...TUESDAY, SEPTEMBER 16Following Monday's 504.48 point drop the Dow Jones Industrial Average closes up 141.51 on the day.
Do you have $85 billion?
That morning, Willumstad called Geithner again. He said that he was planning to draw down the last of A.I.G.’s credit lines that morning. Traders and investors would recognize such a step as desperation, making bankruptcy all but inevitable.“Don’t do that,” Geithner said.
“Why not?” Willumstad asked. “Unless you can tell me there’s a solution in place, I have an obligation to shareholders.”
“Don’t do it. I’ll get back to you.” Geithner hung up.
An hour passed. Hearing nothing, Willumstad gave the order to draw down the credit lines. Then, at eleven-thirty, Geithner called and told him that an emergency meeting was under way at the Fed in Washington about a potential solution. Willumstad hastily rescinded the order.
It was becoming clear to Geithner and Bernanke that government action was the only recourse. Every financial institution was struggling to value assets at a time when there were fewer buyers for them at any price. Financial institutions were growing reluctant to lend to one another, even overnight. That day, the Fed put $70 billion into credit markets, but with little evident effect. European central bankers were also grappling with the rapid deterioration of credit markets and were deeply concerned about the impact of an A.I.G. failure on European financial institutions and markets. Several European central bankers had spoken with Bernanke, urging the Fed to do whatever it could to prevent an A.I.G. failure.
Several Fed staff members, including the vice-chairman, Donald Kohn, and the governors Kevin Warsh, Randall Kroszner, and Elizabeth Duke, assembled in Bernanke’s office. Geithner and Paulson, participating by phone, reported on A.I.G.’s imminent failure and the systemic risks that that would entail. There were no buyers, no lenders.
Letting A.I.G. collapse could be disastrous. “A.I.G. was even larger than Lehman, with a substantial presence in derivatives and debt markets, as well as in insurance markets,” Bernanke later recalled. “Given the extent of the exposures of major banks around the world to A.I.G., and in light of the extreme fragility of the system, there was a significant risk that A.I.G.’s failure could have sparked a global banking panic. If that had happened, it was not at all clear that we would have been able to stop the bleeding, given the resources and authorities we had available at that time.”
Geithner and Paulson proposed extending an $85-billion loan that would be collateralized by all of A.I.G.’s assets. A.I.G. did have several large, profitable businesses, including its main insurance arm, which gave the Fed a legal basis for making the loan. The government would also demand a nearly eighty-per-cent equity stake in A.I.G. and would have the right to veto any dividend payments.
“There was great reluctance,” one participant recalls. “People were uncomfortable. We’d just crossed another boundary. A.I.G. wasn’t a bank or a broker dealer but an insurance company. Could we have let it go? No one had any idea what would happen if we let a company this size fail. There was no precedent. We were aware that lots of banks and investment banks were counterparties and might be at risk, but we didn’t do this to save Goldman, or SocGen, or Deutsche Bank. It was far more complex. We were worried about the households with 401(k) plans, life-insurance policies, and pensions.”
The discussion lasted thirty minutes. There was no real basis for knowing whether A.I.G.’s healthy businesses were sufficient collateral. Still, Bernanke said recently, “Lehman was insolvent and didn’t have the collateral to secure the amount of Federal Reserve lending that would have been necessary to prevent its collapse. In contrast, A.I.G. Financial Products was just one division of a big, global insurance company.” But some Treasury and Fed participants recognized that giving A.I.G. an $85-billion loan so soon after Lehman’s collapse would appear wildly inconsistent. “Opposite decisions were made for apparently similar reasons,” the Treasury official says. “It was hard to justify. But A.I.G. was another order of magnitude. It was a quantum shift. It was so beyond anything we’d ever envisioned.”...MUCH MORE
What we were posting:
3:45 a.m.
Up the WaMu? (WB;WM)
4:08 a.m.
Wamu Down, not out (WM)
5:05 a.m.
AIG Dips Below $3.00 Pre-Market; Remember Portfolio Insurance?
Dynamic Hedging was all the rage in the summer of 1987. Market participants knew they were taking outsized risks in an attempt to capture outsized gains. The rationalization was "I've got portfolio insurance to hedge what I'm doing"6:08
As The Motley Fool put it on the 10th anniversary of the crash of '87:
The concept of portfolio insurance, indeed the name itself, reflects the ardent wishes of its creators for a utopian investment vehicle capable of minimizing the pain of investment loss.I'm reminded of that when looking at what AIG did to themselves. Market players wanted all the upside and none of the risk. AIG said "We can do that for you" and they started selling Credit Default Swaps as fast as they could print them up so the banks and hedge funds could go play in the debt markets with no downside. Yeah right. "Here at Cloud Cukoo Land we believe...". Sure the CDS's had provisions that if AIG was downgraded, the insurer would post collateral to guarantee their guarantee. AIG was the largest insurer. In 48 hours it will be unrecognizable.
AIG is trading at $3.03 down 36% premarket.
Reality bites.
Investment Banking 2.0: Into the Future
6:29 a.m.
The Wall Street Journal on AIG (it ain't pretty)
6:55 a.m.
Hey! Some Good News on AIG!
With the current Dow Jones Industrial Average divisor of 0.122834016 (a $1.00 move = 8.141 DJIA points) AIG could drop from its current $2.40 to zero and it would only knock the Dow down 19.53 points!7:04 a.m.
It would of course knock the stuffing out of the world financial system.
-Reporting from Climateer world headquarters, your Little Ray of Sunshine.
Bill Gross's Fund Guaranteed $760 Million of AIG Debt
7:27 a.m.
Financial Times Report on Modern Energy
7:46 a.m.
Greenberg: AIG Will Fail Without Bridge Loan, Rating Forebearance
8:00 a.m.
Shareholders Run, Much Like Depositors Once Did (AIG; WM)
9:53 a.m.
Washington Mutual stock rises; merger talk disputed (WM)
10:40 a.m.
Lehman's U.K. Landlord Says AIG Insures Rent Payments (AIG; LEH
11:10 a.m.
Oil in steepest two-day slide since 2004 (under $90/Bbl for Brent)
11:19 a.m.
What Is Greenberg Mulling for A.I.G.?
11:39 a.m.
--Breaking-- Fed Reconsidering Stance on AIG Assist
12:18 p.m.
Greenberg-Led AIG Investors Consider Taking Control
12:44 p.m.
How banks depend on AIG
12:59 p.m.
CFR Exclusive Interview: Hank Greenberg (AIG)
1:20 p.m.
Lehman Brothers shuts carbon trading desk (LEH)
1:46 p.m.
DealBreaker on Record as Calling for "Incoherent and Unpredictable Policy Responses to Financial Meltdowns"
2:25 p.m.
U.S. Said to Be Considering Conservatorship as Option for AIG
3:20 p.m.
Pickens suspends plans for water pipeline
3:28 p.m.
Small thoughts, from the little people
From Tyler Cowen at Marginal Revolution:
It's a little scary that the world's largest insurance company hasn't planned for a rainy day.4:18 p.m.
Mr. Macho Market Man Says: "Parachute? We Don' Need No Stinkin' Parachute"
Well, the retail guys have their lips on autopilot: "And Mr. Big, if you annualize that...", but I suppose that sounds better on the upside.
Grandmother would say something like "If the initial condition given is 'The sky is falling', your course of action would be to short sky, try the eggplant"
kottke.org guides us to:
Free Fall
The Free Fall Research Page| Admit it: You want to be the sole survivor of an airline disaster. You aren't looking for a disaster to happen, but if it does, you see yourself coming through it. I'm here to tell you that you're not out of touch with reality—you can do it. Sure, you'll take a few hits, and I'm not saying there won't be some sweaty flashbacks later on, but you'll make it. You'll sit up in your hospital bed and meet the press. Refreshingly, you will keep God out of your public comments, knowing that it's unfair to sing His praises when all of your dead fellow-passengers have no platform from which to offer an alternative view. |
| Let's say your jet blows apart at 35,000 feet. You exit the aircraft, and you begin to descend independently. Now what? |
| First of all, you're starting off a full mile higher than Everest, so after a few gulps of disappointing air you're going to black out. This is not a bad thing. If you have ever tried to keep your head when all about you are losing theirs, you know what I mean....MORE |
Fed to Give A.I.G. $85 Billion Loan and Take 80% Stake
5:34 p.m.
Hank Paulson, AIG and the Line in the Sand
