"Mind-Boggling" is Not Descriptive Enough

A few weeks ago, our illustrious political and financial authorities, through the guise of our Central Bank, determined it was necessary to provide financial assistance to the American International Group (AIG). AIG, one of the largest insurance companies in the world with a tangled web of liabilities, was on the verge of collapse. Rumors swirled about losses of tens of billions. Fears of global financial calamity were everywhere.

Ultimately, an $85 Billion lifeline was arranged. Unlike some of the other recent bailouts, we were assuaged that the Taxpayer was receiving a fair deal for the risk, as the bailout was structured as a loan at market rates combined with a large ownership interest. (By the way, the transaction was structured to keep AIG's liabilities off the Government balance sheet). Of course, most "takeovers" require months of due diligence. This deal was arranged over a weekend, presumably on the back of a quick glimpse of the financial statements that had not previously reflected anything untoward. The word Enron comes to mind.

Oops! Nary a month has passed, and it is clear that no one had a clue. This is particularly true of our financial regulators. According to a story in today's New York Times, the amount of assistance made available to AIG has reached the staggering sum of $144 Billion. Let me put this number in perspective. There are about 130 Million Americans employed according to the Non-Farm Payroll numbers. Assuming per capita allocation, this equates to more than $1,000 per employee. Do you think you could have come up with a better use of your share? With respect to AIG itself, as of the end of last year, the company had 116,000 employees (many of whom are probably not employed in the United States). The cost of keeping just these employees in their jobs now amounts to over $1 million per employee. (That is even more than the average employee of Goldman Sachs has received in great years).

The numbers are mind-boggling. It is possible that the Government recoups its' money. But it is increasingly likely that it will take a significant loss; and quite possible that the financial commitment will keep growing. The actual loss could be staggering. By the way, the TARP is no different. It only took Secretary Paulson a few days to renegotiate on his assertion that his proposal was the only solution.

I don't know about you, but I certainly don't think the Government's actions have anything to do with my interests, nor those of the long-term interests of this Country or its' economy. I have said this elsewhere. It is time to stop hiring the Captain of the Titanic to guide us through icy waters. We are taking on water fast.

Comments

[williambanzai7]

The AIG Event Horizon

In general relativity, an event horizon is a boundary in spacetime, an area surrounding a black hole or a wormhole, inside which events cannot affect an outside observer. Light emitted from inside the horizon can never reach the observer, and anything that passes through the horizon from the observer’s side disappears.

With AIG useful and accurate information concerning the size of the contingent CDS liabilities can never reach outside observers…Any taxpayer bailout money that passes through the AIG Event Horizon disappears.

[Neil Grossman - Huffpost Blogger]

Sorry for being slow. You are focusing on the failures at AIG which I am sure are legion. I am focussing on the absolute incompetence of our political and financial represesentatives which is every bit as bad pre and post this fiasco. I do agree with you, accountability is a major problem at every level. Ignorance is as well. And to be honest, legitimate guideposts of behavior, including the lack of prinicples at every level of society is a major problem.

[MarsAmbassador]

What's mind-boggling is how little detail, numbers and facts are in this article. It could have and probably should have been 3 times as long, and included how the AIG management went on a $500,000 junket in the days after the first bailout and then 2 weeks later went on another expensive trip to go hunting in England. The only thing that will change the culture of these companies is accountability and outrage. Facts will provide the outrage, outrage will provide the mobilization of the citizens to demand accountability. It all starts with laying out all the facts, and as much of them as possible.