrill and Lehman, this would have a ripple effect into all of financial services.

85,000,000,000 and 11

85 billion is the size of the CREDIT LINE that the Federal Reserve gave AIG acess to. 11 is the CURRENT percentage rate that the Fed will charge AIG for use of this credit. I say current because this credit line will actually be LIBOR plus 8.5%. So before anyone screams the word BAILOUT, please note the terms of this deal ain't that great. Not only is this rate outrageously high but is a constantly moving rate. Now, before anyone goes and condemns the Federal reserve remember two things. First, one of the most crucial roles of the Fed is to be the lender of last resort. That's what they did. Second, AIG's credit worthiness ain't that great. The rate is outrageously high and also well deserved.

What this $85 billion really buys is time. What AIG really needs to do is sell off a whole bunch of their assets and downsize so that the company becomes solvent again. This credit line gives AIG just this time.


That's the number of months this credit line is good for and that's how long AIG has to get its house in order or we will be revisiting this situation again.


This is the number that ought to scare all. That's what percentage of the company is now owned by the United States. Given that Fannie and Freddie are also now nationalized, what this means is that insurance and mortgages are, for the most part, currently socialized. Any believer in free markets ought to have nightmares about the number 80 for weeks. Now, frankly, if I am the Fed, this is the only way I consummate the deal myself. This gives the Fed power to veto dividend payments. The Fed was in a position of power and they used it. What this will hopefully spark soon is a debate over whether we are all comfortable with an extension of the federal government having this much power.


It apppears that AIG will need even more cash as they went back to the Fed on the 9th of October, 2008 for an extra $37.8 billion.


Jason Gillman said...


I wish the news would lay it out as simply.

I sometimes fancy myself a fairly astute follower of economic policy, but you helped .. a little.

Thank you.

Unknown said...


I agree! I am learning quite a bit about these financial matters since I stumbled onto this site. I especially liked the explanation of derivatives above this post.

While I don't always agree with what is being written, it is generally well reasoned and educational. Thanks!

Anonymous said...

You should be in the REGULATOR PANEL
on a Think Tank Policy Maker not just a Provocateur.Your contribution will be greatly appreciated.
Thank You For The Honest Provocation.

Anonymous said...

Mike,your numbers are scary.Is the 85 Billion enough?We are talking about mind boggling One Trillion company.
Someone must be held responsible for these debacle.Be it the parent or child.Someone or a group must be having both hands in the tin don't even have a finger to point at wrong doers.How can such a big Corporation fail to see the quick sand.
Totally out of control my friend.
What for if you have so many rules and regulations but no enforcer.
You cannot fault the borrower if you are lax in control.
Think about it.

mike volpe said...

The numbers are accurate. One thing you have to keep in mind is that a financial company makes about one percent in profit on money they manage, roughly. That's why all of these companies have such enormous amounts of assets.

I think the 85 billion will be enough. They really just need to have those that will look to buy up their assets feel as though the company is viable. Ultimately, what they bought wasn't 85 billion but time. Ultimately, this company will get chopped up into all sorts of parts. They just need enough time to do it orderly.