After reading a story in tonight's WSJ about the government having to lend AIG another 37.8 billion on top of the 85 billion line of credit already given to them, NYTimes.comwhich they have almost exhausted, the story reminded me of the problem that my old brain cells had forgotten but which I discussed in my 9/22/08 email as follows:
"One of the newly discovered problems at AIG, as discussed in the Sunday NYT, was a 20 billion hole that the top brass actually just learned about after the Texas insurance commissioner started to howl. Apparently, the insurance subsidiaries were lending securities to other firms, which is find. When that is done, the firm receiving would give cash as collateral for the securities. This is fine. So AIG is okay so far until you hear the punch line. AIG invested the cash in sub-prime mortgages. So, after sometime blew the whistle, the firms holding the securities on loan deliver them back to AIG and now they want their cash collateral back. And guess what, AIG doesn’t have it anymore, or somewhere close to 20 billion short. This was on top of the problem of writing credit insurance on 441 billion in mortgage securities, and 3/4 of those securities were owned by European banks which bought the AIG insurance to reduce the amount of capital they were supposed to set aside by regulators to cover future losses from the securities. As stated by the NYT columnist:
“Enjoy the absurdity: Billions in unregulated derivatives that were about to take down the insurance company that sold them were bought by banks to get around their regulatory capital requirements intended to rein in risk.
AIG was just too stupid for words. It was not that long ago that it had a market cap of well over 200 billion."
You have to think about the absurdity of what AIG was doing. They were just trying to make a little more money on the cash collateral given to them by another firm for the securities loaned by AIG. It was just a little juice for earnings. These people think that they are worth millions in annual compensation. I would not hire any of them to pick up my garbage. And when you add the shenanigans and loose standards of the London unit writing insurance policies on CDOs and assorted other toxic trash, claiming recently about how picky they were, using at first the AAA credit of AIG as the only collateral, and thinking that they had discovered a printing press to make money, then the level of stupidity at the highest rungs of a huge financial conglomerate is just staggering. No wonder people lose confidence. And those fools took from 33% to as high as 46% of the premiums received for the insurance policies to compensate themselves. NYTimes.comWhy, because they were just so so smart just like the ones who used the cash collateral for the securities loaned to other firms to invest in toxic assets? If AIG could have failed and not caused a meltdown, then it certainly deserved to fail and fall into the dustbin of history. But you have to wonder how much of the crisis stems from people looking at the "smart" guys at Lehman, Merrill, AIG, Bear Stearns, Washington Mutual and Wachovia, not to mention the European financial institutions and thinking is there a single competent person running the depositories of trillions of the world's wealth.