Wednesday, December 3, 2008
Whether We End Up Paying For It Through Taxes Or Hyperinflation, It Will Still Come Out Of Our Pockets.
According to Reuters:
The U.S. government saved AIG from bankruptcy in September with a rescue plan that has ballooned to about $152 billion.The article makes it clear that the bailout of AIG was largely due to AIG's credit default swap exposure:
[The government has agreed to] clear the insurer of its obligations on about $53.5 billion in toxic mortgage debt . . . .Because the government has to date refused to cancel CDS, taxpayers are unnecessarily paying many billions of dollars in connection with AIG alone. . . and trillions altogether.
The development is part of the U.S. Federal Reserve's agreement last month to buy up to $70 billion of toxic mortgage assets -- collateralized debt obligations -- underlying AIG credit default swaps (CDS), a type of debt guarantee.
AIG's responsibility to post collateral on the $53.5 billion in assets has been suspended . . . .
The need to post increasing amounts of collateral to counterparties for these guarantees left AIG with deep losses over the last four quarters. It has lost $42.5 billion in that period.***
The Federal Reserve has established two funds -- Maiden Lane II LLC and Maiden Lane III LLC -- to hold mortgage assets linked to AIG.
One will hold the assets underlying the AIG CDS, and the other entity will be for mortgage liabilities from a securities lending portfolio that caused additional losses for AIG.
Whether we end up paying for it in the form of taxes or hyperinflation, it will still come out of our pockets.