It was only six weeks ago that the Federal Reserve declared that the American taxpayers would get all their money back from the AIG (American Insurance Group) bailouts.
If you believed that then I've got a bridge in Brooklyn to sell ya'.
Today, AIG announced another $60 Billion loss and a possible company-wide failure by next Monday unless the taxpayer coughs up some more cash.
American Insurance Group, the insurance giant that is 80-percent owned by the US government, is in discussions with the government to secure additional funds so it can keep operating after next Monday, when it will report the largest loss in U.S. corporate history, CNBC has learned.
Sources close to the company said the loss will be near $60 billion due to writedowns on a variety of assets including commercial real estate.
That massive loss is likely to spur downgrades in its insurance and credit ratings that will force AIG to raise collateral that it doesn't have.
In addition, if AIG's book value falls below a certain level, as it seems certain to do, it will trigger default in certain of its debt instruments, say people familiar with the situation.
Talks between the government and AIG are focussed on how the company can swap some of the debt held by the government for equity in AIG. The problem is that the government's ownership stake cannot exceed its current 79.9 percent, leaving officials to try and find a creative way to transfer value to the US in exchange for AIG reducing its debt so that it can then borrow more from the government to meet its collateral calls.
If you haven't been following this saga, this is what the American taxpayer has already fronted AIG in the last five months:
- an $85 billion loan from the Fed
- an additional $37.8 billion loan from the Federal Reserve a month later
- an additional $20.9 billion under a new program where the Fed would buy commercial paper -- short-term debt often used for day-to-day expenses
- the U.S. government restructured its loans to AIG, giving the company about $150 billion in total as part of a rescue package in November. It included a $40 billion cash infusion from the $700 billion financial bailout
As part of the package restructured in November, the government is also spending up to $53 billion to buy up mortgage-backed assets and other AIG contracts on debt.
And yet that still isn't enough!
To put that in perspective, remember when Hillarycare was too expensive for America? It's cost was $110 Billion to insure all Americans. Now we've thrown $150 Billion at an insurance company, and that appears to be just the downpayment.
But don't worry. AIG has plans on how to pay back the taxpayer - by selling one of its units. There is just one little problem.
As AIG looks for cash to repay a $60 billion taxpayer loan, one option stands out as a potential way to rake in billions: the sale of American Life Insurance Company, or Alico, a consistent star performer in AIG’s vast constellation of insurance subsidiaries.
But an unresolved tax issue — one the company has not disclosed to possible buyers — could complicate the sale and hamper AIG’s ability to repay the bailout. In a worst-case scenario, it could decimate Alico’s business, according to documents and interviews with company officials.
The tax issue relates to a 2004 Internal Revenue Service ruling that says life insurance and annuity products similar to those Alico sells to foreign clients are subject to U.S. income tax withholding. If forced to comply with the ruling, company officials say Alico’s clients would likely flee to competitors — with potentially dire consequences.
"It is unlikely that Alico’s business would survive, much less be sold for a price that would help AIG repay its indebtedness to the Treasury," David Rosenbloom, an international tax expert hired to advise Alico, wrote in a draft letter to the IRS.
So they could partially repay the money we loaned them if we didn't tax them by the legal amounts that they owe the government.
As for all that money we've loaned AIG, we don't know exactly how it has been spent. The Federal Reserve has been refusing to release that information.
However, a recent court ruling has cracked open a window.
[Update: Inspired by the comments below]
What does China and AIG have in common? A lot as it turns out.
Coverage of the 85 billion-dollar AIG bailout by the Fed in the Chinese media has generally been fairly reserved. That's partly because AIG owns around twenty per cent of the People's Insurance Company of China, the country's largest casualty insurer, and the government doesn't want anyone getting worked up about a possible threat to its soundness or that of their policies. AIG also has a special, indeed unique, history in China. It is the only major U.S. company (eighth largest in the world until a few days ago) that was founded here.
Interesting, but no big deal. Right? Well let's adjust our tinfoil hats for a moment and check out recent news.
"The truth is the Administration needs China's help. America's stimulus is very expensive and the U.S. wants China to help finance it," Andrews reported.
Or to put it another way.
In Beijing, she [Clinton] urged China - - the largest holder of U.S. government debt -- to keep buying to help finance Obama’s plan to revive growth, saying "we are truly going to rise or fall together."
Is it really too much to suggest that the decisions to bail out AIG might be influenced by our dependence on the willingness or China to fund America's bailouts? And visa versa?
Or to put it another way: We are bailing out AIG because of their connections to China, who we need to fund our domestic bailouts, in which we are throwing money at AIG, all of which is backstopped by the American taxpayer.