Zeev's Turnips Patch-No Politics (ZEEV)

[marketmaven]

AIG: The Idiocy That Will Not Die
http://market-ticker.denninger.net/

Why do I smell a Fannie/Freddie debacle in here?

AIG owes $25.8 billion on the line, about $2.4 billion more than last week, according to Fed data released yesterday. The draw has increased for six straight weeks. The company said in November that it may borrow additional funds from its five-year Fed credit line to make payments on maturing commercial paper.

Wait a second.... payments on maturing commercial paper? Why would they owe payments on maturing commercial paper that they purchased? I thought that companies paid to borrow, not the other way around?

Oh wait - perhaps it's their commercial paper? Exactly what are they paying to borrow? And if it's expiring, does this mean they can't roll it over? How are these clown funding themselves?

Hmmmm..... so AIG borrowed a bunch of money, perhaps from the Fed Alphabet Soup program) to support the commercial paper market, which they are now shutting down (as of February 1st), and they have a problem rolling it over in the private market? That would make sense. But if they can't roll it over in the private market how is AIG going to be handling it's ongoing short-term financial needs?

These sorts of arcane things may not pique the interest of most Americans, but it should. AIG is now a ward of the state, with some $180 billion in money pumped into or through them. And while their AIGFP (financial products) division was at the center of this mess, writing credit-default swaps against CDOs that couldn't be reasonably valued in the market (due to their thin trading and no agreement on their value) with no money to back it up, the question remains - had AIGFP gone bankrupt along with the holding company would it have mattered to the regulated insurance subsidiaries?

Indeed, the entire point of structuring insurance businesses this way (every state has its own separate subsidiary) is to allow the firm to take one of their subsidiaries through bankruptcy if necessary without destroying policyholder interests in other states! Just go ask all the "Pup Company" insurance structures in Florida, for example, where you have "Joes Insurance of Florida" that is legally and financially distinct from "Joes Insurance" - very handy when a Cat 5 hurricane comes roaring across the state and lays a couple of cites waste!

I have seen nothing other than a bare assertion that we "had to" rescue AIG to prevent these policyholders from getting screwed. Indeed, over the years we have seen multiple instances where insurance company subsidiaries "blow up" and yet the impact remains contained to that specific subsidiary. This is not an accident, it is in fact by design!

So now with AIG as a ward of the state one has to, I believe, ask one simple question - how do we get out of this, and why are we continuing to pump money into AIGFP instead of severing the cord so the remainder of the company is protected?