Word: aig
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...Lynch feels compelled to shack up with Bank of America to avoid a similar fate. Then, having sworn off bailouts by letting Lehman fail and wiping out its shareholders, the Treasury and the Fed reverse course for an $85 billion rescue of creditors and policyholders of American International Group (AIG), a $1 trillion insurance company. Other once impregnable institutions may disappear or be gobbled...
...Uncle Sam Steps Back In The market lost faith in AIG too, but the government was forced to save it. A major reason is that AIG is one of the creators of the aforementioned credit-default swaps. What are those, you ask? They're pixie-dust securities that supposedly offer insurance against a company defaulting on its obligations. If you buy $10 million of GM bonds, for instance, you might hedge your bet by buying a $10 million CDS from AIG. In return for that premium - which changes day to day - AIG agrees to give you $10 million should...
...make sure that swap meisters can make good on their obligations, they have to post collateral. If their credit is downgraded - as was the case with AIG - they have to post more collateral. What put AIG on the brink was that it had to post $14 billion overnight, which of course it didn't have lying around. Next week, the looming downgrades might have forced it to come up with $250 billion. (No, that's not a typographical mistake; it's a real number.) Hence the action. If AIG croaked, all the players who thought they had their bets hedged...
...AIG, like Lehman, was ultimately done in by credit-rating agencies, of all things. The main credit raters - Moody's and Standard & Poor's - had blithely assigned top-drawer AAA and AA ratings to all sorts of hinky mortgage securities and other financial esoterica without understanding the risks involved. Would you know how to rate a collateralized loan obligation? Or commercial-mortgage-backed securities? Sophisticated investors took Moody's and S&P's word for it, and it turned out that the agencies didn't know what they were doing. Credit raters, who claim to offer only opinions, are party...
...Number 1600 echoed her sentiment. When Aee, who holds an AIG-linked trust worth roughly $7000, was told about the assurance by AIG's Singapore management that his investment was protected, he replied skeptically, "I'm not so sure." He said if he managed to get inside the insurer's besieged offices - which looked like it could take him another 10 hours - he planned to "cash out" his entire investment. "There's nothing like cash in your hands," he said...