AIG BLACK HOLE - US CONTINUES TO POUR MONEY INTO SAVING THE INSURER

AIG the insurance giant "partially" taken over by the US Government (under the Bush administration) is getting another $30 billion of your tax dollars.  The Federal Reserve announced this morning that the terms of the bailout have been adjusted.

The company continues to face significant challenges, driven by the rapid deterioration in certain financial markets in the last two months of the year and continued turbulence in the markets generally. The additional resources will help stabilize the company, and in doing so help to stabilize the financial system. 

The New York Times stated that AIG plans to announce a $62 Billion loss last quarter.  Continuing to use taxpayer dollars to bailout AIG is simply throwing good money after bad.  AIG got into this mess because of its unfunded credit default swaps backed by no reserves.  The unregulated CDS market was (and still is) nothing more than a casino style sports book where the events being bet upon were the health and stability of the banking world.  Casinos stay in business because they balance their books with offsetting bets and make money on the vig.  A well run CDS game should have been done the same way.  Unfortuantely, AIG did not have a balanced book, thus with every bank failure and with every corporate failure that it bet against, AIG will have to shell out more and more money to pay off its losing bets.  The notional value of AIG's book is $300 Billion.  The losses could actually be much higher.

Ultimately, AIG will fail - there is no way we can continue to sustain these losses on taxpayer dollars.  While the government is trying to buy time in the hopes that the economy will turn around in time to minimize AIG's losses, our taxpayer dollars are being used to payoff bets AIG made on the health of the financial system.  The wisdom of the continued bailout is being questioned.  Peter Morici told Reuters that "[t]here's no amount of money that you can give (AIG), there are $2 trillion in losses out there."  Karl Denninger, who recently won an award for truth in journalism, even questioned the lawfulness of the Fed's investment.  His analysis is on target.  The gist of the argument is that the Fed is not empowered to make investments, but only to lend money on the best collateral.  What the Fed did with AIG is make an investment first into preferred stock and then converted that into common stock with additional cash.  The Fed isn't making a loan at all, but is shelling out taxpayer money to support an institution that is bound to fail.

The Bush administration made the argument that a takeover of AIG was necessary to prevent a siezure in the insurance industry - so that businesses on Main Street could maintain insurance.  Of course, that was pure rubbish, as all traditional lines of insurance are regulated by the states and require reserves to fund probable liabilities.  The CDS market was not regulated, required no reserves, and is irrelevant to Main Street businesses.  It was a corporate bet that made money for AIG's executives for years, and it is now loosing money for the taxpayer.  This silliness needs to stop.  The only reason to take over AIG in the first place is to assist an orderly liquidation so as not to shock the market.  I accept that as a legitimate function of government.  

Using taxpayer funds to prop up institutions is not a legitimate function of government, and will lead to disasterous consequences down the road.   We rightfully expect our government to be fair and impartial in its dealings with its citizens (including corporate citizens), and we have a right to expect prudence with our money.  The governement cannot bail out all entities.  By picking and choosing which ones to save and which ones it should let perish, the administration is playing favorites.  Playing favorites undermines confidence in government.  Just as Bush and his cronies were roundly unpopular because they blatantly used government power to favor a few at the expense of others, President Obama is heading down that same path.  It makes no difference that the Democratic favorites are different than the Republican favorites.  It is still choosing winners and losers and it is not being neutral.  Faith in government will continue to erode until the nonsense stops.  AIG will fail eventually despite the governments best efforts.  The question is, will the United States go down with AIG?