AIG: What People Don't Know

By Bill Glynn

AIG is getting more loans and lines of credit from the government. You really want to know why? AIG is one of the world's largest insurance companies. AIG, like many insurance companies, was very involved in the mortgage meltdown but not in a capacity that many actually understand. This really has nothing to do with insurance, as you and I know it to be. This is largely about RE Insurance. I mentioned this would be a catastrophe as big or bigger than the banking bailout and it will turn out to be, and is certainly the fact, just with AIG. Preamble: You and I get mortgages at $100 each with a 10% interest rate. The bank lends us $100 each. The bank has depleted its coffers by $200. The bank then lends several thousand others the same amount, more or less, at say 10% interest as well. The bank then takes all those loans and bundles them into a Collateralized Mortgage Obligation and sells this instrument into what was a massive bond market to get their money back. In other words, if the bank put out $1 billion in loans, it sells a $1 billion CMO so it can borrow its money back from the bond market. Now here it is. The bank should sell this bundle of mortgages with an interest rate for investors at least 10%. The problem is the banks can't borrow the money back to lend again at that rate because they can't borrow and lend and make money if the interest rate is the same or higher on the bonds. Here is the reason why...