AIG: “Like A Dog Eating Its Own Vomit”

• Posted by kid dynamite
• on March 10th, 2011

I was somewhat puzzled by tonight’s headline: “AIG Offers to Buy Back Mortgages from NY Fed“

“The American International Group offered on Thursday to pay $15.7 billion to buy back mortgage securities held in a special investment fund set up as part of the insurer’s huge government bailout.”

…

“That special vehicle, known as Maiden Lane II, originally held about $19.5 billion worth of securities. Through both a rise in the value of those securities and a refinancing of A.I.G.’s government-related debt, the fund now holds $13.2 billion.”

First of all, I’m not about to tell anyone that I’m an expert on the Maiden Lane transactions.  I’m not.  I’m sure one of my readers can shed some light, though, because I don’t understand why the NY Times is reporting that Maiden Lane II now holds “$13.2B” of securities.  A quick search finds this statement of the Fed’s accounting for Maiden Lane II, which pegs recent market value at $15.9B, which is down $146MM from the week before, and up $564MM from a year ago.

Never mind the whole “I’m paying you with your own money” aspect of this, I thought this quote was the humdinger (emphasis mine):

“To pay for the transaction, A.I.G. will draw upon cash held in its insurance subsidiaries, which would then hold the securities and profit from the coupons they pay out. The company believes that the securities would actually generate more income than the low-yield investments those subsidiaries currently hold, according to a person with direct knowledge of the matter, who spoke only on condition of not being identified because the discussions are confidential”

*pausing*….*scratching head*….*furrowing brow*

Wait – what was it that got AIG into trouble in the first place?  Oh right – it was described just one paragraph earlier by the NY Times (emphasis mine):

“The fund was originally set up to buy securities that A.I.G. had acquired through a subsidiary that lends out stocks owned by the insurer to other investors for purposes like short-selling. While stock-lending businesses normally invest in highly safe instruments like Treasury securities, A.I.G.’s unit instead invested in higher-yielding mortgage-backed securities — which soured as the housing market collapsed, costing the firm money.”

This would all make sense if it were April 1st, or this article was from The Onion.   Isn’t there a saying, “history repeats itself because no one was listening the first time” ? And yet AIG is doing this a mere 30 months after its own fiscal apocalypse?  Reaching for yield… Grab that yield, baby…  AIG has come to the AMAZING realization that – get a load of this (and turn up your sarcasm detector) – higher yielding securities will generate more income than (safer) low-yield investments!!! HOLY FUCK! EUREKA!  Why didn’t anyone else think of that?  I can’t believe they were so generous as to share that nugget of wisdom with the rest of us! (/sarcasm) {note, to anyone who doesn’t get the issue here:  higher yield = higher risk}

I tip my hat to commenter Assumptionblindness at ZeroHedge, who described this transaction with the kind of poetry I aspire to write some day:

“This reminds me of a dog eating its own vomit.”

If I could have improved on that impeccable description, I wouldn’t have needed to use it in my post title.  Have you ever watched a dog hungrily eye its own pile of puke?  You can see what’s going through its head:  “Hmmm – it looks like there’s some pretty decent stuff in there...”  It’s gross when it’s a dog doing it – it’s a whole other level of disgusting when AIG is doing it with tens of billions of dollars of assets.

-KD

I own AIG warrants, because I am a frickin’ moron.

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