Tuesday, December 01, 2009

AIG Gets Foreclosed On - "I'm Paying You With Your Money"

Irony continues to flourish.  The first story I saw this morning was: "AIG Reduces Government Borrowings by $25B."  Hmmm.. note the careful wording - clearly AIG didn't pay back $25B to the Government - let's read on:

"American International Group Inc. on Tuesday slashed the amount of money it owes the government by $25 billion as it moved two subsidiaries into special holding units ahead of their planned spinoff or sale.

AIG moved American International Assurance Co. and American Life Insurance Co. into special purpose vehicles, which are used ahead of a move to separate a unit from a parent company. The government is receiving preferred equity stakes in the two life insurance companies worth $25 billion in exchange for a reduction in the amount of money AIG owes the government.

AIG will continue to hold the common stakes in AIA and Alico until it determines whether to complete initial public offerings for the companies or sell them privately. No timetable yet has been announced for when an IPO or sale will be completed."

This actually isn't a total shock - it was announced preliminarily back in June, and I wrote about it then.    AIG tried to sell these two businesses, but couldn't get either 1) a buyer or 2) a buyer at the price they wanted.  Thus, they decided to make the Government the buyer at their price, and somehow the Government agreed.

The analogy here is if you have a house with a $1mm mortgage (in AIG's case, it's more like a $180 BILLION mortgage, but let's play make believe).  You owe the bank $1mm, and you've lost your job, so you put your house on the market.  After a year, no one wants to buy your house, and your neighbors' comparable houses have sold for $500k.   You can't just call the bank and say "hey man, the house is really worth $1mm, so you can just take the house and we'll call it even."   Actually - you CAN!  It's called foreclosure - the US Government is foreclosing on AIG.   Also note that while this relieves you of your debt, the bank (the Government in this case!) eats the loss!

What can we learn from this?  Well - we're never getting back the money that was lent to AIG - this is more evidence to that fact.  Once we (the Government) start accepting assets that no one else wants to buy as repayment of debts, it's because they're better than nothing - better than the cash we will NOT be getting!

Now, let's get back to the absurdity.  There's another big problem with this transaction: the Government already owns 80% of all of AIG - from the bailout a year ago.  Sooooo.... Why do we need to get paid back with stakes of companies (AIA, ALICO) which WE ALREADY OWN?!?!?!?!?!    Pure insanity.

Finally, notice that AIA and ALICO will be placed into special purpose vehicles to facilitate this chicanery.   Is anyone else laughing out loud at this?  One of the big problems for the banks was that they had all sorts of off balance sheet assets - lousy MBS, CDO's and other structured products - sitting in SPECIAL PURPOSE VEHICLES, which is a fancy term for "off balance sheet black holes where we can pretend that we no longer have risk, but are merely an accounting ploy."   The banks pretended these assets weren't really effecting their balance sheets, and avoided recognizing the losses associated with them for as long as possible (and some still haven't been recognized.)

Investopedia explains Special Purpose Vehicle/Entity - SPV/SPE
Thanks to Enron, SPVs/SPEs are household words. These entities aren't all bad though. They were originally (and still are) used to isolate financial risk.

A corporation can use such a vehicle to finance a large project without putting the entire firm at risk. Problem is, due to accounting loopholes, these vehicles became a way for CFOs to hide debt. Essentially, it looks like the company doesn't have a liability when they really do. As we saw with the Enron bankruptcy, if things go wrong, the results can be devastating.

I guess when AIG is giving us assets that we already owned and no one else wanted to buy in exchange for a reduction in $25B of debt, the SPV nature (place the assets in a bucket with a made up value slapped on them) of the transaction is the least of our problems.

This post wouldn't be complete without this apropos quote from Teddy KGB

"It's a fucking joke anyway, after all, I am paying you with your money."



Onlooker said...

Yeah, it's just a big shell game to keep people confused enough not to know what to think. And all the while they lie to our faces about how the money will be paid back, blah, blah, blah. F'ng thieves.

The narrative, of course, has been that this one "rogue" division went crazy and blew up the company and almost the world with it. Now the bigger truth that this company was badly mismanaged throughout, from the top, is coming to light (not that there weren't already skeptics of such lies).

And of course the fairy tale notion that they would actually be able to pay back their bail out money is made all that much more insane.

EconomicDisconnect said...

Awesome Teddy KGB reference!

"Not Hungry?"