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AIG Gets The Dreaded "Going Concern"
February 26th, 2010 | 
Author: AIG Gets The Dreaded “Going Concern”
Posted by Karl Denninger
Gee, who saw this coming… oh wait – not in the press release, is it?
NEW YORK–(BUSINESS WIRE)– American International Group, Inc. (AIG) today reported a net loss attributable to AIG common shareholders of $8.9 billion for the fourth quarter of 2009, or $65.51 per diluted common share, compared to a net loss of $61.7 billion or $458.99 per diluted share in the fourth quarter of 2008. Fourth quarter 2009 adjusted net loss was $7.2 billion, compared to an adjusted net loss of $38.5 billion in the fourth quarter of 2008.
Blah blah blah blah look at the 10Q filed with the SEC:
AIG has been significantly and adversely affected by the market turmoil in late 2008 and early 2009, and, despite the recovery in the markets in mid and late 2009, is subject to significant risks, as discussed below. Many of these risks are interrelated and occur under similar business and economic conditions, and the occurrence of certain of them may in turn cause the emergence, or exacerbate the effect, of others. Such a combination could materially increase the severity of the impact on AIG. As a result, should certain of these risks emerge, AIG may need additional support from the U.S. government. Without additional support from the U.S. government, in the future there could exist substantial doubt about AIG’s ability to continue as a going concern. See Management’s Discussion and Analysis of Financial Condition and Results of Operations — Consideration of AIG’s Ability to Continue as a Going Concern and Note 1 to the Consolidated Financial Statements for a further discussion.
Oops.
That’s not a sentence you ever want to see in a quarterly report. It winds up in there because the auditors essentially make you do it – that is, the bean counters think you’re a few beans short of a box.
Or maybe a lot of beans.
Mishkin is on CNBS this morning crowing that “clearly the recession is over.”
Uh huh. And your buddies over at the NY Fed, along with The Fed in DC and CONgress, haven’t fixed a damn thing.
Therefore the recession didn’t do what recessions are supposed to do – that is, clear out crap companies and return balance to the economy.
Instead, we’ve subsidized, we’ve lied, we’ve cheated, and we’ve kept the debt in the system, all of which are disastrous going forward because unlike inventory recessions this has been and is a “balance sheet” recession.
That, by the way, is typical CNBS misdirection too. Words mean things. A “balance sheet recession” is a liars way of saying there is too much debt in the system, not too much inventory.
Of course the fix for a recession caused by too much inventory is to work some of the inventory down.
The fix for a debt recession is to default the excessive debt.
We have done everything in our power at all levels of government to avoid doing exactly that, and it is for this reason that you’re going to continue to see the stress levels rise instead of fall, irrespective of the manipulation, until that excessive debt is extracted from the system – one way or another.
Our machinations have hidden an actual, ongoing depression. More than $2 trillion in direct spent support by the government – borrowed beyond tax receipts in the last 18 months, constitutes 14% of annualized GDP. On an annual basis this is about 10%, and a 10% top-to-bottom contraction in GDP is the economist’s definition of Depression.
This is math, not pumper jizz games and makes clear what’s actually happened. Any person who has lost their job and desperately clawed their head above water on a temporary basis by taking cash advances and using their plastic for a $2 bottle of soda at the local gas station “gets it” – you can play this game for a while, so long as your credit line holds up. You “win” that game if you manage to keep your head above water long enough to find a new job before your debt service requirements exceed your income – even with the new job. You “lose” if your card comes up “Really Declined” before then and are forced into bankruptcy, or if you wind up with so much debt that even finding a new job doesn’t allow you to make the payments.
Nations don’t quite do things the same way. Instead of “bankruptcy” they are forced into severe austerity measures when they are unable to borrow at attractive rates in the marketplace. If nations go too far down the hole and are unable to implement those measures the political system fails by either peaceful means (elections that sweep out the old ruling class and in a new one) or violent (mass civil unrest, revolt or war.)
So far that has not happened. But the machinations of The Fed have been met lockstep by Congress, which has absorbed and subsumed every penny of credit that The Fed has extended, neutering the ability of The Fed to stimulate the economy, and instead of stimulating the economy with its programs Congress has instead propped up failed businesses, effectively burning the money instead of putting it to work.
AIG is symptomatic of the fraud-laced financial disease in our nation – a disease that will soon enough consume us if we don’t excise it from our economy.
Sadly not only does our government refuse to do this but the people of this nation refuse to recognize the bare mathematical underpinnings that are staring them square in the face.
With each passing day we go further into that hole, and at some point the ladder will no longer be tall enough to be able to climb back out.
Disclosure: No position; it is my considered opinion, however, that AIG was a zero two years ago – and still is a zero.
Posted in AIG, American International Group, Economic Crisis, Financial System, Fraud | 
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Oh AIG, What Is That Up Your Sleeve?
Oh AIG, What Is That Up Your Sleeve?
Posted by Karl Denninger
Heh, Bloomberg is blowing a whistle!
A potentially more important development slipped by with less notice, Bloomberg Markets reports in its April issue. Representative Darrell Issa, the ranking Republican on the House Committee on Oversight and Government Reform, placed into the hearing record a five-page document itemizing the mortgage securities on which banks such as Goldman Sachs Group Inc. and Societe Generale SA had bought $62.1 billion in credit-default swaps from AIG.
Yeah. But that 62.1 billion is just part of the problem. See, we seem to be into these clowns for $180 billion. How come, if there was “just” $62 billion in bad paper out there?
“It’s almost too uncanny,” Calacci says. “If these banks had insight into the underlying loans because they had relationships with banks, originators or servicers, that’s at the least unethical.”
The identification of securities in the document, known as Schedule A, and data compiled by Bloomberg show that Goldman Sachs underwrote $17.2 billion of the $62.1 billion in CDOs that AIG insured — more than any other investment bank. Merrill Lynch & Co., now part of Bank of America Corp., created $13.2 billion of the CDOs, and Deutsche Bank AG underwrote $9.5 billion.
I don’t think there’s anything uncanny about it. Look, this wasn’t so simple as “someone placed a bet.” That goes on every day, and there’s nothing wrong with it.
No, this has more nefarious overtones.
They met with bankers at Bear Stearns, Deutsche Bank, Goldman Sachs, and other firms to ask if they would create securities—packages of mortgages called collateralized debt obligations, or CDOs—that Paulson & Co. could wager against.
The investment banks would sell the CDOs to clients who believed the value of the mortgages would hold up. Mr. Paulson would buy CDS insurance on the CDO mortgage investments—a bet that they would fall in value. This way, Mr. Paulson could wager against $1 billion or so of mortgage debt in one fell swoop.
At Bear Stearns, however, Scott Eichel, a senior trader, and others met with Mr. Paulson and later turned him down. Mr. Eichel said he felt it would look improper for his firm. “On the one hand, we’d be selling the deals” to investors, without telling them that a bearish hedge fund was the impetus for the transaction, Mr. Eichel told a colleague; on the other hand, Bear Stearns would be helping Mr. Paulson wager against the deals.
Some investors later would argue that Mr. Paulson’s actions indirectly led to the creation of additional dangerous CDO investments, resulting in billions of dollars of additional losses for those who owned the CDO slices.
Please go read “The Audacity of Synthetics” again, which I wrote a couple of weeks ago. The problem with these things is simple – they existed only because someone wanted to make a bet that the person who bought them would lose all their money!
As I have repeatedly said I don’t give a damn what people bet on or what they want to do in the markets. We have a huge casino here on Wall Street and always have, and trying to make that “go away” is a waste of time. It won’t.
No, the problem is lack of disclosure and the “I’m just the bookkeeper” defense, which is the essence of the investment (and commercial) bank perspective.
Speaking of the latter, how’s that work out for the bookie’s “accountant” when the FBI comes in and raids a wire room that’s running ponies or whatever? Not so good, right?
So how come the “bookkeepers” are still operating in this case?
Now there’s something to think about.
Posted in AIG, American International Group, Corruption, Economic Crisis, Financial System |
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You Had Better Cage The Monster CONgress (AIG/GS/CDS)
You Had Better Cage The Monster CONgress (AIG/GS/CDS)
Posted by Karl Denninger
I’ve been writing about this now over a year in regard to the mess that became of AIG, their “financial products” unit, and what I believe is culpability not only of certain financial parties but more importantly our regulators of these firms.
Now The NY Times has published a new article that makes clear that my clarion call for major changes in these areas of the market were not only spot-on, but are even more necessary today than they were back then.
A.I.G. had long insured complex mortgage securities owned by Goldman and other firms against possible defaults. With the housing crisis deepening, A.I.G., once the world’s biggest insurer, had already paid Goldman $2 billion to cover losses the bank said it might suffer.
A.I.G. executives wanted some of its money back, insisting that Goldman — like a homeowner overestimating the damages in a storm to get a bigger insurance payment — had inflated the potential losses. Goldman countered that it was owed even more, while also resisting consulting with third parties to help estimate a value for the securities.
Read that carefully. The NY Times is making this sound like AIG had insured losses against securities Goldman was holding. That’s what insurance is, right?
Here’s the problem: Goldman didn’t own the securities.
In addition to offering to cancel its own contracts, Goldman offered to buy all of the insurance A.I.G. had written for several other banks at severely distressed prices, according to three people briefed on the discussions.
Negotiating with Goldman to void the A.I.G. insurance was especially difficult, Federal Reserve Board documents show, because the firm did not own the underlying bonds. As a result, Goldman had little incentive to compromise.
Now do you see the outrage in these so-called “protection devices”?
They aren’t. They were raw bets. Very highly-leveraged gambling instruments that had a very low cost at origination – a cost all out of proportion to their eventual potential return.
We do not let “just anyone” buy insurance. You must have an insurable interest. That is, I can’t buy fire insurance on your house. If I could, I might – and so might 20 of my best friends. We might even target those homes we think might have fires. We could even bribe the folks doing a controlled burn nearby to be a little less careful than they ordinarily would. Or, in the extreme case, one of us might just set a fire on purpose!
None of this is allowed in the insurance marketplace because it creates too many incentives for people to set fires and otherwise cause calamities, whether through outright unlawful conduct or helping along “a series of unfortunate events.”
In the regulated options, futures and stock markets we have controls on this sort of thing as well. To short a stock (legally) you have to be able to borrow it. That is, someone who owns it must lend it to you first (perhaps in exchange for money.) As more people short the cache of people willing to lend out that stock for free will evaporate, and you’ll have to start paying up for the privilege of borrowing it. This is a natural check and balance on placing negative bets via shorting.
Buying PUTs or transacting in the futures market has costs too. Those regulated markets have defined margin requirements and they are enforced – nightly. The cost of buying a PUT includes something for the guy who sells it to you, as he is going to hedge his bet by being short the stock. Thus, as the number of PUT buyers increases the premium demanded rises – precipitously so as the demand for those PUTs goes up. Finally, buying a PUT doesn’t come with the right to demand anything more from the seller – his margin requirements are enforced by the exchange and you don’t get to hold the money.
These OTC CDS contracts had another insidious feature: They apparently included a clause that not only would a downgrade of the security trigger margin requirements but so would a downgrade of AIG.
The terms, described by several A.I.G. trading partners, stated that A.I.G. would post payments under two or three circumstances: if mortgage bonds were downgraded, if they were deemed to have lost value, or if A.I.G.’s own credit rating was downgraded.
The perversity of incentives here is that if you can demand that your counterparty hand over more and more “margin” to you it is possible to actually force a downgrade by your actions and thus cause even more margin to have to be posted! This, of course, harms the firm’s liquidity and makes a further downgrade more likely.
Rinse and repeat to destruction – which, incidentally, is exactly what happened.
This is dramatically different than the regulated markets, where valuations are determined by the market, not by one of the parties at interest and the margin requirement is fixed by the deficiency (if any) against the final strike price and the market’s price – the person who happens to be short gets no benefit (or harm) due to his or her credit rating. If you’re underwater, you post margin. If not, you don’t, but in neither case does the person on the other side of the trade get to hold the margin funds! He gets your money only when he closes his position or the option expires (if it’s in the money.)
These “synthetics” (such as the Abacus CDOs) are an outrage on their face. These are not created from the purchase of actual physical asset (e.g. a mortgage security) but rather by someone writing a credit-default swap against a reference. These are then bundled up and sold. When a credit-default swap is then written against a synthetic CDO it is equivalent to writing a gambling contract on a gambling contract as nobody in the chain owns an actual physical asset (such as a loan)!
The simple fact of the matter is that “naked” CDS exposures need to be prohibited right now. They never should have been allowed and not a damn thing has changed. Purely synthetic instruments need to be traded on an exchange in each and every case as a means of preventing chicanery, where margin can be enforced transparently on a nightly basis by a neutral third party in the middle of all transactions – the nominal buyer for every seller, and seller for every buyer. This third party (the exchange), having no skin in the game either way, will not permit the abuses that are too easily committed when you have over-the-counter transactions of this type.
The article referenced makes a decent case that AIG didn’t fall off the cliff, it was pushed. There are even allegations raised of collusive conduct which, if true, add an even more serious angle to this entire story.
But at the end of the day the problem boils down to the same basic facts I have been harping on since the beginning:
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Writing “insurance” on something the purchaser doesn’t own isn’t insurance, it’s a gambling contract.
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When such gambling contracts stack up to a great degree there are huge incentives for someone to commit financial arson. Whether they did or did not is a matter for debate, but that the incentives exist to structure deals in a way that are easily detonated so you can profit from them as exposure increases is not open to debate. Such incentive does absolutely exist – and we must eradicate it.
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To prevent fraud and gaming of the system, such contracts must be on a regulated exchange where each buyer and seller deals with a neutral third party (the exchange itself) that is responsible for nightly margining, trade reporting, open interest and bid/offer maintenance. These facts must be exposed at all times to the public so that the market operates in a transparent fashion and neither side of the transaction can be “pushed”.
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The exposure of these contracts on said exchange will also prevent disasters like AIG from occurring, as the fact that they are short “X” will become instantly visible to everyone, including their regulators. The precise exposure they are taking on will thus be known at all times.
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We must bar backstopped entities (such as banks and insurance companies) from trading in or creating synthetic instruments such as this in the first place. These are not hedges as by definition there are no actual hard assets behind them. The argument that they are created to fill a demand from the market is true but irrelevant – the fact remains that with no actual hard asset acquisition behind them they serve no fundamental credit intermediation purpose which is the purview of banks and insurance companies – they are, instead, pure speculative instruments. Let the hedge funds, operating without any sort of financial backstop, create these all they want – and trade them on a regulated exchange – but keep the banks and insurance companies out of it.
We have not neutered this monster in the slightest. Indeed, the latest rabble in the market with regard to Greece, Spain and Portugal is, not surprisingly, about (once again) credit default swaps blowing out.
And again I ask – who wrote those CDS naked on these nations to people who didn’t actually hold underlying positions in the bonds without them being traded on a central exchange, and why, after 2008 and 2009, do we still let that crap go on?
Posted in AIG, American International Group, CDS, Corruption, Credit Default Swaps, Economic Crisis, Economy, Financial System |
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AIG: The Idiocy That Will Not Die
AIG: The Idiocy That Will Not Die
Posted by Karl Denninger
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 clowns 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?
Posted in AIG, American International Group, Corruption, Economic Crisis, Economy, Financial System |
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AIG Draws $2.4 Billion From Fed Credit Line, Most Since October
Just a day after the hearings investigating the taxpayer bailout and subsequent cover-up of the beneficiaries of taxpayer largesse up on Capitol Hill, AIG apparently needs more money. It appears they are burning through taxpayer money at the rat e of $1 Billion a week!
AIG Draws $2.4 Billion From Fed Credit Line, Most Since October
By Hugh Son
Jan. 28 (Bloomberg) — American International Group Inc., the bailed-out insurer whose borrowing through a U.S. commercial paper program was set to expire this month, increased its draw on a Federal Reserve credit line by the most since October.
AIG owes $25.8 billion on the line, about $2.4 billion more than last week, according to Fed data released today. 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.
“This helps to highlight the risks we’re exposed to as citizens standing behind AIG,” said Bill Bergman, an analyst at Morningstar Inc. in Chicago. “While there’s much more liquidity in markets as a whole, lenders are still being selective.”
AIG, which got a $182.3 billion government bailout, had relied on the U.S. commercial paper program as firms including MetLife Inc. and General Electric Co. reduced their use of government-backed funds. New York-based AIG said it lost access to its traditional sources of liquidity after its 2008 rescue.
Commercial paper is used by companies to finance daily expenses such as payroll and rent. The Fed, which started a program in October 2008 to bolster the market after the Lehman Brothers Holdings Inc. bankruptcy, said it may wind down the facility in February. Lending through the program peaked a year ago at $350 billion.
Mark Herr, a spokesman for the insurer said the increase was fueled by the need for funds to repay expiring commercial paper. He declined to comment further.
Life Insurance
AIG paid down its Fed line by about $25 billion in December by handing over stakes in two non-U.S. life insurance units. The company has said it plans to sell American International Assurance Co. and American Life Insurance Co. to rivals or private-equity buyers or in initial public offerings “depending on market conditions.”
AIG said in November that it will need to repay $23.2 billion in maturing debt, excluding commercial paper, in the four quarters ending September 2010. The insurer said it will make the payments with revenue from its businesses, proceeds of asset sales, dividends from subsidiaries and the Fed credit line.
MetLife, the largest U.S. life insurer, had no borrowing through the commercial paper program at the end of the third quarter, compared with $1.65 billion on Dec. 31, 2008. GE, which competes against AIG in the plane-leasing business, used the program in the fourth quarter of 2008, and didn’t expect to tap it again, the Fairfield, Connecticut based company said in a filing.
Plane Leasing
AIG has tapped a separate Treasury Department facility for $4.2 billion to help restructure its money-losing mortgage guarantor and the plane unit it was trying to sell, the insurer said in November. AIG got the $29.8 billion facility in April as part of its fourth bailout.
The insurer’s rescue includes a $60 billion Fed credit line, a Treasury investment of as much as $69.8 billion, and up to $52.5 billion to buy mortgage-linked assets owned or backed by the company.
AIG said in a November filing that it may “borrow additional funds” from the Fed credit line to make payments on the $5.8 billion in commercial paper that matures in January.
The draw has climbed by $5.9 billion in the past six weeks. The latest increase marked the biggest weekly gain since the end of October, when it surged by about $3.6 billion.
To contact the reporter on this story: Hugh Son in New York at hson1@bloomberg.net;
Posted in AIG, American International Group, Corruption, Economic Crisis, Economy, Financial System |
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Rep. Stephen Lynch (D-MA) Questions Treasury Secretary Geithner At AIG Hearing
One of the highlights of my day.
Meanwhile….
AIG’s mysterious Schedule A finally revealed
The heavily-redacted regulatory filing that spells out the details of the New York Federal Reserve’s controversial bailout of American International Group is a secret no more.
Reuters has obtained a copy of the five-page document the giant insurer and the New York Fed had asked the Securities and Exchange Commission to keep confidential. The effort by the New York Fed to keep the document under wraps has sparked a furor on Capitol Hill and was the subject of a hearing on Wednesday by House Committee on Oversight and Government Reform.
The unredacted version of the “Schedule A – List of Derivative Transactions” fills out some of the missing pieces in the AIG bailout, in which an entity set-up by the New York Fed effectively funneled tens of millions of dollars to 16 big U.S. and Europeans banks that had bought credit default swaps from the insurer.
The unredacted version of the Schedule A enables some to identify all of the 178 mortgage-related securities, or collateralized debt obligations, that AIG wrote insurance-like protection on.
It’s been known for months that Goldman Sachs and Societe Generale were the two banks who recieved the most money in the dea because they had insured the most CDOs with AIG. But the new information enables traders, investors and the general public to see just which deals the banks had purchased insurance on.
The new information also reveals that of the 178 tranches of CDOs that AIG insured, some 14% were on deals issued after 2005. That’s critical because in December 2007, former AIG Financial Products head Joseph Cassano had said AIG largely got out of the CDS business by the end of 2005.
The newly disclosed information also reveals that Goldman not only bought a lot of CDS from AIG to protect itself; the Wall Street firm also originated a good number of the CDOs that were in SocGen’s portfolio. Some of the Goldman deals in SocGen’s portfolio that AIG had insured includes CDOs with names like Adirondack 2005, Putnam Structured Product CDO 2002 and Davis Square Funding IV.
Janet Tavakoli, a derivatives consultant who has called the AIG bailout a gift to the Wall Street banks, said the issue isn’t just what deals AIG insured, but the underlying assets in those deals. She noted that a goodly number of the CDOs held by the banks also held pieces of other CDOs.
Goldman Sachs, Societe Generale, Deutsche Bank, Merrill Lynch and other banks sold their ailing collateralized debt obligations to the New York Fed-sponsored entity, Maiden Lane III. AIG then canceled out the CDS contracts it had sold as default insurance on those 178 CDOs.
“If all of this had come out in the public domain in late 2008, Goldman Sachs and Merrill would have been deeply embarassed and the Federal Reserve woudl have been questioned,” said Tavakoli.
In the process, the banks were made whole and AIG no longer had to pay out billions of dollars in cash collateral to the banks everytime the CDOs dropped in value.
SEE WHAT YOU ARE THE PROUD OWNER OF HERE: Un-redacted AIG Schedule A PDF Document
Yes, they paid 100 cents on the dollar for these ‘investments’ with YOUR money, which were not only rated CCC- or less, but had already deteriorated 20, 30, 40 and 50%.
Posted in AIG, American International Group, CDO, CDS, Corruption, Economic Crisis, Economy, Federal Reserve, Financial System |
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