AIG (AIG): Recycling Debt Without Paying Anyone Back

AIG is ready to repay the Fed $40 billion. The money will come from preferred shares it raised with backing from Treasury. If AIG defaults, the federal government gets the bag. That is the great part of the bailout. The capital supplied from the Fed and Treasury works on a merry-go-round.

According to MarketWatch, "American International Group Inc. the New York insurer, closed its $40 billion stock placement with the U.S. Treasury under the government’s Troubled Assets Relief Program, the company said late on Tuesday."

"AIG said it would use the proceeds to reduce its borrowings outstanding under the credit agreement the Federal Reserve Bank of New York extended to the insurer in September."

AIG is not the only practitioner of this art.

Now that a number of banks have received Treasury investments, with Citigroup (C) at the head of that list, they are still hitting the Fed’s short-term lending window, the “emergency” window set up for banks to trade crummy assets for real cash. The government does not like to release data on the borrowers, or any information on financial companies that it can withhold for that matter. The stigma might be too great and investors and customers might get frightened like horses in a thunder storm.

The government has the singular distinction of loaning money it may never get back and hiding the facts of how the lending has been apportioned. The average citizen gets to pay for something which he neither understands nor can identify.

The economy could still be faced with a wave of rolling defaults from the very institutions that the government has funded. Banks may still face substantial write-offs from consumer debt and their exposure to mortgage derivatives. The Fed and Treasury will be up against preventing defaults which would undermine the value of their own loans. The only answer—more money. Cure the default by risking another one down the road.

AIG is on the road to Perdition. The Fed is going with it

Douglas A. McIntyre.