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Sept. 14 (Bloomberg) -- American International Group Inc., trying to stave off credit downgrades that would force it to post more than $13 billion in collateral, is seeking capital from buyout firms Kohlberg Kravis Roberts & Co. and J.C. Flowers & Co.
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AIG Bankruptcy Would Be "Extinction" Event (AIG)
Jonathan Kennedy | Sep 16, 08 7:21 AM
UPDATE: AIG's former CEO Hank Greenberg went on CNBC this morning to beg the government for a bridge loan. He tried to differentiate the company from Lehman, Fannie, Freddie, et al, by arguing that failure would be catastrophic (and un-American). He also said the company's subisdiaries are healthy, so the company is "not insolvent." Here is the full transcript from CNBC.
EARLIER: We'e survived the collapse of Lehman Brothers (LEH) and the sale of Merrill Lynch (MER), but money manager Michael Lewitt argues that AIG (AIG) is a different story.
In an op-ed for the Times, Lewitt argues that a liquidity crisis at AIG will hammer everyone on Wall Street by interrupting the $60 trillion market for credit default swaps, in which AIG is a central player.
A.I.G. does business with virtually every financial institution in the world. Most important, it is a central player in the unregulated, Brobdingnagian credit default swap market that is reported to be at least $60 trillion in size.
Nobody knows this market’s real size, or who owes what to whom, because there is no central clearinghouse or regulator for it. Credit default swaps are a type of credit insurance contract in which one party pays another party to protect it from the risk of default on a particular debt instrument. If that debt instrument (a bond, a bank loan, a mortgage) defaults, the insurer compensates the insured for his loss. The insurer (which could be a bank, an investment bank or a hedge fund) is required to post collateral to support its payment obligation, but in the insane credit environment that preceded the credit crisis, this collateral deposit was generally too small AIG Bankruptcy Would Be "Extinction" Event
...Lewitt argues that a liquidity crisis at AIG will hammer everyone on Wall Street by interrupting the $60 trillion market for credit default swaps, in which AIG is a central player...Nobody knows this market’s real size, or who owes what to whom, because there is no central clearinghouse or regulator for it.
This is the crux of the whole problem, right here.
If we don't let these derivatives unwind, partly by letting AIG and other large players go bankrupt, we will all suffer until they are unwound. It will happen anyway. Better to let it happen while the US economy has at least one leg to stand on, than to wait until it is so weakened that something like this will implode the whole system.
Buffet was right when he called derivatives "weapons of mass financial destruction", and this unregulated market is full of toxic waste that is bringing other, semi-healthy institutions down. Derivatives are worth only pennies on the dollar (some = zero) and the counterparties can't possibly perform. Let 'em GO.
I think the idea is that if the gov't bails out AIG it will stop the chain reaction.
Quote:
Originally Posted by Nor'Eastah
This is the crux of the whole problem, right here.
If we don't let these derivatives unwind, partly by letting AIG and other large players go bankrupt, we will all suffer until they are unwound. It will happen anyway. Better to let it happen while the US economy has at least one leg to stand on, than to wait until it is so weakened that something like this will implode the whole system.
Buffet was right when he called derivatives "weapons of mass financial destruction", and this unregulated market is full of toxic waste that is bringing other, semi-healthy institutions down. Derivatives are worth only pennies on the dollar (some = zero) and the counterparties can't possibly perform. Let 'em GO.
I think the idea is that if the gov't bails out AIG it will stop the chain reaction.
We can't stop the chain reaction. This is what is causing all this mayhem. There are elements of Wall Street who wish to keep this game going. They don't want anyone to know what is really on their balance sheets. It will come out, probably sooner rather than later. They refuse any regulation of these instruments. How many otherwise healthy institutions do we have to see fail due to these derivatives? It will bring them all down if we don't "interrupt" the toxic sewage leak.
Let all the derivatives fail! They are not performing anyway. That is my only point. They are dragging down the rest of the market.
I haven't heard anymore news about this. As I understand it, they need the money today!
It's not ideal, but I think the fed needs to bail them out this time.
There was a interesting report on CNBC earlier. Apparently the previous CEO Greenberg put out a letter or something saying he has been trying to offer his help (and some financial help included) but they don't want to because he "might overshadow the CEO". What kind of crap is that? I think there are rumors he has some backing to try to take over the company or something. Interesting stuff. Amazing though if they really won't accept his help just because of ego. Anyone heard anything else on that?
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Quote:
Originally Posted by Nor'Eastah
We can't stop the chain reaction. This is what is causing all this mayhem. There are elements of Wall Street who wish to keep this game going. They don't want anyone to know what is really on their balance sheets. It will come out, probably sooner rather than later. They refuse any regulation of these instruments. How many otherwise healthy institutions do we have to see fail due to these derivatives? It will bring them all down if we don't "interrupt" the toxic sewage leak.
Let all the derivatives fail! They are not performing anyway. That is my only point. They are dragging down the rest of the market.
Quote:
Originally Posted by Lulu101
I haven't heard anymore news about this. As I understand it, they need the money today!
It's not ideal, but I think the fed needs to bail them out this time.
We just can't take the risk!
Nor'Eastah is right. It time to let companies that bought the toxic crap out there to fail, so we can move on. All this intervention by the FED and lending of money by other large institutions is not going to get rid of all the bad paper out there. It just has to work through the system. And yeah some of there investment bank are going to go the way of the DODO. Hey, that just the way the world works some times.
Heck guys. I believe this is only the first shoe to drop. Wait until people out there start defaulting on there credit cards payments in Mass. We are going to have real fun then. Think about it how do you think alot of people are keeping there head above water right now. Better yet how are a lot of people still buying more expensive items and services in a tightening lending market. That's right. They are using the credit cards. Eventually for a lot of these people their head is going to sink below the waves. And Whoaaaaaa, Wait until retail creditors start going under.
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