Untested claims are apparently the reason for the current Treasury Department, extending more Federal Taxpayer Funds in a better deal for the reclamation of AIG. No, not "claims" on Insurance Policies. Claims that AIG cannot raise private capital without a supposed "fire sale."
Newspaper reports today lead with the language that the previous bailout deal with AIG "was putting too much strain on the company." Andrew Ross Sorkin and Mary Williams Walsh, "U.S. Provides More Aid to Big Insurer" (New York Times Online, Monday, November 10, 2008). To like effect describing this as a "strain" on the company, is this report by Carol D. Leonnig, "AIG Close to Getting New, Larger Bailout" (Washington Post.com, Monday, Novermber 10, 2008), reposted as "Government to Grant AIG New, Larger Bailout". The bailout, otherwise known as the Emergency Economic Stabilization Act of 2008, was never intended to protect AIG from "strain". The infusion of capital by using Federal Taxpayer Funds was always intended, instead, to protect the national economy from chaos. There is a difference.
The new deal negotiated by AIG with the current regime "would help the company". Andrew Ross Sorkin and Mary Williams Walsh, supra. But that is not the point. Not at all. Will the deal now help the national economy and the Federal Taxpayer, even at the expense of an individual Company, or will it instead help the Company at the expense of the Federal Taxpayer?
In basic terms, there are currently two (2) ways to raise capital. One is by using Federal Taxpayer Funds through the current federal government regime, and the other is by raising private capital. Either way, the purpose is to generate a so-called infusion of capital. What AIG reportedly tried to do was to raise private capital to finance guarantees it made of toxic Collateralized Debt Obligations or "CDOs". AIG's CDO guarantees generated calls for collateral. This means that AIG had to raise cash to pay those calls based on obligations assumed by one among many AIG member companies. AIG reportedly tried to raise private capital -- cash -- by selling off certain successful Insurance Companies that were not apparently tied to the toxic CDO obligations of AIG.
If successful in making those sales, AIG would raise the cash by raising private capital, of course, but AIG would no longer own the successful Insurance Companies that AIG was selling to others. Many of AIG's member Insurance Companies were and are still very successful. For a list of AIG Member Companies, go to www.aig.com. (How hard AIG tried to raise private capital is subject to question by many questioners.) Essentially, AIG gave up. AIG and certain shareholders of AIG's deflated stock termed the effort "a fire sale." See Andrew Ross Sorkin and Mary Williams Walsh, supra; Carol D. Leonnig, supra.
In the restructured deal with AIG, it is reported on Monday, November 10, 2008 that Federal Taxpayers will spend $30 Billion while AIG offers $5 Billion -- or less than 15% of the total -- to buy up the CDOs. The purchase price of the CDOs reportedly will be set at 50 cents on the dollar. The combined $35 Billion will be used to purchase $70 Billion of the Collateralized Debt Obligations foolishly guaranteed by a member company of AIG (a member company which, to say again, is not one of its successful Insurance Companies). AIG reportedly will incorporate "a new entity" which will hold these previous liabilities, which accountants will remove from AIG's own balance sheet. See Andrew Ross Sorkkin and Mary Williams Walsh, supra. Under this new deal, AIG will keep its successful Insurance Companies and not sell them off to gain private capital.
Federal Taxpayer Funds will not stop there, apparently. Under the new AIG deal with the current Treasury Department, an additional $22.5 Billion in Federal Taxpayer Funds will be given to AIG for the purpose of also purchasing other financial products that AIG foolishly guaranteed, namely, "residential mortgage-backed securities". AIG will be asked to contribute $1 Billion or 4.3% of the total in that regard. See Andrew Ross Sorkin and Mary Williams Walsh, supra. Once again, accountants will remove losses from AIG's bottom line because again, a new corporation or corporations will purchase and hold these previous liabilities, too. Also, as with CDO purchases under this new deal negotiated by AIG, AIG will keep its successful Insurance Companies and not sell them off to gain private capital.
The changes in AIG's new deal are enormous. In short, the changes negotiated by AIG change the whole intent of the appropriation of Federal Taxpayer Funds. Rather than using Federal Taxpayer Funds in an emergency to shore up the national economy in a crisis, the current Treasury Department is agreeing in this deal to use Federal Taxpayer Funds to protect AIG in its emergency right now, with any benefits to the national economy to come much later, if at all. This is not a good change for the Federal Taxpayer. It is not capitalism. And it is not wise policy for the use of Federal Taxes.
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