Top 15 For 2008 (No. 9): AIG Blows Up On Bad Mortgage Bets
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StreetInsider.com has put together its 'Top 15 For 2008' which chronicles our view of the most significant news on Wall Street during the tumultuous year.
Number 9: AIG Blows Up On Bad Mortgage Bets
The credit crisis made easy road kill of once mighty insurance giant AIG (NYSE: AIG), as bets the company made on mortgages and mortgage derivatives turned disastrous. Reluctantly, the U.S. government was forced to step-in to avoid the global systemic risk a AIG bankruptcy could have caused.
In the early part of 2008, AIG, which bet big on mortgages, repeatedly claimed that they had things under control, but by the middle of the year a picture started to develop that things were bad - real bad. Losses on mortgage-related investments and credit swap exposure at AIG started to add up. A liquidity crunch like no other seen by man was building fast. Credit rating agency downgrades dealt the final blow, forcing the company to post more collateral on certain contracts.
On the weekend of September 14th, the same weekend Lehman Brothers collapsed, reports surfaced that AIG was in desperate need of cash and was reaching out to the federal government for help. The next week in became clear how desperate the situation was and on September 16th, after private efforts to raise capital failed, the US government announced an $85 billion bailout of the embattled insurer.
The government laid down some tough terms for AIG, as rightly it should have. The U.S. government received a 79.9% equity interest in AIG and initially set an interest rate on the loan of three-month Libor plus 850 basis points.
But the initial AIG bailout plan proved to be just the beginning, as the government clearly had no idea of what a mess the company was in ---- AIG quickly turned into a giant black hole and headache.
In October, less than a month after the initial $85 billion bailout, the government needed to give AIG another $38 billion!
AIG had the U.S. in a bind. How could they not give them more money after already sinking $85 billion into the black hole that is AIG?
In November, it was more! The total now was $152.5 billion, 80% above the original amount! In addition, the government had to adjust the terms of the bailout after it became clear that in order to get paid back they would have to take less. The new plan would also involve purchases under the TARP and the interest on the credit facility was reduce to three-month Libor plus 300 basis points from the prior rate of three-month Libor plus 850 basis points. The Fed also set up two new lending facilities for AIG, one for Residential Mortgage-Backed Securities and one for Collateralized Debt Obligations.
AIG was suckered by Wall Street into insuring things that were doomed to fail. In turn, AIG suckered the U.S. government into taking on the risk with threats of worldwide financial armageddon. Now 'we the people' are the fools!
Number 9: AIG Blows Up On Bad Mortgage Bets
The credit crisis made easy road kill of once mighty insurance giant AIG (NYSE: AIG), as bets the company made on mortgages and mortgage derivatives turned disastrous. Reluctantly, the U.S. government was forced to step-in to avoid the global systemic risk a AIG bankruptcy could have caused.
In the early part of 2008, AIG, which bet big on mortgages, repeatedly claimed that they had things under control, but by the middle of the year a picture started to develop that things were bad - real bad. Losses on mortgage-related investments and credit swap exposure at AIG started to add up. A liquidity crunch like no other seen by man was building fast. Credit rating agency downgrades dealt the final blow, forcing the company to post more collateral on certain contracts.
On the weekend of September 14th, the same weekend Lehman Brothers collapsed, reports surfaced that AIG was in desperate need of cash and was reaching out to the federal government for help. The next week in became clear how desperate the situation was and on September 16th, after private efforts to raise capital failed, the US government announced an $85 billion bailout of the embattled insurer.
The government laid down some tough terms for AIG, as rightly it should have. The U.S. government received a 79.9% equity interest in AIG and initially set an interest rate on the loan of three-month Libor plus 850 basis points.
But the initial AIG bailout plan proved to be just the beginning, as the government clearly had no idea of what a mess the company was in ---- AIG quickly turned into a giant black hole and headache.
In October, less than a month after the initial $85 billion bailout, the government needed to give AIG another $38 billion!
AIG had the U.S. in a bind. How could they not give them more money after already sinking $85 billion into the black hole that is AIG?
In November, it was more! The total now was $152.5 billion, 80% above the original amount! In addition, the government had to adjust the terms of the bailout after it became clear that in order to get paid back they would have to take less. The new plan would also involve purchases under the TARP and the interest on the credit facility was reduce to three-month Libor plus 300 basis points from the prior rate of three-month Libor plus 850 basis points. The Fed also set up two new lending facilities for AIG, one for Residential Mortgage-Backed Securities and one for Collateralized Debt Obligations.
AIG was suckered by Wall Street into insuring things that were doomed to fail. In turn, AIG suckered the U.S. government into taking on the risk with threats of worldwide financial armageddon. Now 'we the people' are the fools!
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