Sunday, March 15, 2009

AIG Disclosures

Reuters inform that AIG disclosed CDS swap payments totaling around $48 Billion and guarantee payments totaling around $12 Billion to American cities. This accounts around $60 Billion of the total $160 Billion American tax payers have paid to AIG so far. So we are still missing $100 Billion here, a long way to go.

Based on disclosures so far, here are quick observations:

1. Europeans have much less to grumble about America. They have essentially ‘exacted’ the price from Americans for the folly Americans created in the first place – CDO’s made off sub-prime loans. In other words Americans seems to have paid at least noticeable retribution to Europeans for being the root cause of the global mess. Will it mean, Angela Merkel of the world ‘lecture’ less Americans and American Capitalism? It was all along expected that substantial amounts will be paid to Europeans, since they were the first gullible buyers of CDOs. What better way than to disclose this when President Obama will be visiting London soon? Hopefully, this should put some ‘level playing’ field in political terms for all the haggling which is inevitable when America and Europe try to co-ordinate simultaneous stimulus as well as global framework of regulating financial industry. Now that some American money in some form has landed in European pockets, will it give leverage to Obama Administration in persuading Europeans to spend more? It should. It also mean Obama Administration needs to undertake little bit arm twisting in making Europeans to spend stimulus money for European folks. For good Obama Administration, Congress and American politicians have realized that simultaneous spending by world governments in their respective regions is the best bet for over coming American recession, best bet for world to come out of the recession quicker. So anything that makes reluctant Merkels and Sarkozys of the world to spend on stimulus is good. AIG payouts – hey, anything is okay in this argument.

2. Coming back home, now that Goldman Sacks and Morgan Stanely’s of Wall Street have money from Uncle Sam; how about returning some of the TARP money? As reports have been flooding news media, many American banks are eager to pay back taxpayers money so that those will be free from the heavy handed government control. Well, we do not want these banks ‘free’ to get back to their ‘naughtiness’. This means at least certain parts of proposed financial industry regulation reforms need to be in place so that banks without TARP money control still do not run amok. Talk about the ‘interconnectedness’ which Obama Administration is so fond to talk about. In any case, some pieces of financial regulation reforms need to come up fairly quickly which in turn should make Fed to accept TARP repayments. But the point is American banks will have dollars to return back taxpayers money.

3. Along with American banks, payments to American cities are welcome (not just because Californian cities got paid most where I live!) because it reduces the unrelenting financial pressure of recession on city governments all across America. City governments which are not broke, whose retirement plans are less destructed; all those are welcome additions in fighting the financial Armageddon which has fallen on state and local finances. This is consistent with Obama’s game plan of fighting recession at state and local levels along with national level stimulus.

4. Finally, all these AIG payouts should demonstrate that even in the distressed times, Americans are willing to fulfill their obligations which are not compromised on any narrow nationalistic interests. Obama Administration does not have to overplay here, but the demonstration of American leadership - albeit as much weakened as is evident – is quite clear here. Fed did not do as like London tried to limit RBS and HSBC’s exposure to non British subjects. Or like Paris, which is hell bend on ensuring all the money is exclusively spend in France only. The point is AIG payout should indicate that Americans will not very easily fall for any kind of protectionism. Granted that Americans do not have any choice here and obviously it is in America’s interest to reignite world trade. But the fact remains that AIG payouts visibly indicate American resolve to play by the rule. Will it make Wen Jiabao’s of the world less worried about Treasury bonds? It should and that is the silver lining about this entire AIG saga.

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