AIG a Passthrough for Goldman, Merrill 3 / 9 / 2009

Well readers, there is really not much value to report concerning AIG. I am not a conspiracy theorist, but this one makes me wonder. Last week the US government put an additional $85 Billion into the ailing company. That brought their total pledged amount to $160 Billion. These amounts were originally to satisfy balance sheet liquidity requirements. Indeed in AIG's testimony to congress, "federal liquidity requirements" were used as the rationale for the loan. (and let's face it, this is no loan, in its best year (2006) the company reported 23.0 billion EBITDA, but 2007 and 2005 show a more likely 12.0 billion Edita. So in 13 years (at previous solvent balance sheet levels) the government will make its principal back. Anyone care to bet on that happening?

This scenario is akin to me asking my 12 year old to insure my losses with her liquid assets. Not one financial group that had its losses insured by AIG looked past the AAA rating. These are the experts who built their financial future on AIG's balance sheet and Moody's / S & P's ratings.

So where did this 160 billion loan "pledged" by the government go? The AIG CFO said, " the vast majority of tax payer funds have passed through AIG to other financial institutions." Those institutions include Bank America and Goldman Sachs. Bank America and Goldman Sachs. These are the same banks that lobbied the government back in the Fall to halt the short selling of financial stocks for 30 days. This after their traders (Merrill Lynch in the case of BofA) had earned huge profits shorting Bear Sterns and Lehman. Then the market's turned on them and they were able, under Paulson (the former Goldman chief, then Treasury Secretary), to stop the shorting of financial stocks (including their stock). Oh, and to take advantage of TARP funds and Government stimulus they switched their businesses licenses from Investment licences to Commercial banking Licences.

So the AIG bailout is really just a way to conduit MORE funds to BofA and Goldman. (yes that's an over simplification.) But these are firms that did NO homework on the liquidity of the AIG balance sheets when they paid AIG to insure certain of their key investment risks. These so called experts are permitted to take advantage of the system every where they turn to protect or off set their bad investment decisions. WE do not.

Is it a conspiracy? No. Unfortunately, our current government has neither the experience, nor the guts to pull off that kind of maneuver. Was there favoritism, most certainly. Is this a problem? In a free market, yes. It says to investors that there is no level playing field. That the rules can and will change to suit the big boys. So why then would any one invest in stocks? Scary thought.

So what value can we take from this? Your financial partners (AIG was to Goldman and BofA) must be highly scrutinized. If you need to insure your business risk, other than act of God insurance, the risk in the transaction is too much. And finally, do your own homework and use some common sense.

Build value every day.

Brad van Siclen