Wednesday, 17 September 2008

AIG in Conservatorship

Phew, this is the news alright. AIG is not a US Government backed vehicle, it is a large private company, also it is owned in many US states. The US Federal Government has little legal precedent for suggesting it nationalise the group in return for $100 billion.

On the other hand, they would not do such a thing if they did not think such a thing was utterly needed. Clearly the health of the global financial system is at risk. The fight is now against a Depression, not a recession, led potentially by a real meltdown in financial services worldwide.

Gulp.

This is serious now, the Fed is acting like it did in 1930 and 1931 - let's hope it all works out better this time.

No point owning shares in risky/any US financial stocks now though, with shareholders likely to be wiped out....

9 comments:

Ed said...

As I understand it, AIG were taking people's premiums (risks they knew quite well because they have actuaries to calculate them) and investing the cash in incredibly risky and volatile ventures. WTF were they playing at and why did the regulatory regime not force them to have decent reserves? Is the situation similar here?

Simon Fawthrop said...

The explanation I heardon Wake Up To Money was that these were warrants to the value of 80% of the comapny and the US Govt has a controlling vote. This means that the US tax payer will at least get some upside, if there is any whilst the shareholders are still taking risks.

There was also speculation that AIG will be broken up - apparently they own, amongst other things, a plane leasing company and a consultancy that specialises in helping distressed companies, now isn't that just too ironic to be true?

Steven_L said...

There seems to be a lot of different information doing the rounds on AIG. Can you clear this up for us CU?

The other day you were on about credit-default swaps in relation to AIG. The mainstream media was talking about these too. As I understand it these are on one hand used as insurance contracts by people holding various kinds of debt, and on the other hand used as bets on various credit events happening.

Is it AIG issuing these things? If not who is? And will the demise of Lehman mean that lots of people are trying to cash these hedges/bets in now? The other day you were on about what might happen if the CDS market 'unwinds'. What do you meanby 'unwind'? Is this just cityspeak for saying the bookies can't afford to pay the punters?

Anonymous said...

I have been around a long time and i have survived recessions - not all that difficult to do .

Today i am very worried because this has all the feel of something big.

I am not as financially astute as most on this blog but i can recognise big trouble when i see it.Still with National Savings!!

Nick Drew said...

Ken - nothing 'non-astute' about NS&I: tax-free, index-linked-plus, HMG credit - what's not to like ? the only surprise, to me, is how few people seem to know about them

(just MHO, of course, no investment advice here)

Anonymous said...

Safe money, but low return.

I guess that's the point :)

CityUnslicker said...

Blue Eyes - yes that is the nub of it, low risk business money put into high risk bets - just like Northern Rock.

Steven - yes that is the sum of it. Don't get carried away with the $42 trillion notional value of contracts, total liabilities in real cash are less than sub=prime. Just that the banks and insurers no longer have any money left to cover the defaults.

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