[jyl]

Here is a thread to discuss this evolving event. Let's not get it moved over to the political/religious subforum. There's already an AIG thread "over there", in this thread let's stick to the economic and political implications, please.

Here is a quick background.
- AIG is a large insurer, some say the largest.
- Its insurance business is very profitable, I think EBIT around $20BN/yr excluding asset impairments.
- Like most insurers, it has a big balance sheet. Appx $1TR of assets and similar liabilities.
- Among those assets and liabilities are various assets that are declining, and various liabilities that are increasing.
- The former include RMBS, CDOs, etc backed by a variety of prime, Alt-A, and subprime mortgages. Apparently if AIG were to mark this debt down as far as, say, MER or GS have done, it would have eliminated another $20-30BN of capital.
- The latter include CDS written by AIG, which require increasing deposits of collateral as the spreads widen and as AIG's own credit rating deteriorates, supposedly AIG was looking at a $10-12BN collateral demand this quarter alone. Also AIG had some $40BN of debt that matures in the coming year and must be rolled over.
- AIG raised something like $20BN of capital last quarter, but apparently that is already been consumed by deterioration in its balance sheet. In the past few weeks the ratings agencies signaled that they would downgrade AIG's debt and now they have done so. The stock has plunged to almost nothing. This made it impossible for AIG to raise more capital on terms that seemed acceptable.
- The Fed tried to pressure MS and GS to commit $70BN to a rescue of AIG. MS and GS declined. Other private entities also could not or would not step in.
- The Fed does not regulate insurance companies, so it was reluctant to step in.
- Now the Fed and/or Treasury have decided to commit $80BN in the form of a loan, to prevent AIG from going BK. In return the govt will have priority security interests on AIG's assets and take warrants that will largely wipe out AIG's shareholders. Depending on the outcome, the govt could make a healthy profit on this investment, or could lose it all, or anything between.
- Presumably the govt concluded that the impact of an AIG failure on the financial system would be too severe to permit. The govt is clearly not averse to letting firms fail - they are standing aside and allowing LEH to go under. They apparently saw something different with AIG.
- The above is a gross over-simplification - I spent 1 hour reading reports on AIG yesterday and still don't have a clear picture of what they own and owe, and what sort of systemic risk an AIG failure would have been to the financial system. And the details of the deal are not known and perhaps not finalized.

So, that is what I know, and it isn't much. The insurance industry is not my area of expertise, to say the least. (In fact I wrote a post on AIG in another thread, then deleted it when I realized how much I did not know.)

Any thoughts or information, please post. If I learn more, I will post also. But I'm kind of busy right now . . .