Solvent Insurer / Insolvent Insurer (Why are taxpayers paying off AIG's Hedge Fund?)

Solvent Insurer / Insolvent Insurer
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By Barry Ritholtz - March 4th, 2009, 7:30AM

Forget the good bank/bad bank, I have an even bigger beef with this INSANE absurdity: Why are the taxpayers making good on hedge fund trades gone bad?

I cannot figure that one out.

When AIG first faltered, there were two companies jammed under one roof. One was a highly regulated, state supervised, life insurance company. In fact, the biggest such firm in the world.

The other firm was an unregulated structured finance firm, specializing in credit default swaps and other derivatives.

The first firm was Triple AAA rated. They had a long history of steady growth, profitability, excellent management. They made money (as the commercial goes) the old fashioned way: They earned it.

This half of the company held the most important insurance in many families’ financial lives: Their life insurance. When an AIG policy holder passed away, the company paid off the policy, providing monies that get used to pay off mortgages, kids’ colleges, and surviving spouse’s life time living expenses. Given the importance of this payment, one can see why it is crucial to make sure there are sufficient reserves to make good on the promise of the life insurance policies. The actuarial tables used are conservative, the accounting transparent. The policy payoffs rock solid, utterly reliable.

AIG, this insurance company, was well run. It made a steady income, provided a valuable service to its clients.

It was also very solvent.

The other part of the firm was none of the above. It was neither regulated nor transparent. It existed only in the shadow banking world, a nether region of speculation, and of big derivative bets. This part of the company engaged in the most speculative of trading with hedge funds, banks, rank speculators, gamblers from around the world. Huge derivative bets were placed, with billions of dollars riding on the outcome. It served a far more limited societal function than the Life insurance portion, other than a legal pursuit of profit.

This part of AIG was nothing more than a giant structured finance hedge fund. Despite the fact this hedge fund had no rating, no supervision or oversight, it managed to trade off of the Triple AAA rating of the regulated half of the firm. Somehow, it was treated as if it was Triple AAA, regulated and guaranteed by the government.

This was nothing more than a giant scam, perpetrated by the people who were running the AIG hedge fund.

It was exempt from any form of regulation or supervision, thanks to the Commodities Futures Modernization Act. This ruinous piece of legislation was sponsored by former Senator Phil Gramm (R), supported by Alan Greenspan (R), former Treasury Secretary (and Citibank board member) Robert Rubin (D), and current presidential advisor Larry Summers (D). It was signed into law by President Clinton (D). It was the single most disastrous piece of bipartisan legislation ever signed into law.

As you might have guessed by now, this portion of AIG is the INSOLVENT half.

Here is the question that every single taxpayer should be asking themselves: WHY AM I PAYING $1000 TO BAIL OUT THIS GIANT HEDGE FUND?

Of all the many horrific decisions that Hank Paulson made, this may be his very worst. That is a very special description, given his track record of incompetence and cluelessness.

More...on what Ridholtz says should have been done at......
http://www.ritholtz.com/blog/2009/03/solvent-insurer-insolvent-insurer/

now that the you-know-what finally hit the fan.

need any further explanation

But the question can be re-framed. Why are we paying off this hedge fund owned by a Saudi Prince?

Would it not be a hoot, if this was Bin Laden's best friend?

"Bin Laden was born in Saudi Arabia around 1957 to a father of Yemeni origins and a Syrian mother. His father, Mohammed bin Laden, founded a construction company and with royal patronage became a billionaire. The company's connections won it such important commissions as rebuilding mosques in the holy cities of Mecca and Medina." http://www.infoplease.com/spot/osamabinladen.html

For the "Bad" that has descended upon our way of life, was cited by hillary Clinton as the person she wanted on her financial adviser team. Sen Clinton was saying that Greenspan could help us see our way out of the subprime mess!

So I voted for Obama, sure that he would not fall under the sway of Wall Street Weasels. Certainly he would turn to Issa, Maxine Waters, Clemmons, or Kucinch for advice on what to do about entities like AIG.

My bad, too! For Obama was no sooner elected than he was saying "Good Job there, Hank!" (meaning Paulson) and appointing Geithner, Summers, Rubin and Gensler to positions inside his administration that such nefarious liars should never have been able to touch.