AIG Bailout Is Now at $250 Billion?

The Treasury is in full obfuscation mode. It is putting out some very confusing numbers as to its bailout of AIG. For example today's press release on the bailout said:

The U.S. Treasury on Monday announced that it will purchase $40 billion of newly issued AIG preferred shares under the Troubled Asset Relief Program. This purchase will allow the Federal Reserve to reduce from $85 billion to $60 billion the total amount available under the credit facility established by the Federal Reserve Bank of New York (New York Fed) on September 16, 2008...

In one new facility, the New York Fed will lend up to $22.5 billion to a newly formed limited liability company (LLC) to fund the LLC’s purchase of residential mortgage-backed securities from AIG's U.S. securities lending collateral portfolio. AIG will make a $1 billion subordinated loan to the LLC and bear the risk for the first $1 billion of any losses on the portfolio. The loans will be secured by all of the assets of the LLC and will be repaid from the cash flows produced by these assets as well as proceeds from any sales of these assets. The New York Fed and AIG will share any residual cash flows after the loans are repaid.

Proceeds from this facility, together with other AIG internal resources, will be used to return all cash collateral posted for securities loans outstanding under AIG's U.S. securities lending program. As a result, the $37.8 billion securities lending facility established by the New York Fed on October 8, 2008, will be repaid and terminated...

In the second new facility, the New York Fed will lend up to $30 billion to a newly formed LLC to fund the LLC's purchase of multi-sector collateralized debt obligations (CDOs) on which AIG Financial Products has written credit default swap (CDS) contracts. AIG will make a $5 billion subordinated loan to the LLC and bear the risk for the first $5 billion of any losses on the portfolio. In connection with the purchase of the CDOs, the CDS counterparties will concurrently unwind the related CDS transactions. The loans will be secured by all of the LLC's assets and will be repaid from cash flows produced by these assets as well as the proceeds from any sales of these assets. The New York Fed and AIG will share any residual cash flows after the loans are repaid.

PEU Report takes a stab at figuring out what all this means:

AIG lined up more billions in taxpayer funds. The first $143 billion wasn't enough to save the company. In a confusing, financial magician move, AIG will get $40 billion for preferred stock, $52.5 billion in TARP money for junk assets, and their total debt to Uncle Sam shrinks by $25 billion. That sleight of hand brings the total for AIG to over $250 billion.

Hey, if you spent $250 billion on a bailout of one company, you would try to hide the fact also.

Fed Gives Green Light To New York Fed To Pump Up To Another $37.8 Billion Into AIG

The Federal Reserve Board has authorized the Federal Reserve Bank of New York to borrow securities from certain regulated U.S. insurance subsidiaries of the American International Group (AIG), under section 13(3) of the Federal Reserve Act.

Under this program, the New York Fed has the green light from the Fed to borrow up to $37.8 billion in "investment-grade" (Yeah, right), fixed-income securities from AIG in return for cash collateral. These securities were previously lent by AIG’s insurance company subsidiaries to third parties (And apparently, the third parties don't want them as collateral, anymore).

For those keeping score, this is in ADDITION to the drawdowns to date of $85 billion under the original New York Fed loan facility.

Dow Jones Ditches AIG

Kraft Foods Inc. will replace AG in the Dow Jones Industrial Average, effective with the opening of trading on September 22, Dow Jones & Company announced.

"We are refraining at this point from adding another stock in the financial industry because of the extremely unsettled conditions. We realize this decision leaves the Dow Jones Industrial Average under-weighted in financials, and we will address this situation in due course," said Robert Thomson, managing editor of The Wall Street Journal.

"We are adding Kraft because the Dow Jones Industrial Average had no representation in food products. Kraft is one of the world's leading food companies," Mr. Thomson said.

-EPJ Newsdesk

Paulson Statement On Fed Action Surrounding AIG

September 16, 2008
hp-1143

Statement by Secretary Henry M. Paulson, Jr. on Federal Reserve Actions Surrounding AIG

Washington, DC--

Treasury issued the following statement by Secretary Henry M. Paulson, Jr. on Federal Reserve actions surrounding American International Group:

These are challenging times for our financial markets. We are working closely with the Federal Reserve, the SEC and other regulators to enhance the stability and orderliness of our financial markets and minimize the disruption to our economy. I support the steps taken by the Federal Reserve tonight to assist AIG in continuing to meet its obligations, mitigate broader disruptions and at the same time protect the taxpayers.

-EPJ Original Documents

Fed Loan To AIG Will Be 850 Basis Ponints Over LIBOR

The Federal Reserve Board is lending as much as $85 billion to rescue American International Group. The Fed will earn 850 basis points above LIBOR and will also receive a 79.9% stake in the company.

As of December 31, 2007, AIG listed $1.1 trillion in assets.

-EPJ Newsdesk

Fed's Statement On AIG

Text of the Federal Reserve’s statement on AIG.

The Federal Reserve Board on Tuesday, with the full support of the Treasury Department, authorized the Federal Reserve Bank of New York to lend up to $85 billion to the American International Group (AIG) under Section 13(3) of the Federal Reserve Act. The secured loan has terms and conditions designed to protect the interests of the U.S. government and taxpayers.

The Board determined that, in current circumstances, a disorderly failure of AIG could add to already significant levels of financial market fragility and lead to substantially higher borrowing costs, reduced household wealth and materially weaker economic performance.

The purpose of this liquidity facility is to assist AIG in meeting its obligations as they come due. This loan will facilitate a process under which AIG will sell certain of its businesses in an orderly manner, with the least possible disruption to the overall economy.

The AIG facility has a 24-month term. Interest will accrue on the outstanding balance at a rate of three-month Libor plus 850 basis points. AIG will be permitted to draw up to $85 billion under the facility.

The interests of taxpayers are protected by key terms of the loan. The loan is collateralized by all the assets of AIG, and of its primary non-regulated subsidiaries. These assets include the stock of substantially all of the regulated subsidiaries. The loan is expected to be repaid from the proceeds of the sale of the firm’s assets. The U.S. government will receive a 79.9 percent equity interest in AIG and has the right to veto the payment of dividends to common and preferred shareholders.

-EPJ Original Documents

Will The Fed Sterilize The $85 Billion AIG Bailout?

It is very likely the Fed will do so, that has been the modus operandi of the Ben Bernanke Fed. 

Rather than print new money for its bailouts, the Fed has been using the Treasury securities in its portfolio, i.e. sterilizing the bailouts, but that portfolio has been dwindling of Treasury securities as the bailouts and  "special credit facilities" draw on that portfolio. Exactly one year ago, the Fed held $779 billion in  Treasury securities. As of last week, the portfolio holds $479 billion. An $85 billion drawdown of that portfolio takes it down to $394 billion.  Ouch. The portfolio has been cut in half in the last year. 

The Fed only has $394 billion for bailout sterilizations, after that the Fed has one option, money printing, with all its ugly inflationary ramifications.

-Robert Wenzel

Government May Take Control of AIG; $90 Billion Loan

The Fed is considering offering a secured bridge loan to AIG, and under the proposed rescue plan, the U.S. government may end up controlling the firm, according to a person familiar with the matter, WSJ is reporting.

UPDATE CNBC reports:

Sources put the size of the loan at $85 billion to $90 billion, adding that it will be secured and include incentives for quick asset-sales by AIG.

As part of the deal, the government will get warrants for most of AIG’s equity—severely diluting existing shareholders.

UPDATE 2 NYT reports:

Fed to Give A.I.G. $85 Billion Loan and Take 80% Stake

In an extraordinary turn, the Federal Reserve agreed Tuesday night to take a nearly 80 percent stake in the troubled giant insurance company, the American International Group, in exchange for an $85 billion loan, according to people with knowledge of the negotiations

-EPJ Newsdesk

"Private Sector Solution to AIG's Situation Is Dead"

CNBC is reporting that a private sector solution to AIG's situation is dead. It looks like some type of government bailout will occur.

This should come as no surprise. We called it a dead deal when it was announced. However, what should come as a surprise (and alarm)is the Fed even asking Goldman Sachs and J. P. Morgan to attempt to raise $70 to $75 billion for AIG in this market.

This is scary in that it shows the Fed has no sensitivity to the markets at all. We repeat, Bernanke is C-L-U-E-L-E-S-S.

-Robert Wenzel

AIG Plunges

American International Group Inc. fell 61 percent today in early in New York trading. Last night, AIG's credit ratings were cut.

EPJ Newsdesk.

Tone Deaf Federal Reserve Caused The Last 200 Point Drop In The Dow

A brief lull in market moving news is only now allowing us to catch a breath long enough to point out that the Fed caused the last 200 point drop in the market, yesterday.

The last drop came immediately after the Fed asked Goldman Sachs and J.P. Morgan Chase "to help make $70-$75 billion in loans available to AIG." WTF?

Is the Bernanke Fed totally tone deaf?

Earlier in the day,yesterday, the Fed Funds rate shot up to 6%, as banks were hoarding cash and just didn't want to lend to one another. The Fed had to inject $70 billion to force the Funds rate down to its 2% target. So we have a scenario where banks aren't even lending to one another, there are whispers that even Morgan Stanley and Goldman may not be able to withstand the panic,and the Fed goes out and asks Goldman and MorganChase to find $70 to $75 billion for AIG. I repeat the Fed had to inject funds because banks weren't loaning to one another and, in this crisis environment, the Fed asks Goldman and MorganChase to scratch up $70 to $75 billion for a firm on the brink of failure. C-L-U-E-L-E-S-S.

That's when the market tacked on the last 200 point drop in yesterday's 500 point decline.

-Robert Wenzel

The Morning Ahead

The factors to monitor in the morning are near overwhelming.

To start, we have an FOMC meeting. Will the Fed cut rates?

Henry Paulson is scheduled to testify before Congress in the morning, and later in the day he is scheduled to give a speech at the Brookings Institute about the economy and housing. He is likely to be very cautious at both venues about what he says. Will he by accident trigger more downside action?

Lehman has filed for Chapter 11 and other banks have continued to trade with it. Yet, despite being in Chapter 11, and presumably under court supervision, Lehman continues to push for a shotgun sale of its money management firm, among other assets. How will this activity sit with the bankruptcy judge and other bankers?

The Merrill Lynch acquisition by Bank of America looks shaky. Will the deal still be alive by the end of the day? How tight of an acquisition contract was John Thain able to draw up in such an intense, short term period?

What news will develop from the AIG situation?

How will the markets react to the downgrade of WaMu?

Will the panic in the investment bank arena spread to the two remaining major independent players, Morgan Stanley and, the very well connected, Goldman Sachs? 

How bad will things get overnight in overseas trading?

Have a good nights sleep.

-Robert Wenzel

S&P and Moody's Cut AIG's Rating

Moody's and S&P have cut AIG's credit rating.

This is likely to result in an immediate demand from AIG of at least $10 billion, and perhaps as much as $18 billion, since many who have funds with AIG have the right to call those funds away from AIG if there is a credit cut.

-Robert Wenzel

Brother, Can You Spare $70 to $75 Billion?

The Fed has asked Goldman Sachs and J.P. Morgan Chase "to help make $70-$75 billion in loans available to AIG." according to WSJ.

File under: Not going to happen.

AIG's shares closed down 61% at $4.76 at 4 p.m. Monday. The insurer's stock has lost 90% of its value so far this year.

-Robert Wenzel

"AIG Is a Financially Sound Company." -New York Governor Patterson

Somebody has to say it. Not only is Governor Patterson legally blind, he's financially blind.

Right now no one knows if AG is financially sound, not even company officials.

The New York State Department of Insurance has allowed AIG to access $20 billion of capital in its subsidiaries to free up liquidity. This smells. The subs had $20 billion of capital just laying around? Oh yeah.

As Eric Salzman points out AIG is a "derivative fun-house. Every turn is another adventure. Marty Sullivan, who ran the place until last spring, seems like he pretty much let anybody do whatever they wanted......and they did! I bet you there isn't one guy at AIG who could give you a complete picture of the company if his life depended on it."

Salzman goes on, "Jim Cramer says that he can't figure out AIG! If you asked Cramer if he could build an atomic bomb on the set of CNBC, odds are he would tell you he could. If Cramer admits he can't figure them out, that's pretty serious!"

And, forgive me, the blind Governor has it all down and knows it sound? Not likely. I'm not riding if the Governor is driving.

-Robert Wenzel

NY Fed Meeting on AIG

A NY Fed spokesman confirms a meeting on AIG. The Treasury and banks are at the meeting.

Eric Dinallo (Superintendent of Insurance for New York State) is also at the meeting that began at 11:30 AM ET.

-EPJ Newsdesk

Datapoints

The Dow is down 277 points.

The decline in the S&P. financial index is not anywhere near the lows hit in July, while the S.&P. 500 is approaching those levels.

AIG is down $5.31 to $6.83 per share.

Goldman Sachs is down $8.76 to $145.32 per share.

-EPJ Newsdesk.

ECB, BOE Pump Extra Cash Into Money Markets

In the wake of a Lehman bankruptcy, a sale of Merrill and a request by AIG for $40 billion from the Fed,the ECB and BOE pumped extra cash into money markets this morning.

With interest rates on the overnight loans that euro-zone banks make to one another climbing, the ECB early Monday injected €30 billion (US$42.65 billion) in extra overnight funds into markets. The Bank of England pumped £5 billion (US$9.87 billion) in extra three-day funds. The Swiss central bank said it would take similar steps if necessary.

The ECB issued a statement early Monday morning saying it "stands ready to contribute to orderly market conditions." The Bank of England said its action was "being taken in response to conditions in the short-term money markets this morning."

-EPJ Newsdesk

Bulletin: A.I.G. Seeks $40 Billion in Fed Aid to Survive

The American International Group is seeking a $40 billion bridge loan from the Federal Reserve, as it faces a potential downgrade from credit ratings agencies that could spell its doom, a person briefed on the matter said Sunday night, NYT is reporting.

Ratings agencies threatened to downgrade the insurance giant’s credit rating by Monday morning, allowing counterparties to withdraw capital from their contracts with the company. One person close to the firm said that if such an event occurred, A.I.G. may survive for only 48 hours to 72 hours....

-EPJ Newsdesk

The Balance Sheet Basics of Companies in Crisis

Below are balance sheet basics of companies in crisis, based on their SEC filings. It is likely assets are overstated, but this will give you a good size comparison of the companies who are in or were in crisis:

Bear Stearns had $399 billion in assets and $387 billion in liabilities. They were counterparty to $1.25 trillion in derivatives trades.

Lehman Brothers has $640 billion in assets and $613 billion in liabilities.They are counterparty to $729 billion in derivatives trades.

Merrill Lynch has $966 billion in assets and $931 billion in liabilities. They are counterparty to $4.2 trillion in derivatives trades.

AIG has $1.0 trillion in assets and $972 billion in liabilities. They are counterparty to $447 billion in credit default swaps.

-EPJ Newsdesk