General Question

Bri_L's avatar

AIG did what?

Asked by Bri_L (12143 points ) October 10th, 2008

So Gov. gives them money and they hold this huge outing.

Can the gov. penalize them for something?

Observing members: 0 Composing members: 0

18 Answers

SquirrelEStuff's avatar

http://www.youtube.com/watch?v=SKsiZdOD5u4

AIG is the government. Corporations are the government. Bankers are the government. We are just their subjects.

“None are more hopelessly enslaved, then those who believe they are free.”
Johann Wolfgang von Goethe

dalepetrie's avatar

Seems to me….

The government has decided that AIG is too big and important to fail…

This happened before the stock market crashed (make no mistake about it, that fucker crashed this week)....

AIG is almost DEFINITELY more important to the government this week than it was when we gave them 85 billion dollars…

We gave AIG 39 billion more, even though we knew about this “outing” because they already spent the first 85…

We have a tremendous equity stake in AIG now, if it fails, we lose our “investment”....

ergo, as long as we can keep printing money, and as long as AIG keeps asking for it, they could anally rape W’s mother and they’d get what they want.

SquirrelEStuff's avatar

What exactly is it we are investing it in, Dale? What is AIG? How do we win?

AIG doesn’t ask for it, they just take it.

dalepetrie's avatar

You’ll note “investment” is in quotes.

In exchange for the 85 billion, we took an 80% equity stake in the company, so essentially we are investing in AIG, which is a large insurance company with tons of arms spreading all around the financial services industry. If, the theory goes, the investment banks recover, and AIG is “saved”, we would reap 80% of the profits until we sell their stock back to them. We win if we save them and they go on to profitability and have to pay us back more than we “invested”.

Our government isn’t “required” to bail them out, but our goverment built a huge stack of cards that is in danger of falling down and taking the entire house of cards with it, and if they can keep the whole damn thing from falling down, they’ll have less to rebuild.

All Ponzi schemes collapse eventually!

SquirrelEStuff's avatar

We dont win if we save them. We lose either way because in order for them to “win,” WE have to pay them so they can make a profit. No matter what happens we are forced to keep working to pay taxes to bail them out and then our bills which also will go to them.
If Obama understood what was going on, he would address it, not play their game.

Bri_L's avatar

So are they being watched and “advised” or “regulated” with this money or are the same lunkheads in charge as were before?

SquirrelEStuff's avatar

It doesnt matter. The money wasnt there to begin with. There was no money. The money is made up. They essentially stole how ever many our of work hours it will take for us to make up for the money.

robmandu's avatar

AIG holds parties for their top earning independent agents. ==> This is how they reward the people that make them the most money.

These parties are planned months in advance. This one in particular required a $400,000 non-refundable deposit. ==> Kiss that money goodbye if you don’t hold the party.

To me, this was a carryover from the old way they conducted business. They still need to reward top earners (else those folks will sell other companies’ insurance and how then would AIG pay back this loan?)... but I’d like to hope they’d learn to do so in a more cost-effective manner.

I’d be willing to be that most of the same lunkheads are in charge.

In any case, it’s not bad budgeting that got AIG in trouble. It was excessive risk incurred by over leveraging their financial positions. Risk is manageable (via software) if monitored and understood.

So I hope those lunkheads get their act together, intelligently manage their risk, and play the game the right way.

Bri_L's avatar

That was a VERY helpful. I actually understand it now.

Lurve to Robmandu.

dalepetrie's avatar

Chris,

I know where you’re going with that, but I think now that we’re in, we’re in…only way to pull out now is to cut our losses.

But the problem really lies in the fact that if AIG goes down, business both big and small fail on a scale you or I can not even imagine.

We can not play the game, but if we do that we’ll have 25% unemployment in a matter of weeks. We all bought into this pyramid scheme, we either have to be willing to pay the price and suffer the consequences (and never do it again), or we need to find a way to get us back on the path we had been on before we veered sharply to the right.

SquirrelEStuff's avatar

What do you mean by paying the consequences?? None of this matters. In order to keep it propped up, it only means we are paying into the system. We are paying a bank to let us live in our house. We are paying insurance companies, who pay banks to let us drive. The banks OWN US.

The people who have worked for 20–30 years dont want to admit that this system is broken and they worked all that time for nothing. We all need to work together to provide necessities for each other, not work for a corporation and bank so we can pay our bills which ultimately go back to the corporations or banks. Its not a pyramid scheme, its a circular scheme. Its round. It goes round and round and the only winners are the banks.

We have all the resources available to us. We dont need corporations or banks to let things have value and meaning to us. We need 100% unemployment so no one gets kicked out of their house, making them angry at the judge and mortgage company, causing crime to go through the roof.

We need to stop supporting the system completely. Just shut it down. The people create the items and services we make, not the companies. The companies just profit, while the people work.

dalepetrie's avatar

If only the rich people would let 100% of the people keep their houses rather than reposessing every single one of them and making whatever they could of value. As long as the haves actually have so much, they have all the chips. Unless you’re wililng to squat on some uninhabited property somewhere and plant your own garden, it’s a pipe dream.

Ideally we’d all go back to basics, but in the era of the 150 inch plasma TV, no way, ain’t gonna happen. Great theory, won’t work in practice.

SquirrelEStuff's avatar

Look at why we have 150 inch plasamas. So we can watch garbage, that the same companies own. It is entertainment.

We need to go back to basics. Whether we or forced to or not, its gonna happen. We just need to be prepared and figure out what is really important to us.

dalepetrie's avatar

Unfortunately, to too many people, watching garbage on a huge TV IS what’s important. That’s why your idea is great, but impractical.

galileogirl's avatar

Back to the original question about the AIG spa retreat. The people at the top think differently than the rest of us. I once worked for a company that was seriously failing because of foreign competition. The leaders of the company held on to the idea that our product was better quality and we had to maintain a quality image. When they looked at cutting expenses they focused on cutting workers’ hours, buying a cheaper medical plan, even limiting supplies. Meanwhile they were leasing luxury cars for the executives, maintaining a house at Lake Tahoe for entertaining clients and leadership weekends at Carmel resorts. They just didn’t get it until the company went out of business putting over 150 people out of work

After I went into teaching I saw the same attitude among the top brass. Teachers did not get a raise for 8 years, average class size went from 29–35, and schools ran out of paper by April 30. Meanwhile the Superintendent and his top 5 assistants received 10% raises, they flew all over the country (to observe more ‘successful” school districts), 1st class flights and hotels eating at 4 star restaurants and getting a housing allowance. Their rationale was that there were 5,000 teachers in the district and the additional $350,000 paid in annual admin salaries would have been less than $6 per teacher/per mo (an insignificant amount)

dalepetrie's avatar

galileogirl -

I once worked for a Fortune 500 insurance company, which a month after hiring me, created a new position (at my same level and pay), and offered that to me. The new position was for the purpose of researching questions that come up from time to time…the question I was first charged with answering was along the lines of “we think we can use this alternate method of accounting for x part of our business…first off, find out if it’s legal for an insurance company to do this, find out if other insurance companies are doing this, and determine what our annual tax savings would be if we did this, and how much it would cost us to do this.” I worked there for 4 more months in which time I determined the answer to this question. Then I was laid off, because my newly created position was not an “essential function”. But as they prided themselves on being one of the 100 best places to work in the country, they didn’t just kick me to the curb. Even though I started at the end of May, and was told at the end of September (this was back in ‘99) that my job was being eliminated, they gave me 2 months’ notice, only made me work through the end of October, paid out my PTO (which accrued at the rate of 5 weeks per year), paid me 8 weeks of severance, AND paid me a pro-rated portion of the bonus I would have gotten in April the following year had I remained in their employment till December 31. In short, I worked five months and essentially got paid for 9. I also got free outplacement assistance, help with my resume, job search, printing services, computer usage, the whole shebang. I was working again by December 8 (8 days after my official last day, and I could have started on December 1, but I decided to spend a week travelling first). Not a bad deal and not the industry standard (have been laid off by several other companies, and usually you’re lucky to get 2 weeks pay).

But here’s the deal. This company had been around for nearly 150 years. Up until the year before I started, it had never undergone a corporate merger and had never laid off a single employee. The year before I started, it absorbed a competitor, and laid off about 2,000 people worldwide. People were on edge when I got there, but they said this was a one time thing. But about 2 months after I got there (after I accepted a newly created position for the purposes of researching “special questions”), they announed they were pulling a whole bunch of people aside to interview everyone in the company and determine how they could do things better, cheaper, faster and smarter (they called it BCFS…we just dropped the CF part of that when we discussed it internally).

In the end, the recommendations that came out were that we should trim our corporate staff by 15 to 20% worldwide (another 3,000 people). And why? Well, because this would save the company $100 million per year. And this was necessary because? Well, it really wasn’t. You see, for the first time in 150 years, they felt that “to be competitive in the global market™” they would like to try some television advertising. Now, they were making an annual profit somewhere in the range of a BILLION DOLLARS A YEAR. But they must have had other plans for THAT money (probably paying people off to take a hike). Well, that and they prided themselves on ALWAYS paying dividends to stockholders on a quarterly basis. And of course, that 100 Million a year could not have come out of the 9 figure compensation package that was being paid the the CEO. No, much better to affect the livelihoods of 3,000 people rather than cut into shareholder profits or pay the CEO an 8 figure comp package instead of a 9 figure comp package. Even if it cost them a couple hundred million to do it, since within a couple years, they’d make it up, it was worth it.

And of course they started hiring shortly thereafter and many of the people they let go were REHIRED! The CEO retired with a huge hit the road package. The company did its advertising, then merged with another large company, which actually became the dominant company (the company now bears the other large company’s name and not the name they spent 150 years building and $100 million advertising). And the $500 worth of company stock I brought with me has fluctuated over these last 9 years to between $400 and $700, including the $12 in annual dividends I’m paid.

So yeah, priorities are not straight at the top.

I work for a small real estate development company now. The owner is a great guy and does look out for his employees. But we have no cash, we’ve been living on borrowed money for the entire 2 years I’ve been here. Top priority is #1 – his mortgage payments on his 3 homes which are worth a combined $10 mil, #2 – the lease payments on his Mercedes, his wife’s Mercedes and the slightly less expensive but still very nice vehicles his sons (who also work for the company) drive, and #3 – his credit card bills. Even in the midst of this dearth of cash we’ve had, when his and his wife’s auto leases ended, they re-upped for brand new Mercedes’. The guy probably owns $100 million in real estate, but is leveraged to about $85 million of that, and if he tried to liquify, he’d be upside down. But no reason to stop driving that Mercedes.

steelmarket's avatar

This is going to be a pretty sloppy summary of the situation, but here goes…

You buy a house, and you sign up for a mortgage to borrow the money from Company A to pay for it. Now, somewhere down the line, Co. A no longer wants to service your mortgage (i.e., make sure you are paying on time, the right amount, do you have enough insurance, etc.) so they bundle your mortgage with a few thousand like it into a package and sell it to Co. B. When Co. A gives the mortgages, they are gambling upon your ability to pay, which is tied into your credit rating but also into the health of the economy as well.

Now, there is risk involved in this package, potentially a lot of risk, because any or all the mortgages could go into default. Yes, the mortgage holder would eventually get the deeds to the defaulted houses, but the cost of clearing the deed, renovating the properties and selling them could exceed their value. Then we are talking about ot just a zero return on investment but potentially a huge loss.

So, Co. B, cognizant of the potential for huge loss, goes to AIG and buys an insurance policy against losses on this package. AIG calculates their risk as an insurer and puts a price on the policy premium. It is what insurance companies do. Co. B ponies up the premium and the policy is in place. In the recent case of AIG, we are talking packages totaling many billions of dollars. Let’s say that the particular package that contains your mortgage is $1billion dollars.

Unfortunately, this particular package of mortgages is composed of loans to high-risk people and high-risk mortgages (variable rates, etc.). So, when the economy trembles, maybe you lose your job, your budget gets squeezed, and the outcome is you can’t pay your mortgage and it goes into default. Let’s say that 50% of your fellow mortgagors in this mortgage package default. Co. B then “files a claim” with AIG for their losses, according to their “insurance policy” with AIG. AIG sends $500 million dollars to Co. B.

Put together a few of these $500 million dollar hits and AIG suddenly owes more money than they are worth, and we all know what that means. Now, was Co. A wrong for issuing mortgages to iffy borrowers? Yes. Was Co. A wrong for creating mortgages structured to fail? Yes. Was Co. B wrong for buying the mortgage bundle and getting the insurance policy? Not really. Was AIG wrong for insuring the bundle? No, BUT – they certainly underestimated the risk and their exposure (possibility for loss).

I am not even going into the whys and nots of the bailout – this post is already too long. And, you financial folks, please forgive this extreme oversimplication. As you know, this is a very complicated issue.

Bri_L's avatar

@steelmarket – that was very helpful and at my level to for which I am gratefull. Thank you!

Answer this question

Login

or

Join

to answer.

This question is in the General Section. Responses must be helpful and on-topic.

Your answer will be saved while you login or join.

Have a question? Ask Fluther!

What do you know more about?
or
Knowledge Networking @ Fluther