The Overpayment Begins (from The Baseline Scenario)

[swag]

http://baselinescenario.com/2008/11/10/aig-bailout-overpayment/

... Today’s government re-re-bailout of AIG (WSJ article; Yves Smith commentary) can be hard to follow, but one provision is the creation of a new entity with $5 billion from AIG and $30 billion from the government to buy collateralized debt obligations (CDOs). The goal is to buy CDOs that AIG insured (using credit default swaps), because if those CDOs are held by an entity that is friendly to AIG, that entity will no longer demand collateral from AIG. The theory is that in the long run these CDOs will not default and that the new entity will make money on the deal.

The rub is that this entity is planning to pay 50 cents on the dollar for these CDOs. This has two problems. First, 50 cents is almost certainly more than these CDOs are worth on their own (hence the title of this post). If they were really worth 50 cents on the dollar, AIG wouldn’t be having the problems it is having posting collateral; like the original TARP plan, this is an unfounded bet that the market is mispricing these assets. Second, and more bafflingly, the CDS contract is presumably separate from the ownership of the CDO; that is, buying the CDO from the counterparty doesn’t eliminate AIG’s obligation to pay if the CDO defaults, and hence doesn’t serve its stated purpose. If, on the contrary, the CDS contract is contingent on the counterparty holding the CDO, then the CDO is worth a lot more than 50 cents to the counterparty, because it is insured for 100 cents by AIG - and we all know the government isn’t going to let AIG default on those swaps. And no sane counterparty would sell for 50 cents...

[Wiley50]

1. A third multi-Billion installment and a third swanky exec retreat. Up to $160 Bil Now.

This bailout is the world's biggest extortion ever. And most of us could see that from the start.

But it went through anyway.

Bush, Bernake and Paulson have 6 weeks left to drain us so bad
that they can shut down Social Security, Medicare and Medicaid.
That's what they're up to.

And if that doesn't finally put the blue collars in the street spilling white collar blood
I don't know what will.