This is from a post today at Naked Capitalism.
I'm bringing it here because it's another outrageous example of the financial industry taking advantage of us all. Hopefully this will bring some wider attention to this from non financial types.
Why is AIG being permitted to continue to give the finger to the government, and ultimately, the US public that saved its bacon?
The short answer, is that the US government’s need to resort to accounting fictions is being used skillfully against it.
The latest AIG stunt is that it is refusing to sell its derivatives business. Remember that AIG owes the taxpayers a mind-numbingly large amount of money, but intransigent CEO Robert Benmosche has refused to execute on the agreed-upon plan, and instead is off on his own mission.
And why might that be? This is yet another, classic management favoring “heads I win, tails you lose” bet that is given more respectful treatment than it deserves by the Financial Times:
AIG has shelved plans to sell the whole of its derivatives portfolio, which nearly destroyed the insurer in 2008. It believes that keeping up to $500bn worth of complex positions could help it to survive as an independent entity and repay US taxpayers….
[...]
Let’s return to the Financial Times:
Gerry Pasciucco, who joined AIG after it was rescued by the government in September 2008 to wind down AIG Financial Products, said the troubled unit would still be out of business by the end of this year….
The original plan…was to sell off all the positions and close down AIGFP as soon as possible. But Mr Pasciucco said that derivatives with a notional value of between $300bn and $500bn – or between 15 and 25 per cent of the derivatives portfolio’s original size – would not be sold. The assets could either be managed by AIG or outsourced to an external fund manager, he added.
AIG’s management, led by chief executive Robert Benmosche, believes that such a move reduce the need for fire sales and enable AIG to reap the benefits of rallying credit markets, Mr Pasciucco said. AIG recorded billions of dollars in paper profits on its derivatives in the third quarter of 2009…..
AIG executives said the Treasury and the New York Federal Reserve, which took an 80 per cent stake in the insurer in return for more than $80bn in federal funds, had been consulted on the decision to keep the derivatives. Peter Hancock, the derivatives expert who has just been hired to oversee AIGFP, among other responsibilities, is also believed to back the move.
Yves here. I prefer Rep. Brad Sherman’s take on this matter:
If [Benmosche] holds onto [the assets] and their value goes down, the taxpayer loses, and if they go up, he and AIG’s shareholders win… “It’s heads he wins, tails we lose.
Yves again. This is basically a market timing bet. And how seriously ought we to take this?
Read the rest... Why is the Administration Tolerating AIG Feather-Bedding and Intransigence?