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Watching Jim Cramer last night, he had AIG on the Sell Block - they may have 500 billion of exposure to Lehman, all the expensive junkets and golden parachutes, waste of taxpayer funds, terrible, horrible, awful. CDS Casino, so on and so forth, accessory to financial arson on Lehman... Cuomo attacked them vigorously on the expenses and golden parachutes: AIG agreed to behave better immediately - henceforth, they will live a godly, righteous and sober life.
This whole thing is degenerating into a morality play. AIG has been given the scarlet letter - the company is a poster child for everything that's wrong with our financial system. Paulson imposed the penance - a usurious bridge loan and confiscation of shareholder interest. Even Bernanke seemed to hold his nose when he discussed the bailout of AIG.
I must digress here - to demonstrate that I am in no way soft on evildoers. Please consider my stance on the moral hazard created by credit default swaps, or my attacks on the dishonesty of all participants in the sub-prime mortgage fiasco, starting with mortgage applicants, moving along to brokers, appraisers, banks, those who sponsored securitizations, rating agencies, bond underwriters, etc.
Before I retired, I worked for a sleazeball contractor, whose wife was a real estate broker. One of his ace maneuvers was to take her customer's deposits out of her escrow account and use the money in his construction business. Being the book-keeper, I became aware of this when reconciling the bank accounts (no easy task) and elected to report them to the appropriate regulatory authorities. Ever straightforward and honest, I gave them a copy of my letter, just so they could know where I stood. Their lawyer was incredulous - he asked me if I had "really done that." Yes, I had really done that. Soon enough, I was laid off for lack of work. Oh well.
Getting back to AIG - it is very rare that large and powerful companies are run by boy scouts. Usually they are run by capable individuals with outsize egos and a pragmatic attitude on moral and ethical issues. For that matter, most governments and government agencies are run by similar persons, if not worse. A man has a tendency to believe what puts bread on the table, and to attribute his success to his merits, and his failures to bad luck.
Now the exception to this observation would be Berhshire Hathaway. Warren Buffett is too old to be a boy scout but he is just a squeaky clean guy who is always prepared. He is a nice guy who is in the process of finishing first.
I am long AIG in my Marketocracy portfolio, with an average cost of 4.45. I also own it in my personal portfolio, with a somewhat lower average cost. Given AIG's status as an outcast, a moral pariah in the wasteland of American business ethics, what am I to do? Perhaps I should sell my AIG and buy some Berkshire Hathaway.
I am going to wait for the earnings report. Now that we have a new CEO installed by Mr. Clean, and a new CFO who is going to be watching expenses, perhaps there will be some clarity forthcoming. I did a long and detailed analysis of AIG's disclosed CDS exposures and maxed out at a 4 billion dollar loss. I missed the securities lending exposure, but half of that is a liquidity issue, not a realized loss. In any event, it was already marked to market. It is going to be fascinating, to see how AIG got to where they need 85 billion plus 37.8 billion of bridge loans. I suspect mark to market lunacy.
Perhaps Edward Liddy can dress in sackcloth and rub his head with ashes, make a pilgrimage to Washington, demonstrate humility and an awareness of AIG's awful sins, and make some headway on that 80% confiscation.
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