Friday, March 13, 2009

What are we paying for?

I've made a few investments over the years. I bought a few shares in Target, for example. On the whole it's done well; though during the last few quarters, it could have been better.

Over the past year, the value of a share of Target has declined considerably, but on the whole I've realized a gain on my investment. This is not because I'm a brilliant investor. My wife told me to buy Target, and I did as I was told. Also I looked into it a little before I bought. That's called due diligence.

Now as an American taxpayer, I am an investor in a number of other companies with wildly divergent business models. One of them is AIG. Now I didn't want to buy shares in AIG. I didn't research their business plan, their cash flow, or their prospects and decide to pick up a part of their business for my portfolio. All that was done on my behalf by the gubment last fall when Hank Paulson bailed the bastards out because not doing so would have been unthinkable in the face of the systemic risk posed by AIG's failure.

You do what is needed. You do what you must do. Because you're a mensch. Because you are an American.

But what did we buy when we bought into AIG's business? Well we bought a lot of things, naturally, and one of the things we bought was a shitload of credit default swaps -- obligations to make whole people who had taken on risks in other financial market instruments that had the possibility of turning sour. Things like collateralized debt obligations, mortgage backed securities, and plain old corporate bonds.

So far, I and all of my fellow taxpayers are into AIG to the tune of of $165 BILLION. We, the people, OWN its puckered ass. At close today, it was valued as a whole at $1.35 billion. This is not a winning investment by any standard. We spent $165 billion to get a portion of $1.35 billion in equity? This is how the system works?

And so as investment folks we should by rights get a glimpse at what is being done with our bucks. We're the capitalists now, right?

Not so fast, children. We bailed out an insurance company! That means they have obligations to others. The money we "invested" in AIG went elsewhere! From the NY Times:

Nevertheless, Edward M. Liddy, the chief executive of A.I.G., explained to investors last week that “the vast majority” of taxpayer funds “have passed through A.I.G. to other financial institutions” as the company unwound deals with its customers.

On Wall Street, those customers are known as “counterparties,” and Mr. Liddy wouldn’t provide details on who the counterparties were or how much they received. But a person briefed on the deals said A.I.G.’s former customers include Goldman Sachs, Merrill Lynch and two large French banks, Société Générale and Calyon.
We spent many billions to do what? We spent billions to make whole the likes of Société Générale, and make sure they not suffer the pain of investing in mortgage securities based on non performing buyers.

Is this a great country or what?

And we don't get to know where the money goes.

Because of the way A.I.G. wrote its swaps, and because the company had a double-A credit rating at the time, it did not have to put up collateral to assure its customers that it would be able to pay on the insurance if necessary. Collateral would be required only if A.I.G.’s credit rating were cut or if the debt underlying the swaps declined.

Both of these “unthinkable” events occurred in 2008. Suddenly, A.I.G. had to cough up collateral it didn’t have.

SO, you see, the rescue of A.I.G. also involved a bailout of its many customers, none of whom the insurer or the government is willing to identify.
We are not allowed to know who is benefiting from our (it is OUR money!) rescue effort.

We bought an outfit that had enormous obligations to other outfits. AND nobody's saying just what and how much those obligations entail. So we can't do the due diligence an investor ordinarily should do on his risks.

Basically we're being asked to pick up the tab for a pig in a poke.

Cool, eh?

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