Wednesday, March 18, 2009

AIG: The Third Horn of the Beast

You can go ahead and place me in the category of "angry" when hearing about bonuses for the idiot's at AIG who were responsible for selling insurance on mortgage bonds that eventually soured. It seems stupid to reward such failure, of course we are doing the same for Fannie and Freddie and there is no or little outrage.

I think our anger would be better directed at members of congress who failed in their oversight duties, yet continue to be re-elected (rewarding failure). Everyone is upset at AIG, but ignoring a much larger failure, Fannie and Freddie. This is exactly what congress wants, AIG is a headfake to keep you focused away from their direct misdeeds and failures.

What exactly did AIG do to deserve such attention and such large amounts of bailout money (by the way, they are receiving less than Fannie and Freddie)? They decided to emulate the Fannie Mae and Freddie Mac business model. Fannie and Freddie were private companies with implicit government backing and their job was to buy and insure mortgages in order to maintain a liquid, orderly market. In essence they guaranteed mortgages. AIG was bailed out for doing the exact same thing, they sold insurance to other institutions to guarantee the mortgages that institution had purchased. AIG didn't do anything the federal government didn't do themselves (via Fannie and Freddie), in fact what AIG was doing was probably applauded by those in the government as it allowed for more mortgages to lower income, less creditworthy individuals. Let's also not forget that AIG was insuring AAA rated securities. These AAA ratings came from government regulated credit rating agencies.

AIG's problem was that they weren't thought of as a quasi-government agency, thus when things went south the margin calls came in, had they actually been labeled as Fannie and Freddie - there would be no margin calls and there would probably still be an AIG. Of course that ignores the fact that Fannie and Freddie BOTH failed as well and required $200 billion (and likely triple that) in bailouts. How much bonus money did Fannie and Freddie pay out to politicians over the years? No outrage?

AIG did a bunch of stupid things, but now that they are owned by the government the company is being slaughtered and turned into the whipping boy of all whipping boys. Their sin? Having the audacity to copy the Fannie/Freddie model.

AIG is now basically government owned, which would imply a AAA rating, yet its still receiving margin calls - can some explain that to me?

The Fannie/Freddie model was flawed, so was the AIG model - but let's be careful just who we direct our anger at, much of the blame lays directly at the feet of the United State Congress (both parties). We also can't allow the Fed and Treasury to escape blame, they were asleep at the wheel.

AIG is going to need a "government name", how about "AGEE" - then we'll have Fannie, Freddie and Agee - the three horned beast that brought down Wall Street and the global economy.

Scott Dauenhauer CFP, MSFP, AIF