Sunday, March 08, 2009

Where is the AIG bailout money going?

I get this question alot and the answer is simple:

(1) AIG is an insurance company.
(2) Of the many things they insure, financial instruments is one of them.
(3) Banks hold financial instruments (like CDOs) and they want to protect their investment a little by buying insurance from AIG which basically means that the Banks will get their money if the CDOs default because AIG has insured them.
(4) The CDOs default.
(5) AIG needs to pay the banks the insurance.
(6) Lot's of defaults occur and AIG runs out of money.
(7) So.... the USG gives/lends AIG money (billions) but it only passes through AIG to the banks in the form of insurance payouts. It is just another way of channeling money to banks.

Once all the insurance policies are paid off there will be no need for AIG to exist as an insurer of financial instruments. AIG will be allowed to declare bankruptcy which means the USG won't get paid back all the billions they (you) lent them.

1 comment:

  1. You should point out the fact many of the AIG contracts are with non-US banks. So as the USG uses taxpayer money to prop up AIG which is nothing more than a way to channel money to banks; then US tax dollars are being used to prop up non-US banks. And when AIG goes bust (as you speculate) then the US taxpayer gets screwed.

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