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Tuesday, September 16, 2008

 

fed help for AIG back in play


trust CNBC at your own risk.

as i said earlier:

part of me doubts that the fed dare extend a hand. is that naive? probably.


still, the fed parties talking to the press yesterday sounded so proud to have discovered their backbone with lehman! they're going to have to eat some humble pie and hop back on (or under) the moral hazard horse if they try to bail out an insurer which they do not supervise in any fashion.

UPDATE: AIG briefly rallied to $4 on the report -- now at 10.30am, it has subsided back to $2.52, a 47% loss on the day.

some interesting and candid views from roger altman, former lehman man and treasury official, now leader of boutique i-bank evercore. the fed is damned if they do and damned if they don't. his clear highlighting of the possibility of an american government financing crisis in the aftermath of an AIG bailout is particularly chilling.

UPDATE: via alea and the bbc -- why AIG is important:

"Approximately $307bn (consisting of corporate loans and prime residential mortgages) of the $441bn in notional exposure of AIGFP's super senior credit default swap portfolio as of June 30, 2008 represented derivatives written for financial institutions, principally in Europe, for the purpose of providing regulatory capital relief rather than risk mitigation. In exchange for a minimum guaranteed fee, the counterparties receive credit protection with respect to diversified loan portfolios they own, thus improving their regulatory capital position."


that is, the failure of AIG as counterparty will force regulators of large commercial banks all around the western world to raise capital or sell assets to restore risk-adjusted capital ratios to good levels. as no one can raise capital, that means a compounding of the debt-deflation dynamic already seen to be underway in the liquidation of investment bank assets.

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