Monday, Feb 23, 2009
Give it a stress-test, quick.
New York Times: A.I.G. to Seek More Government Aid
The American International Group, the battered insurance giant that is now effectively majority-owned by the federal government, is in talks to receive more government aid as it prepares to record one of the biggest losses in corporate history.
A.I.G. could take as much as a $60 billion hit when it reports earnings during the next week. It expects to disclose losses across a wide variety of holdings, from commercial real estate to credit default swaps, the private contracts that helped lead it to the brink last fall.
Posted by gardeniadotnet @ 10:00 PM (536 views) Add Comment
9 Comments
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1. gardeniadotnet said...
I don't know about you, but I can't keep track of all these derivatives cancelling each other out. lol
Nil (sum) desperandum!
2. paul said...
No wonder the western world is printing money - there's no way it has enough to fill these black holes.
3. timmy t said...
Don't you get the feeling that they just can't stop bailing out now? It doesn't matter how many billions they pour into these companies, they just keep needing more. But can you imagine the reaction if they stopped bailing out and a company like AIG failed - would beg the question "what happened to our money?" The public outrage that would ensue means they just have to keep printing.
4. Crunchy said...
It's not just banks that are shy to lend we are talking countries now.
So what does one do? Buy the fastest printer you can get your grubby hands on and cheat.
HYPERINFLATION DEPRESSION people will get very angry indeed...MASS CRIME AND ANARCHY AHEAD not just for the elite.
WHERE WILL IT END or is this it?
5. gardeniadotnet said...
Denninger isn't happy:
Confidence is absolutely destroyed. The government, which is an 80% owner of AIG, failed to warn prior to the company claiming that it will report a $60 billion loss next week and if it doesn't get more government money by Monday it will file for bankruptcy.
This aborted a nascent rally off the lows and shoved us to NEW lows - the closing lows.
Folks, this is the government. It is not an "ordinary correction." It is the intentional hiding of losses and the truth from the American people along with investors worldwide.
These acts are pure evil; they are premeditated, intentional, and have destroyed confidence, and unless the government stops this right now we are going to be seeing the DOW at 3,000 before the end of the year, the S&P will lose 50% or more of its remaining value (yes, that means the S&P will trade near 350 - or worse), 20% of the S&P 500 will go bankrupt and 20% of America will be unemployed.
6. gardeniadotnet said...
JP Morgan Chase = $8.5 Trillion
Citibank = $2.7 Trillion
Bank of America = $2 Trillion (pre-Merrill Lynch merger)
These are the Credit Default Swaps reported by the banks. It includes what they owe (CDS paper they have written) and what they are owed (CDS paper they purchased). So they are exposed to the notional tune of over $12 Trillion.
So what happens if one of the largest writers of CDS paper on the planet (AIG) were teetering on the edge of bankruptcy?
Mmkay... so the 3 banks above roughly "owe" and "are owed" roughly equivalent amounts. Seriously, there's like... just a few BILLION dollars difference - a rounding error, really. What say we suddenly declare HALF of the CDS paper that you "are owed" worthless (i.e. get in the "unsecured creditor" line in bankruptcy court). Suddenly that rounding error turns into real money: $500 Billion to $2 Trillion. Wow, that's some stress.
postmodernecon.blogspot.com
7. gardeniadotnet said...
Sorry bob1, sorry 51ck, I'm not buying in to the 'cancelling out' theory of derivatives.
8. techieman said...
garden - in actual fact the problem with AIG and most of the big insurers is that this will be a double whammy. Once you take into account the credit derivatives which causes those books to contract which causes the economy in general to undergo an emergency stop, you then get increasing claims in other areas such as "normal" insurance. An example of this is D&O and E&O as the stock market falls (in the us in particular) there is a "loss" that MAY have been caused by management / audiors etc a la Enron.
The point is in a bull market these practices are most likely overlooked, or rather not looked for but in a bear..... As time goes on the scenario is increasing Frauds (of all sizes) and increasing "real" insurance losses against say property and even liability as people cut corners to save money and thwart liquidations etc.
It would be interesting to see the breakdown of losses and movement per quarter. And then you have its investmens of the premium funds themselves....As the article states "It expects to disclose losses across a wide variety of holdings, from commercial real estate to credit default swaps,".
As for the cancelling out .... my only comment is that if a company is encouraged to grow by its shareholders and it does this by underwriting more and more low yeilding but PERCEIVED low probability of loss lines of business, then its hardly surprising that the major insurers have been hit, as all the chickens come home to roost.
Finally IF AIG goes bankrupt then what happens to the claims ? (i dont know about the US but i assume they have a similar compensation scheme as here - so the government pays anyway!). As for commercial insurance then that is another issue - should AIG be allowed to continue to underwrite? Thats the question.
9. d'oh said...
The cancelling out "theory" works only as long as both counterparties remain solvent or each counterparty is internally hedged. Clearly the latter isn't the case as an insurer will have a different business model to the insured, and as for the former...
Yes, the face value of derivatives (recently reported as US$668 trillion or so) may not be an accurate reflection of the risk, but it is quite clear that the risk is in the trillions, and not zero because of counterparty failure.
Last time I checked US$2 trillion was a lot of money.