Commentaries
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Time to junk AIG
The federal government’s $180 billion effort to prop up American International Group has worked, averting an even bigger financial catastrophe. Now it’s time for the Obama administration to oversee the dismantling of the failed insurance giant with all due speed.
A report this week from the Government Accountability Office makes clear that AIG would crumble and likely reignite financial fears around the world without the government’s massive support.
And the report says it’s “unclear” whether AIG will ever pay back the $121 billion in government assistance that’s still coursing through its balance sheet.
The GAO report should provide the administration will all the ammunition it needs to get tough with AIG. The report’s conclusions should stiffen the spine of regulators in their dealings with Robert Benmosche, AIG’s new $9 million chief executive.
The former MetLife chief executive seems to act as if he has taken over a financial company that’s simply made one or two bad decisions — not one that nearly brought the global economy to its knees.
Benmosche’s plan to take his sweet time in selling off AIG’s assets might make sense if the insurer could someday stand on its own without the government’s help.
But the GAO report raises serious doubt about whether AIG will ever be self-sufficient again, noting that “the company continues to rely heavily on the federal government as its source of liquidity and capital.”
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The Wall
There was a faint probability for AIG to get out of trouble post the $180 billion effort from the Fed. However consecutive losses quarter after quarter is too much for any firm to take. And with the magnitude of losses AIG has consistently displayed in its filings, one could only guess how much more is left to see. AIG is probably fading until and unless the federal government really resuscitates it back to life… and I mean literally!!
The amount of leverage that AIG had exposed itself to, has finally taken its toll, but what makes bigger larger banks like JPM still tick! JPM is going relatively strong, trading at $45 and gradually improving. It’s probably safe to say that JPM is probably in a bigger mess than AIG. I found a few things about JPM which I wasn’t sure I should know. Throwing a blind eye to it, would be like being a hypocrite…
In a bid to bolster non-interest revenues (trading revenues) JPM assumed leverage far in excess of its optimum capacity. Its oversized derivative exposure (notional value) has exploded to almost $80 trillion – a staggering 5-6 times the size of the US GDP. What’s more, the market exposure it had so far has been hedged among the coterie of large banks, exchanging the market risk for counterparty risk! The slightest disturbance could cause a financial storm within these banks. This could affect the financial system as well, keeping in mind that the total volume of derivative exposures in terms of notional value exceeds $200 trillion in the US.
There’s more in this report. Here’s the link:
http://boombustblog.com/index.php?option =com_docman&task=doc_download&gid=238