The audacity of AIG: Part 2

I left off by talking about how AIG sold too much insurance none of which was backed up with reserves. I also included a metaphor about a house, a hurricane, and a canny speculating investor. I noted that the investor makes a bet to take out insurance policies on South FL houses, that a hurricane will blow through the area. When it does he wins.

Now AIG is on the hook for a mindboggling amount of money. It doesn't have the money to cover the losses. It can only do one thing, declare bankrupcy. Except there is a problem. By declaring bankrupcy, al of the actual residents of South FL who have a policy with AIG won't receive any money. Since AIG is the biggest insurance company the Federal Government knows that it can't simply allow all of these policyholders to go homeless. Stepping away from the metaphor, this means that aside from speculators there were those who were honestly interested in insuring their assets (what exactly are those assets, you may be asking?).

So, the government steps in. James Kwak has a timeline of all of the interventions the government has made to help AIG meet its obligations. The takeaway is this:

When the weekend of September 13-14 began, AIG said it needed $40 billion. After digging through the books, Goldman and JPMorgan put the price tag at $75 billion, and declined to put together a consortium to lend the money. The Fed lent $85 billion, thinking that would be enough. Almost six months later, we still don’t know the extent of the damage.

but wait, there's more...