Tue, October 28, 2008
Brother, Can You Spare $122.8 Billion??
Most people thought that the Federal Reserve was being generous when it provided $85 billion to AIG in an equity deal plus $37.8 billion in liquidity lending. As it turns out, that might not be enough to keep the company going.
AIG’s newly-appointed CEO Edward Liddy (no idea whether he’s related to G. Gordon) appeared on PBS’s NewsHour With Jim Lehrer last week and acknowledged that he wasn’t sure that the funds provided for AIG will be sufficient to keep the company afloat.
A big part of AIG’s problem arose from the 400+ billion dollars in credit default swaps that it sold, including $57.8 billion in swaps linked to subprime mortgages. Add to that the credit downgrades that have forced AIG to keep offloading collateral, and it’s no wonder that the insurance giant is bleeding cash. The company has assets up for sale, but in the midst of the current global financial crisis, it can’t hope to get top dollar for even its most salable parts.
I admire Liddy for being honest enough to admit the fact that he’s not sure whether the AIF package is enough; plenty of managers might not be so realistic or so open.
Given the jitters in the markets, it’s likely that the government would figure a way to keep AIG propped up in the event that even more cash is needed, but the old saying about throwing good money after bad comes to mind. At the moment everyone is hoping that there are no big hedge funds with ugly derivative positions still on their books that might touch off just the sort of domino effect that the government thought it was averting by preventing AIG’s collapse.