You're very likely to hear it.
AIG is the 900lb Gorilla in the China Shop, and he's full of piss and vinegar.
What is AIG? The largest insurance company in the United States.
So what would make AIG detonate, and why would AIG blowing up kill the financial system?
Because AIG, like so many other insurance and similar companies, wrote Credit Default Swaps to virtually anyone, had inadequate (read: no!) margin supervision, and they now are in liquidity trouble.
In short, they levered up their balance sheet like the rest of the geniuses on Wall Street, and like most of these other clowns, aren't well-enough capitalized to survive a ratings downgrade.
To put this in perspective they are now trying to put together a 70 billion dollar credit line from multiple banks in order to allow AIG to be able to post collateral.
$70 billion dollars?! Yep.
These folks have a one trillion dollar balance sheet. And, like the rest of the financials, they have operated in a "no regulation" world for the last 20 years, and thus were running hog-wild making money hand-over-fist writing these swaps.
The worse news is that essentially everyone on Wall Street - and Main Street - is in some way connected to these folks. Either as a swap-buyer or as a buyer of some other form of insurance. So if and when they "boom" we have an instantaneous mess that hits everyone at once.
Welcome to reality folks.
I have warned about unbridled leverage for over a year, since The Market Ticker began publication. This disease has infested every corner of our financial system, from the corner store to the investment banker to the insurance company. None ignored the "vast profits" they could make, and to a lesser or greater extent they have all dug very deep holes from which there is no escape.
One by one the explosions of one firm will set off more blasts, until the leverage is reduced to safe levels, frequently by bankruptcy.
As each firm falls its credit default swaps become "zeros", and the people on the other end either have to be able to net it out (e.g. if the detonated firm had an opposite position with someone else, and you can find them, then you can rewrite the deal between the two of you - no harm, no foul) or someone has to pay. Of course if the swap is on the dead firm's debt, well, that poor bastard has to get out his wallet.
The bad news is that he may not have anything in it, and then the other guy both has a lawsuit and an exposed position he thought he was hedging.
Neither political party has had the will to get in front of this and put a stop to it. I have been writing, faxing, and petitioning (along with many of the readers of this blog) Congress and Regulators over the last year, pointing this out the entire time, and insisting that Congress and Regulators had to get in front of this problem and put a stop to it.
Instead all we've seen is Congress and Regulators, including Treasury, the FDIC, the OTS, OCC and The Fed stick their fingers in their ears and go "la la la la la la la la la".
Now we are discovering that the "exigent circumstance" facilities that The Fed has put in place, and Congress has permitted, have in fact made the problem worse because instead of forcing everyone to take their marks and deleverage, they have instead allowed everyone to play "hide the sausage" and continue to lie, cheat and steal.
That is exactly what they did but the fuse continued to burn and has now gone inside the box.
In turn we have now seen Fannie, Freddie and Lehman detonate. The fuse is inside on AIG and as it approached the corner of the container Merrill snipped theirs (temporarily anyway) by committing an obscene act with Bank of America.
If and when AIG detonates the impact will be global - and substantial.
There is $440 billion of counterparty risk embedded in AIG; this is the sort of BS that we allowed in that this firm alone was allowed to amass this much centralized risk to the system without the capital to back the swaps it wrote, and if there is no resolution to the AIG mess it is reported that they will be filing bankruptcy tomorrow.
Such a filing will trigger a "credit event" on the entirety of the $440 billion, in addition to impacting the insurance policies the firm wrote in the "real" economy - auto, fire, life insurance, annuities, business insurance and everything else!
The hubris displayed by these executives and regulators is outrageous - and in many if not most cases deserving of indictment.
Both Presidential Candidates, and indeed, the entirety of the House and Senate finance and banking committees, have received dozens of my Tickers documenting these abuses and the fact that these "extraordinary facilities" have been abused and no transparency has in fact occurred.
This morning we learn that one of the reasons that BAC said "no mas!" to Lehman was that their marks were, in BAC's opinion, indefensible.
Folks, there is one and only one way to stop this crap, and that is to ban "Level 3" and off-balance sheet garbage entirely, as I have repeatedly called for since last fall in both Tickers and petitions.
We had Enron years ago as a consequence of permitting this crap and now we've got the entirety of our financial system on the verge of imploding as a consequence of our lawmaker's refusal to put a stop to this outright FRAUD!
Senator McCain was on CNBC this morning claiming that "we're all at fault" (no, really John?) and yet what has he done about it as a sitting Senator? Where are your bills to address the fraud Senator?
Senator Biden (Barack Obama's VP pick) was on CNBC this morning talking about how the real cause is "the war" and other similar garbage. Senator, where are your bills to put a stop to the off-balance sheet crap and outright fraud in our financial system?
Senators, here is my solution, as I have said for over a year in multiple petitions and tickers:
No off-balance sheet anything. Period.
No Level 3 anything. If you can't get a bid on it in the market, its worth zero. If you can get a bid, that's its value today. If it goes up in value tomorrow, fine, but today, that's its price.
No off-exchange derivatives. You want to trade it, you can do it on an exchange with a central clearing house. This guarantees that margin supervision will be enforced because the "guy in the middle" is going to demand it. The OCC and DTC have done a damn good job of guaranteeing margin supervision. Bring that level of supervision to all derivatives and do it today. As a transition "tool" declare that any derivative not traded on a public exchange has a valuation and coverage against any other asset of zero.
All "assets" must be disclosed and marked daily. No exceptions. My account must be marked every night to the market. So should everyone else's, especially those who are trading with (or are) regulated and/or public entities.
No exceptions. You cheat, you go to pound-me-in-the-butt prison. PERIOD.
Oh by the way, if our CONgress and President don't cut this crap out, right now, we are going to go down the drain. The TIC data was out this morning and made clear that confidence is being destroyed - quickly - in the United States.
Agencies, corporates and equities are all down big, and Treasury purchases are declining.
Cut the crap right now Washington, or that $2 billion a day we need to meet our budgetary requirements is going to disappear.
How much more CLEAR of a warning do you need?
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