AIG: Taxpayer Nightmare

In my opinion, the two key points of the AIG (AIG) article in the Wall St Journal last night are as follows:

“The new package is a tacit acknowledgment that the original $85 billion rescue in September, combined with an additional $37.8 billion made available to the company last month, together haven’t come close to stabilizing AIG”

If they were wrong the first time, why would twice the money work the second time? If it takes $150 billion to ’stabilize’ one company, I surely hope that AIG is the last large firm that will experience trouble.

“Over time, two scenarios could emerge. The assets held by the two vehicles might recover in value, allowing the government to eventually make money on the investment. Conversely, the assets - many of which are tied to the housing market - could continue to decline in value, hitting taxpayers with big losses.”

The above pertains to paying 50 cents on the face value for AIG’s CDOs and MBSs.  That sounds a little high given multi-sector CDOs have been written down to 10 cents months ago by many. The market has only gotten worse.

Once again, big bets are being made with tax payer money predicated upon the housing market doing better in the future. Well, unless all of the credit and leverage is allowed to return through exotic mortgage programs that allowed an $80k household income to purchase an $800k home, do not expect housing ‘come back’ any time soon. Well, that’s of course wage inflation carries incomes up 300% or 30-year fixed rate mortgages drop to 1.5%.

Remember folks, the past 5-years of home price appreciation was built upon fake fundamentals and financial sector fraud where everyone earned $200k per year for the purpose of buying a home.

Source; Wall Street Journal - U.S. Throws New Lifeline to AIG, Scrapping Original Rescue Deal

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