Friday, March 20, 2009

AIG Bailout Disaster


The latest saga of this ongoing financial debacle centers around $165 million of American International Group (AIG) bonuses paid out to the very same executives that led the flailing insurer down the road towards ultimate collapse.

The shenanigans have further incited populist outrage directed at a crumbling, free-wheeling culture that has been unceremoniously dismissed as a laissez-faire sham. Recent developments have spiraled out of control, promulgating a circus like dog and pony show of finger pointing, death threats, and open calls for the resignation of the Secretary of the U.S. Treasury.

AIG is a Disaster

The leading insurer at one point featured a market capitalization of over $100 billion and served as a prominent fixture of the Dow Jones Industrial Average. In summary, American International Group is a dominant player within all lines of insurance - particularly products designed to protect trading partners from the risk of counter party failure. Proper collateral and reserves must be posted in order for any insurer to make good on these promises. Still, AIG upped the ante throughout the credit and real estate boom - aggressively embracing egregious levels of risk to maintain pace with competitors.

Then, the bottom fell out in 2008 - with the AIG Financial Products Division serving as a critical flash point of the ensuing storm.


The viscous cycle of forced deleveraging arrived part in parcel with collapsing property values, minimal access to free capital, and credit rating agency downgrades that mandated AIG to put up even more collateral. Of course, AIG was then forced to liquidate assets at fire sale prices.

The September 15, 2008 bankruptcy of Lehman Brothers exacerbated the malaise as inquisitive onlookers questioned the valuations of distressed securities festering within AIG's books. The brutal developments threatened to crush AIG and set off yet another wave of chaos as this mega, multi-billion dollar insurer would have destroyed thousands of global banking institutions.

The U.S. Government proceeded to institute fiscal Marshall Law - effectively designating AIG as a "Too big to Fail" intermediary. $170 billion worth of Treasury Asset Relief Program (TARP) loans, guarantees, and veiled capital grant money was funneled from the tax payer to American International Group coffers via Treasury and the Federal Reserve Bank. The legendary bailout is rivaled only by the nationalization of our Fannie Mae and Freddie Mac government sponsored enterprises.

The brewing outrage has only grown with every headline depicting a ramshackle banking culture that apparently masterminded the demise of Main Street America. Politicians and economic policy wonks must delicately balance the act of saving AIG, preserving the sanctity of high finance, and commiserating with populist contempt.

Of course, the well-intentioned U.S. Capitol brain trust has only been further embarrassed by sordid details of $1,000,000 resort vacations, lavish gifts, and the recent $165 million worth of bonus payments to AIG brass financed by the taxpayer.