AIG – Taxpayer Nightmare

Posted on November 10th, 2008 in Daily Mortgage/Housing News - The Real Story, Mr Mortgage's Personal Opinions/Research

In my opinion, the two key points of the AIG article in the Wall St Journal last night are as follows:

“The new package is a tacit acknowledgment that the original $85 billion rescue in September, combined with an additional $37.8 billion made available to the company last month, together haven’t come close to stabilizing AIG”

If they were wrong the first time, why would twice the money work the second time? If it takes $150 billion to ‘stabilize’ one company, I surely hope that AIG is the last large firm that will experience trouble.

“Over time, two scenarios could emerge. The assets held by the two vehicles might recover in value, allowing the government to eventually make money on the investment. Conversely, the assets — many of which are tied to the housing market — could continue to decline in value, hitting taxpayers with big losses.”

The above pertains to paying 50 cents on the face value for AIG’s CDO’s and MBS’s.  That sounds a little high given multi-sector CDO’s have been written down to 10 cents months ago by many. The market has only gotten worse.

Once again, big bets are being made with tax payer money predicated upon the housing market doing better in the future. Well, unless all of the credit and leverage is allowed to return through exotic mortgage programs that allowed an $80k household income to purchase an $800k home, do not expect housing ‘come back’ any time soon. Well, that’s of course wage inflation carries incomes up 300% or 30-year fixed rate mortgages drop to 1.5%.

Remember folks, the past 5-years of home price appreciation was built upon fake fundamentals and financial sector fraud where everyone earned $200k per year for the purpose of buying a home. -Best Mr Mortgage

Source; Wall Street Journal – U.S. Throws New Lifeline to AIG, Scrapping Original Rescue Deal

5 Responses to “AIG – Taxpayer Nightmare”

  1. AFAIK AIG was a big net seller of CDS’ ( Lehman etc. ) and now other parties are sucking gov money out via AIG. Housing collapse was just a begining…

  2. I question how any insurance company it to remain solvent when we are in the middle of an asset devaluation and insurance companies are supposed to be making payout out of asset pools. A commercial policy I have with AIG had a big jump in price citing higher industry losses. Maybe those were AIG losses they were talking about!

  3. …even 1.5% 30-year fixed rate mortgages are not going to save the housing market. There aren’t enough potential buyers with 20% down payments, job security, and the ability to move to make much of a dent in the current inventory. Wait until the Alt A mortgages recasts start to hit California and other bubble states….pure bloodshed. Interesting the SF Gate showed that 90% of Bay Area zip codes are down year over year ($ / sq ft). Some of the nicer areas are a full two years behind San Diego’s crash, but they will crash nonetheless. We are headed back to historical norms for housing appreciation, i.e. just a tad over inflation, and no more. The Bay Area Kool-Aid crew is going to get a harsh lesson in mean reversion as this continues to play out (San Carlos, Cupertino, etc. — I’m talking to you! 😉 Watch and see….

  4. Mr. M

    Here are some of my notes from the BIS report on CDS derivatives for the period ending December 31 2007. Based on the last release date, the new report should be out mid to late November right after the G20 meet in Washington.

    There was an increase in CDS notational value from June 2007 to Dec 2007 of 26%.

    This growth rate if carried forward to June of 08 would give us a notational value of 71 trillion of CDS contracts.

    The huge jump however came in the fair value of contracts, in six months, jumping from 721 trillion to 2 trillion, for a gain of 177%

    Notational value increase in six months 26%
    Fair value increase in six months 177%

    The huge jump in fair value of contracts to two trillion, a 177% increase shows that the market was starting to crumble. I am curious as to how much of the 60-70 trillion notational value is with AIG. The AIG bailout is dwarfing the banks. I wonder how much of AIG CDS might be holding up bank balance sheets?? Such as you mentioned that Wells had not marked down its assets like some of the other banks. Buffet described these as toxic sewage though….

    Might do some snooping to see what comes up.

  5. The simple solution is to declare all CDS contracts as betting slips and all the issuers as bookies and let the RICO prosecutions begin.

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