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AIG is Toast
So says Felix Salmon:
AIG's $2.5 billion of 5.85 percent notes due in 2018 plunged 19.5 cents to 33 cents on the dollar as of 9:55 a.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
(quote from here). 33 cents on the dollar? The message is loud and clear: AIG is toast. This is the massive counterparty failure everybody's been scared of, and frankly I'm astonished that the broader stock market isn't plunging as a result. No one is prepared for the repercussions here: the failure of AIG is likely to be an order of magnitude more harmful than the failure of LTCM would have been. And it's not even happening on a Friday, where we could have yet another Emergency Weekend to try to work things out.
Posted by Alex Tabarrok on September 16, 2008 at 01:53 PM in Economics | Permalink
Comments
oh man, this is AIG. an institution that
one thought was invincible. how things turn.
Posted by: sa at Sep 16, 2008 2:20:15 PM
It's fine with me. You screw up and overreach, you fail. Isn't that how it's supposed to work?
Although, I am glad to have a vegetable garden.
Posted by: Howl at Sep 16, 2008 2:26:14 PM
We live in interesting times. I'm going with the conspiracy theory that the PPT is keeping the markets afloat. Don't think that will last long though - there's going to be a run on the market to match the soon-to-be runs on the banks.
What does someone with a decent amount of cash do in this environment?
Posted by: meter at Sep 16, 2008 2:27:26 PM
What does someone with a decent amount of cash do in this environment?
Do nothing and sit on the cash. Cash is king in a crisis. If you must do something and feel greedy:
1. Short the S&P 500 by buying an ETF like SH or SDS (ultrashort 2x).
2. Buy SPX put options.
3. Wait for the apocalypse and then pick over the rubble looking for bargains. This is tricky though, because a lot of people lost a ton of money by prematurely buying "bargain" stocks like Bear Stearns and Lehman and Fannie/Freddie.
AIG bankruptcy would make for a pretty good apocalypse. But, like the cast of Buffy, we may have reason to ponder the plural of "apocalypse".
Posted by: at Sep 16, 2008 2:43:55 PM
meter: Stay in cash (and diversify into foreign cash). Most commodities are not doing well now, either, although I am considering an investment in canned goods.
Posted by: David Wright at Sep 16, 2008 2:49:15 PM
I put about a third of my stock money into Berkshire last week, so right now I feel like a genius. But, it could be a long hour.
Wells Fargo could have been even smarter, but I try not to be too smart.
Trying to predict rare events (e.g. apocalypse) seems not a high-percentage move to me. I don't believe these institutions are the market. But, the nice thing is, we'll have a nice drop, and a recovery and everyone will be able to tell everyone else "I told you so."
Posted by: Andrew at Sep 16, 2008 3:03:15 PM
Bloomberg and others are now reporting that the federal government has reversed course and will consider lending to AIG. The stock market is up sharply since about 2:45 pm Eastern time. Tomorrow's apocalypse has now been rescheduled.
Posted by: at Sep 16, 2008 3:23:35 PM
What most people do not realize is that
AIG is in effect to the global derivatives
market what the FDIC is to the US commecial
banking system. However, it is scarier in
that if the FDIC goes bankrupt (which is not
out of the question given that if Washington
Mutual fails outright, paying off its depositers
will use up half of FDIC's funds), it can
always run to the Treasury and get an infusion
of funds from the taxpayers, which is in effect
what happened during the old S&L crisis. But,
there is nobody AIG can run to so easily,
although it is now apparently trying to run to
the US taxpayer (or, more realistically, the
Chinese central bank or sovereign wealth fund
through the US government).
Posted by: Barkley Rosserr at Sep 16, 2008 3:49:33 PM
to at:
Buy yourself more of an education. If you can't do that, buy yourself a diploma. No better way to spend your cash in a crisis than by getting smarter. (or pretending to)
Posted by: Linkt at Sep 16, 2008 3:58:35 PM
Market closed 10 minutes ago. Since then, AIG has dropped 57% in aftermarket trading...
Two guesses: 1) someone knows something; 2) tomorrow is going to be a bad day
Posted by: Greg A. at Sep 16, 2008 5:10:28 PM
AIG rose in the afternoon on speculation the feds would cave, then fell again after hours when Sen. Dodd and Shelby displayed a lack of enthusiasm.
Posted by: David at Sep 16, 2008 5:34:59 PM
If the Treasury and Fed wipe out the equity holders, and the debt holders, and auctions off the healthy assets, what will they fetch in this market? Are the other units capitalized properly? How much does AIG need to cover their derivative exposure?
Posted by: Anthony at Sep 16, 2008 5:54:28 PM
Greg A.,
Not necessarily, in fact it could be a hopeful sign. If AIG shares are flatlining, it probably means that the market is anticipating that the federal government will get involved in a bailout, in which case the common shares go to zero like they did for Fannie and Freddie.
Surely the Feds will wipe out the common and preferred and debtholders and try to preserve the derivatives counterparties and the insurance policyholders.
S&P 500 futures are holding up pretty well, above 1200 as I write this. Ie, the market is not anticipating a bad day tomorrow, at this time.
Posted by: at Sep 16, 2008 6:14:30 PM
For all the folks bashing regulation (not that they're all wrong by any stretch), a counterpoint:
"For one thing, banks and mutual funds are major holders off AIG's debt and could take a hit if the insurer were to default. In addition, AIG was a major seller of "credit-default swaps," essentially, insurance against default on assets tied to corporate debt and mortgage securities. Weakness at AIG could force financial institutions in the U.S., Europe and Asia that bought these swaps to take write-downs or losses.
AIG's millions of insurance policyholders appear to be considerably less at risk. That's because of how the company is structured and regulated. Its insurance policies are issued by separate subsidiaries of AIG, highly regulated units that have assets available to pay claims. In the U.S., those assets can't be shifted out of the subsidiaries without regulatory approval, and insurance is also regulated strictly abroad."
from http://online.wsj.com/article/SB122156561931242905.html
So - if you bought an insurance policy from a highly regulated AIG subsidiary, you're probably fine. If you bought a Credit Default Swap from AIG, you would be screwed, but the government is bailing you out (you're welcome).
Tell me again - if we decided as a society that insurance had to be very highly regulated, why didn't we put credit default swaps into that bucket?
Posted by: Kyle S at Sep 16, 2008 10:24:05 PM
If you bought a Credit Default Swap from AIG, you would be screwed, but the government is bailing you out (you're welcome).
CDS were not bought by moms and pops. They are OTC derivatives products. Since I don't trade these and my company doesn't trade these (exactly because of the risk), I'm pretty bitter that I (along with other taxpayers) am being forced to become a counterparty to a deal which I did not agree to and on terms I don't like.
Yesterday when Lehman wasn't bailed out, I was happy that the bailouts may finally be coming to an end. Now, I'm right back to growing more bitter by the day.
Posted by: Methinks at Sep 16, 2008 11:22:11 PM
Methinks: I agree with you. I'm just pointing out that for all the whining about how regulation is the great satan, the heavily regulated insurance cos are the ones that don't need to be bailed out here.
Posted by: Kyle S at Sep 17, 2008 12:14:05 AM
Time to contact Nicholas Nassim Taleb to tell him he's right!
Posted by: at Sep 17, 2008 1:22:07 AM
OOooh damn the "mighty" AIG- American International Group, Now becomes the American I
American Indebted Group, Christ hang in there
Posted by: Paul A Okumu at Sep 17, 2008 1:28:44 AM
I'm not certain the effect will be to wipe out all shareholders. In this article, it states that "the government will have veto power over the asset sales and the payment of dividends to shareholders."
http://money.cnn.com/2008/09/16/news/companies/AIG/?postversion=2008091700
Maybe dividends is the wrong word and a better phrase is "profits from the sale of assets."
Posted by: meter at Sep 17, 2008 9:49:51 AM
S&P 500 futures are holding up pretty well, above 1200 as I write this. Ie, the market is not anticipating a bad day tomorrow, at this time.
For posterity, let's record what happened "tomorrow", which is today: the S&P 500 opened around 1210, very close to the previous close of 1213. However, the market took a big fall on worries about Morgan Stanley (which fell 26% and as much as 44% intraday) and the S&P 500 closed around 1156, a drop of about 4 3/4%, closing at its lowest point of the day.
Posted by: at Sep 17, 2008 4:09:14 PM
Placing the above in context for you, the reader of the future: the bailout of AIG took place yesterday, overnight, and the market fell sharply today nonetheless.
Posted by: at Sep 17, 2008 4:15:41 PM
is everyone crazy...the biggest asset in the aig group is a non admitted company, the lexington insurance co, the largest excess and surplus lines P&C company on the planet...if it fails the state guarantee funds will not apply because it is a nonadmitted asset... SO LET ME PUT IT ANOTHER WAY SO WE ALL UNDERSTAND...IF THE LEXINGTON FAILS, UNLIKE THE OTHER ADMITTED ASSETS IN THE AIG INSURANCE GROUP [ IE NATIONAL UNION OR AMERICAN HOME] NOT ONE PENNY WILL BE PAID FROM THE STATE GUARANTEE FUNDS, LEAVING TENS OF THOUSANDS OF POLICY HOLDERS WITHOUT ANY PROTECTION OR RECOURSE... this is no secret. so why are the state insurance comissioners not telling THE PUBLIC STOCKHOLDERS THE WHOLE TRUTH ABOUT AIG'S INSURANCE AND THE DIFFERENT REGULATIONS THAT APPLY TO THE MOST IMPORTANT ASSET WITHIN THE AIG'S INSURANCE OPERATIONS ..... IF THE LEXINGTON FAILS, AND IT MIGHT, THERE WILL BE SOME REAL EXPLAINING TO DO BY THE NEW YORK INSURANCE DEPT AND THE REST WHO HAVE EITHER SAID DON'T WORRY ITS JUST A HOLDING CO. PROBLEM OR REMAINED SILENT....SHAME ON THEM NO WONDER THE PUBLIC HAS LOST IT'S TRUST IN GOVERNMENT RS
Posted by: at Oct 18, 2008 9:07:28 PM
