AIG update

In September blogged "If Lehman Brothers fail today, who tomorrow...? AIG?". Today I read in the FT that:

"AIG, the walking-dead insurance giant, is reported to have gone through $81 bn or so of the $122.5bn worth of financial facilities provided by the Fed since September 2008, first through an expensive (850 basis points over 3-month Libor) 2-year $85 bn facility and soon after through a rather cheaper (as far as I can tell) $37.5 supplementary facility. Not only is AIG seeking additional Federal assistance. It is also arguing that the original $85 bn facility is unfairly expensive, compared to the 5 percent plus some warrants charged by the US Treasury for its capital injection into nine large US commercial banks.

AIG is correct in noting and complaining about the inexplicable discrepancy between the cost of official funds charged to the nine banks and that charged to AIG. The unfairness, indeed the outrage, however, lies in the US Treasury injecting equity into the nine US commercial banks on sweetheart terms, way below what these banks ought to have paid for the money, and way below what it would have cost them to raise the money in the markets, whether from Warren Buffett or from Qatar.

AIG’s current modus operandi and business model is obviously not sustainable. Indeed it is not viable even in the short run. What if the US authorities reduce the cost of the existing facilities and dole out a further $200 billion or so to see them through to Thanksgiving? AIG will no doubt be back for another $200bn when the turkeys have been digested, to see them through to Christmas. This is getting very silly indeed."

Read the rest of William Buiter's article and feel very scared...