Things I Don't Understand

[scaryblackdeath]

So I actually passed Econ 100 (or 101?) in college, and I like to think I generally understand stocks and supply & demand & stuff, but I really can't claim to understand larger financial stuff. It's just not my strong point. So I turn to you, my collective of smart and/or knowledgeable friends, to explain it to me in terms I can understand

Comments

[creamer_boy]

1.) AIG took advantage of the complexity of derivatives and the fact that regulation of them under Bush was non-existent to create exotic financial instruments. Because of the complexity of how they were valued in relation to their underlying, tangible assets, AIG relied on their prestige and rating to sell them off. This started a snowball effect, driving prices up and allowed AIG to show great profitability, which it used to further increase their prestige and rating, and used the capital generated to make other investments. Then the whole thing fell apart. People realized that the whole thing was, in essence, a completely legal scam, which drove down AIG's stock price and value. This caused creditors to AIG (foreign banks) to call in their loans early on the justification that AIG's greatly reduced worth represented an increase in risk. This caused AIG to have to shed its capital, and the snowball continues. Essentially, if I ask to borrow $5,000 from you and show you that I have $1,000 in savings that will be used to keep paying you for a time if I use my job, you might think it a fair risk. But if you find out that the $1,000 was actually a loan from my brother, who is asking for it back right now, it completely changes the amount of risk, and calls into question my underlying ability to pay.

Bottom Line: AIG spent money on credit, having obtained that credit by falsifying it's ability to pay. Now it has to pay it back. BTW, it doesn't even have the money to survive day-to-day.

[creamer_boy]

2.) Yes and No.

Remember we have no idea where ANY of the bailout money is going, as the previous Administration did not create any enforceable method of tracing the money.

So yes, because it's going to the same place.

No, because that's an assumption based on lack of information.

The Blogs have been saying, though, that AIG's money is going to overseas banks to whom THEY owe money for this debacle. Conspiracy theory about it says that it's in essence bribe money to keep the foreign banks quiet about some sort of outright fraud AIG perpetrated.