Friday, November 7, 2008

Why I'd Like to Punch AIG in the Face

I did not ever really intend for this blog to become an economics dissertation by a guy with minimum economics education, but the times have driven the content and my interest. Here we are.

A few months ago now, the government provided a gimungous loan to AIG (American International Group) to, ostensibly, prevent the entire collapse of western capitalism. I understand the value of this loan and the critical component that insurance contributes to stabilizing economies. This was a loan for $85B, but in return for the money, the U.S. government assumed an approximately 80% stake in AIG.

Here is where my face-punching desire arises - shortly after this loan to AIG, the U.S. government developed a new commercial-paper-funding program. Commercial paper can be thought of us very short term loans (possibly 1 or 2 days or less) intended to enable a company to fund immediately ongoing operations. Many people actually say that the true credit crunch was that commercial paper providers completely stopped providing commercial paper for a short period of time, thus freezing the flow of commerce. Anyway, the Federal Reserve started pouring money into the commercial paper market so that banks had access to low-interest money, and this was intended to support these banks lending to corporations.

AIG, those wieners, have been taking money from this new commercial paper program from the government and have been paying back their original loans from the government, because this new program provides "less expensive" money for them. That is a smart, but wiener, business move, particularly when viewed with respect to the kind of money that automakers are currently requesting from the government. According to this article, the U.S. government "has put about $144 billion at AIG's disposal." The world is not fair, but how is this incredibly not fair? GM, Ford, and Chrysler are begging for about $25B on top of the current $25B that they have been budgeted in loan guarantees, but again I want to emphasize that these originally approved loans have been written into the budget and are not even close to being yet available.

Regardless of one's opinions about the U.S. auto industry, it is hard not to be angered at AIG's actions. These guys are pretty brazen. Not only did executives from AIG go on a $440K vacation after accepting the original loan, but there is evidence that as executives became aware that their risky investments were imploding and that their company would start to accrue losses, they changed their compensation structure to a guaranteed structure as opposed to largely performance-based pay.

And that, my friends, is why I would like to punch AIG right in the face.

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