Monday, March 2, 2009

AIG accounting: creeping bailout

AIG lost over $61 billion in the 4th quarter of 2008. The government seems prepared to aid them with over $30 billion, after the over $150 billion already used from taxpayers.

It seems the government is not thinking ahead and planning out what makes sense.
What they're doing is rational at the time but not when looking at the situation as a whole.

It is similar to giving a car that will need a new transmission and battery, 4 new tires because the old ones are flat. The new tires will help the car work for the immediate future, but once the transmission and battery are completely inoperable, then the cost of keeping the car working will be multiples of the tire repair. So what is needed is a reasonable estimate of how much it would cost to get and keep the car working for a longer period of time maybe say 2 years.

In this case that would be 4 new tires, a new transmission, a new battery, and whatever else would need to get fixed over the next 6 months. Then it would make sense to determine if that amount was acceptable or is it better to just get another car.

It could be possible that those who "know" believe that AIG must be saved, but that the total cost would be difficult to sell politically. So the plan could be to pay it in piecemeal efforts and leverage the next payment by noting what had already been payed and not wanting to waste that prior effort.

Either way, whether there is no plan or a secret plan, the administration needs to explain a pathway towards a healthy banking system. Right now, it seems like a disaster.

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