Too Big to Fail
Let's think about those words for a moment.
TOO. BIG. TO. FAIL.
The implicit meaning behind that all-too-spoken term is that certain financial institutions are too important to the economic system to be allowed to fail. It's become a crutch to justify ever-increasing mountains of taxpayer capital being funneled into various and sundry "pillars" of banking, insurance and finance.
No financial institution has come to symbolize the term more so than American International Group [AIG]; which has sucked from the taxpayer teet not once, not twice, not thrice, but FOUR TIMES in the last six months.
- September 16, 2008 -- The Federal Reserve provides $85 billion in a 2-year term loan, and in turn the taxpayers are rewarded with warrants to purchase 79.9% of AIG equity
- October 8, 2008 -- The New York Fed provides access to $37.2 billion in exchange for various and sundry AIG investments and counterparty exposures
- November 10, 2008 -- The Fed and the Treasury take a number of measures including injecting $40 billion of TARP funds in exchange for a preferred with 10% coupon. The previous line of credit terms are lowered from LIBOR+8.5 to LIBOR+3. And the NY Fed creates two new entities [with a cash infusion from AIG] that allows AIG to to buy/dispose of toxic assets
- March 2, 2009 -- AIG gets access to another $30 billion more in exchange for the new tranche of non-cumulative preferred stock. The company effectively sells two units to the Fed in exchange for forgiving $26 billion of the existing credit facility, and gets the LIBOR floor removed. Finally AIG continues to have access to at least $25 billion under the pre-existing NY Fed facility.
And what do the American taxpayers have to show for their charitable efforts?
Well, the 4th capital infusion came as AIG announced the largest quarterly loss by any company in U.S. history. In three months time, AIG lost $61.7 billion. I couldn't help but watch, mouth agape, as AIG CEO Ed Liddy appeared on CNBC today acting as though this was just a minor hiccup. His calm in the face of this debacle astounded.
AIG, on the taxpayer dime, just lost more money in three months than Bernie Madoff allegedly bilked out of his investors over decades of supposed fraudulence, and yet the CEO admits the company may need MORE funding before all is said and done. This is not to say the failure of AIG doesn't bring with it tremendous risks. In fact, AIG has taken the liberty of circulating a report on the economic impact of such an event. But the market is telling us SOMETHING.
- September 16, 2008 -- SP500 closed at 1213.59
- October 8, 2008 -- SP500 closed at 984.94
- November 10, 2008 -- SP500 closed at 919.21
- March 2, 2009 -- SP500 closed at 700.82
If the market is the ultimate discounting mechanism, shouldn't our policy makers take note? Or perhaps that's too much to hope for; after all, they have a PLAN.
The definition of insanity is doing the same thing over and over again and expecting different results. -- Albert Einstein
You needn't be a genius to understand the pertinence of Einstein's quote.
Disclaimer: At the time of writing, the author or firms affiliated with the author maintained a long position in SDS, but did not maintain a position [long or short] in AIG or any related instrument. The author and the firm reserve the right to alter their investment positions at any time in the future. The content on this site is provided as general information only and should not be taken as investment advice. Content should not serve in any way as a recommendation to buy or sell any security or financial instrument, or to participate in any particular trading or investment strategy. The ideas expressed on this site are solely the opinions of the author(s) and do not necessarily represent the opinions of firms affiliated with the author. Any action taken as a result of information or analysis on this blog is ultimately your responsibility. Consult your investment adviser before making any investment decisions.