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November 7, 2008

AIG's Bailout 2.0: The Perils of Open-Ended Liability

This should come as no surprise given that supposed insurer AIG has drawn down more than $80-billion of its $122-billion facility, but the company is apparently in talks with the U.S. government to be bailed out of its bailout. It wants to convert a goodly amount of its existing government loan to equity, thus cutting its interest payments, which are currently set at 850 basis-points over LIBOR.

Good for AIG, I suppose, but it points to how open-ended the two-sided AIG liability remains. It is serving as a kind of orifice via which the global credit default swap system pushes out its collateral calls, and it is forcing the U.S. government (read: you and me) into levering up on the other side. As long as asset prices keep falling, increasing the amount of collateral required in AIG's "policies", these calls will keep coming, making AIG's liabilities – and therefore ours – frighteningly open-ended. The situation is, of course, made worse by AIG's inability to sell any of its functioning assets into a marketplace where buyers are having trouble getting credit.

More here.

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