Monday, November 10, 2008

Bailout Squared

In case you missed it, today we (and by we, I mean, The Taxpayers of the United States, acting against our will) bailed out the bailout of AIG. Almost 8 weeks ago, the government bailed out AIG to the tune of $85 billion dollars. Very shortly thereafter, the Fed loaned AIG another $37.8 Billion dollars. Today it was announced that the terms of the bailout were being re-written, because they were too tough on AIG. Now, our elected officials have been telling us that we're "investing" in the future of companies, not bailing them out. When the AIG deal was announced, I actually liked it - we (the government) were charging AIG a rate of 850 bps (that's 8 1/2 percent) higher than the prevailing LIBOR rate at the time. Super - that's a fine rate of return for us, and it's very much NOT just giving AIG money.
There was only one problem - AIG can't pay back the loan at that rate - it's too high for them! So, we've extended the term of the loan from 2 years to 5 years, cut the interest rate from L+850 to L+ 300 (that's a 5 1/2 percent reduction !!!!!) and oh yeah - thrown in another $50Billion or so. It doesn't sound like so much of an investment anymore...
I'm too despondent about what's going on to rant about it, but there are a few good pieces out there: Yves Smith wrote a composed and detailed piece explaining why this newly structured bailout is complete crap. Karl Denninger wrote a little about AIG today, but I prefer the piece he wrote this weekend about the general effects of all the money our Treasury is pissing away. As I've said before, Denninger indeed rants, but his thesis is accurate and quite relevant.
I thought the most succinct analysis of the AIG change of terms was from Dealbreaker, who incorporated Darth Vader's famous quote: "I'm altering the deal - pray I don't alter it any further."

(AIG CEO) Liddy: "Paulson, take the $60 billion in 5 year LIBOR+300 bonds and $40 billion in preferred shares and put them in my account."
(Treasury Secretary) Paulson: "You said it was $85 billion in 2 year, LIBOR+850 bonds!"
Liddy: "I am altering the deal. Pray I don't alter it any further."

Oh - one more thing: the bill ($150B+) for our "investment" in AIG alone now exceeds 1% of the annual GDP (roughly $14Trillion) of the United States. Staggering. To put that another way: we are spending one penny of every dollar of every single good and service produced in the United States this year on AIG.

1 comment:

Jason said...

The AIG bailout is small change and means nothing to the Fed. The Fed is transparent in that it is subject to the oversight of Congress. Is twice a year not fast enough? The intent of Congress in shaping the Federal Reserve Act was to keep politics out of monetary policy. Legislation requires that the Federal Reserve reports annually on its activities to the Speaker of the House of Representatives.