The AIG Bomb

Tuesday 03 March 2009

by: François Vidal | Visit article original @ Les Echos

François Vidal argues that in spite of the efforts of Washington's top pyrotechnicians, such as Treasury Secretary Timothy Geithner, AIG remains a ticking bomb. (Photo: Jonathan Ernst / Reuters Photos)

Tick-tock, tick-tock. In spite of the efforts of Washington's pyrotechnicians, the AIG bomb is still live. Yesterday, the American insurer announced an additional loss of $62 billion for the last quarter of 2008 alone. A world record for three months, and undoubtedly even for a full year, for any company. In total, for the year just past, the group, which has already eaten up $150 billion of public money and has just obtained a #30 billion extension, has lost close to $100 billion. At this level, the sums evoked rather elude common sense. Nonetheless, the final tab for the American taxpayer could very well prove to be still more astronomical.

For what yesterday's announcements reveal is that six months after AIG's rescue, Washington has still not found a way to escape the vicious circle. In spite of efforts deployed to clean up the insurer's balance sheet, some $300 billion worth of CDS ("credit default swaps") - those contracts that guarantee buyers against the bankruptcy of a lender - remain on its books, out of $450 billion worth sold and still in its portfolio in mid-September! In consequence, putting AIG into bankruptcy is out of the question. Such a decision would provoke a seism in the heart of global finance such that it would consign the shocks provoked by Lehman Brothers' bankruptcy to the level of circles in the water.

So Washington is compelled to try to fill a hole that will remain bottomless so long as the financial markets continue to tumble. Just as it is compelled to bail out a Citigroup in its death throes and other American financial institutions that are also "too big to fail." In these circumstances, one may wonder whether any salvation for American finance outside the public sector exists.

HSBC gave its answer yesterday. The Sino-British bank decided to put a stop to its trans-Atlantic expenses not related to its private bank. It will purely and simply cease all retail credit activity with US borrowers. A market which the bank entered at a high cost at the end of 2002, but which made it vulnerable to "subprime" risk. Today, HSBC prefers to cut off its arm rather than leave its skin there. Its shareholders will pay the price for that decision through a record capital increase of 12.85 billion pounds. For American taxpayers, the precise amount of the damage remains to be defined.

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Translation: Truthout French language editor Leslie Thatcher.