Given that the firm is getting charged an absurdly high interest rate of around 11-11.5% on its 'loan', it's effectively a race against the clock to sell off the individual parts of AIG to repay it. That's why it's more like a bankruptcy than a true nationalization; the government has no intention of running the largest firm in the private insurance markets.
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5 years ago
3 comments:
I don't agree with everything this guy is saying. Yes, it's a 12% loan. Yes, AIG is low on cash. But bankrupcy? Come on! AIG have more than enough assets. But it's all a matter of liquidity. This market is running on fear right now. AIG can't sell some of their assets because nobody is buying. That's why it's called a bridge loan.
In my mind, the author is buying into the fear that the world is coming to an end. Sometimes, working on the trade floor just means you can't help but follow the herd.
Is AIG 80B underwater, or is it more of a matter of being able to front that amount of money at this point in time?
AIG is not 80 billion underwater. They are a huge writer of credit default swap, which is a form of bond insurance. They would receive quarterly payments, in return, they would pay the payer a lump sum in case the bond in question (looks like the culprit are certain MBS tranches) fails.
Not all these swaps have hit the credit event that will force AIG to pay yet. But the value of the swaps have moved against them so much, they are forced to put up a lot more collateral to back up these swaps. If AIG don't put up, then they have to declare bankruptcy. They technically still own the cash/assets they put up as collateral, they just have to set it aside.
There is ground for the fear of the loss on these CDS. My bet would be on the side that these fear is a bit overdone.
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