AIG..."Too Big To Fail?"

Lots of "fun" stuff going on in the markets this week. In regards to AIG and the "bailout" by the US Government, here is simplified look at what is happening...

Q: How much money does AIG need to pay out (i.e. short-term debt obligations)?
A: $14,500,000,000... and up to $85,000,000,000 over the next two years.

Q: How much cash does AIG have available?
A: Less than $14,500,000,000.

Q: What would AIG be worth if they sold everything?
A: More than $14,500,000,000... probably close to $85,000,000,000.

Q: How much money is the US Government loaning AIG so they don't have to sell everything to meet their short-term debt obligations?
A: Up to $85,000,000,000 over the next two years.

Q: What does the US Government is get in return?
A: 79.9% ownership in AIG.
11.5% interest on the amount AIG borrows.

Q: If the US Government didn't step in, what would happen?
A: AIG would be forced to sell off assets in order to meet short-term debt obligations. This would snowball until they were unable to do so, at which point they would declare bankruptcy.

Q: So what? AIG should burn in hell for all I care...
A: $85,000,000,000 is a lot of money. If AIG had to liquidate immediately, the market would be flooded with assets would would most likely spell disaster for the financial markets (much worse than we are seeing right now). In otherwords... AIG is "Too big to fail."

Q: Why is the US Government saving AIG and not Lehman Brothers?
A: AIG has the ability to repay the $85 billion dollars they are being loaned. Their loan is "secured" by the assets they own. Lehman Brothers doesn't have nearly enough assets to "secure" a loan the size that would be needed to "bail" them out. In otherwords, the US Government is making somewhat of a good loan, opposed to all the crappy loans that got us into this whole mess in the first place...

Q: Ok... so what does the future hold?
A: It is hard to tell. The most likely outcome is that AIG will be forced to liquidate itself slowly in order to repay the "bailout" from the US Government. Since this will occur over a longer time, the hope is that the financial markets will be able to support it.

Q: I'm still confused. Can you say it all again?
A: Nope... this is pretty much as simple as it gets.

-dunkie