"Mr. Bernanke said [AIG] became a 'hedge fund, basically, that was attached to a large and stable insurance company' and made 'huge numbers of irresponsible bets.'" Federal Reserve Chair Ben Bernanke, quoted by Edmund L. Andrews and Jackie Calmes, "Fed Chairman Backs Call For Higher Spending" p. A14, col. 1 (New York Times Nat'l Ed., Wed., March 4, 2009).
AIG is breaking itself up and selling itself off in pieces. AIG is selling a controlling interest in its two biggest units to Federal Taxpayers in exchange for more Federal Taxpayer Funds. The two units are to be put in trust, and the Federal Taxpayers will receive 70% to 75% interests in American International Assurance (AIA) and American Life Insurance Company (Alico). Alico in particular was recently taken off the market for a private sale after AIG received offers it considered all too low. The current arrangement with the Federal Government is AIG's way of selling itself off by another means. Francesco Guerrera, "AIG to Split in Exchange for Lifeline" p. 1, col. 2 (Financial Times, Monday, March 2, 2009).
The reported purpose of the new deal is to leave AIG, by whatever name, in the Insurance business. Period. See Mary Williams Walsh, "A Remake of A.I.G. Is the Goal of Rescue" p. B1, col. 6 (New York Times Washington Edition, Business Day Section, Tues., March 3, 2009). In the words of former AIG Chair Maurice "Hank" Greenberg, there will "never be another AIG as we knew it." Maurice Greenberg, quoted by Brady Dennis, "AIG Posts $61.7 Billion Loss, Faces Grim Future" p. D1, col. 6 (Washington Post, Tuesday, March 3, 2009).
There is a dispute apparently among newspaper reports whether this new agreement represents the "third bailout" of AIG by the Federal Government, e.g., Brady Dennis, "AIG Posts $61.7 Billion Loss, Faces Grim Future/Insurer Warns It May Need More U.S. Help" p. D1, col. 6 (Washington Post, Tuesday, March 3, 2009); Brady Dennis, "Ailing AIG to Receive Access to More Cash/Insurer Expected to Report Record Losses" p. A1, col. 5 (Washington Post, Monday, March 2, 2009),or the "fourth intervention" by the Federal Government in favor of AIG since September, 2008. Andrew Ross Sorkin and Mary Williams Walsh, "U.S. Said to Offer $30 Billion More to Help Insurer/4th A.I.G. Intervention" p. A1, col. 6 (New York Times Washington Edition, Monday, March 2, 2009).
Parenthetically, the linked Times report tracks these three previous "interventions" up until now: (1) September, 2008: The Federal Reserve loaned $85 Billion to AIG secured by AIG's "warrants" for just a hair less than 80% of AIG shares; (2) October, 2008: The Federal Government made a $38 Billion "facility" for the use of AIG's "securities lending business," and also provided AIG access to "a new commercial paper program"; and (3) November, 2008: The Federal Government "restructured" its original loan terms with AIG in a number of ways, including reducing the principal of the original rescue loan to $60 Billion, extending the repayment period from two years to five years, "injecting" $40 Billion in new money into AIG, all for a total commitment of $150 Billion in Federal Taxpayer Funds into AIG, the Times reports. Id.
Once again: The reason for all this splitting up and selling off? The Insurance operations of AIG are reportedly as profitable now as they ever were. The reason for separating the successful Insurance operations from fantastic failures of finance including so-called "financial services divisions" was previously posted here many times: AIG entered many derivatives contracts and made much money, but it did not back up its derivatives commitments with sufficient capital reserves and it was not regulated in doing so When Standard & Poor's was poised this week to again lower AIG's credit ratings, another collateral call round would have been triggered which AIG could not afford to meet. Before that could happen, as reported for example by Sorkin and Walsh, supra, the Federal Government "intervened," again.
Derivatives. Credit Default Swaps. Securitization. No regulation. No Reserves. How is that all going, again?
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