I haven't seen a lot of talk about AIG lately, and I fear it is because we don't get it. So I'm appealing to the brainiacs here at Kos to help me get it. I've been discussing this with some smart friends, and the question is: where does the money go? Who is being bailed out? If AIG is losing a half million dollars a second (or something like that says CNN) then who are the beneficiaries and how can the holes be plugged?
Joe Nocera wrote an incredibly interesting article on this in the Feb 27 NY Times Propping Up a House of Cards. Read it, it's fascinating.
What I saw as the two main points of his article were:
When you start asking around about how A.I.G. made money during the housing bubble, you hear the same two phrases again and again: "regulatory arbitrage" and "ratings arbitrage." The word "arbitrage" usually means taking advantage of a price differential between two securities — a bond and stock of the same company, for instance — that are related in some way. When the word is used to describe A.I.G.’s actions, however, it means something entirely different. It means taking advantage of a loophole in the rules. A less polite but perhaps more accurate term would be "scam."
and
Here’s what is most infuriating: Here we are now, fully aware of how these scams worked. Yet for all practical purposes, the government has to keep them going. Indeed, that may be the single most important reason it can’t let A.I.G. fail. If the company defaulted, hundreds of billions of dollars’ worth of credit-default swaps would "blow up," and all those European banks whose toxic assets are supposedly insured by A.I.G. would suddenly be sitting on immense losses.
He says that in addition to insuring credit default swaps, AIG wrote something called "2a-7 puts" allowing money market funds to invest in risky bonds and guaranteeing their safety, then never set up reserves to cover losses.
Nocera says bailing out AIG is essentially bailing out the entire Western banking system, which he agrees is too big a risk but...
that doesn’t mean we should feel resigned about what is happening at A.I.G. In fact, we should be furious. More than even Citi or Merrill, A.I.G. is ground zero for the practices that led the financial system to ruin.
I'm a well-educated MBA and these problems seem at the heart of the problem with the financial crisis, yet I fear we're not mad because we don't get it. Does anyone? Are we being screwed to prop up European banks? Who wins when the money is paid out?