If you’ve got kids readers, you’ll know what the little… angels are like.
They ask for a donut – you say, “No.”
So they ask again. This time you say, “Only if you behave then.”
Of course, they agree, and you buy them a donut. Shortly after they’re as naughty as they were before.
So, what do you do? You can’t take the donut back because they’ve eaten it. So you tell them you’re not going to buy them one the next time they ask. But of course you crumble under the pressure. Anything to stop the shouting and screaming in the middle of the shopping mall.
Kids 2, Parents 0.
Across the big pond in the United States, the biggest parent/child battle of all time is taking place.
The parent (US Government) is trying to work out how to get the donut back from the child (AIG) after it’s scoffed it.
After AIG stuffed its face to the tune of USD$182.3 billion of taxpayer money you’d think it would count itself lucky to still be around and work out how to pay some of the cash back.
Not a chance.
For a start the company has got a whole bunch of what you might call related party interests. The US government is an 80% shareholder in AIG, but it’s also a creditor.
Which hat does the government wear when it’s dealing with AIG? Is it the shareholder hat that wants to maximize its return which means striking the best deal possible for repaying (or not repaying) the debt?
Or is it as the creditor who wants to maximize its return by securing the most favourable debt terms which would naturally reduce the profitability of the company if the interest and debt repayments are too high?
Or does the US government conclude it is in a neutral position and not worry about it?
We’ll be honest. For a pea-brained editor it’s more unfathomable than a work of art by Escher.
Either way, we’re not quite sure how AIG will be capable of paying the money back. For all those interventionists that point towards the quadrupling in the AIG stock price since early July…
They may care to remember that even so AIG’s market capitalization is still only USD$6.5 billion.
That dwarfs the USD$70 billion equity investment by the US taxpayer.
In other words, at the current market price the US taxpayer’s USD$70 billion investment is now worth $5.2 billion, or a 92% loss.
Some would argue that’s not a bad return for a public sector investment!
But the point is, what obligation does AIG have to pay this back? It doesn’t. I mean, if you make a decision to buy shares of BHP Billiton, BHP isn’t under any obligation to pay you anything. You aren’t owed anything by the company.
You’ve made an investment in which you hope to share in the profits made by the company.
It strikes us that unless there is about a 1,300% increase in the share price, or that AIG begins to pay dividends on the stock, the US taxpayer will remain out of pocket.
The other fantastic investment made by the US government is of course by providing funds to AIG as debt. Right now the outstanding amount is around USD$75 billion. Again, we’re not sure where that money is going to come from.
If we accept the argument that AIG took unacceptable risks, then it would seem logical that it won’t produce the same profit levels as it did in previous years. AIGs profits since 2001 were as follows:
2001 – USD$4.09 billion
2002 – USD$5.73 billion
2003 – USD$8.11 billion
2004 – USD$9.84 billion
2005 – USD$10.48 billion
2006 – USD$14.05 billion
2007 – USD$6.2 billion
And then there was 2008 where it booked a loss. A loss of USD$99.29 billion.
Hence the taxpayer bail-out.
Ah, but it can sell some of its assets to pay the money back. As we understand it, it’s already done that. But if we look at the quarterly balance sheet we wonder exactly what kind of assets it holds.
USD$570 billion in “Long Term Investments,” USD$4.9 billion in “Property, Plant and Equipment,” and USD$6.4 billion in “Goodwill.”
Considering AIG also has total liabilities of USD$772 billion it’s going to struggle.
But don’t think this is the sort of thing that can only happen in America. And you shouldn’t think it’s a one-way street either. It’s not just the taxpayer bailing out private enterprise, it’s the taxpayer bailing out the government as well…
With the help of private enterprise.
I don’t know what you’d call it. I suppose it could fall under the banner of ‘Corporatism.’
But whatever you label it, it’s the government and private sector banding together to stitch-up the individual.
I’ll explain what I mean in a moment. But a perfect illustration of what it means comes from something we heard while watching CNBC yesterday evening. A guest panelist said something along the lines of:
“I’m a social liberal [as in the US terminology of left wing] but a fiscal conservative.”
Look, it’s not the first time we’ve heard that said, and it won’t be the last. We recall the Fairy Ruddfather spouting something similar. What it really means is “privatizing profits, and nationalizing losses.”
Or to put it another way, “Leave me alone to make a profit, unless I make loss, then can you help me out?”
But getting back to the point. The flow of funds from the private sector to the government seems to be more liquid. That’s evident from two news stories in the Australian Financial Review (AFR) today.
“Banks may be forced to buy up sovereign debt” and,
“NAB joins call for higher super savings”
The stories are different but the outcome is the same. In both instances it will be the individual that is doing the ‘buying.’
In the case of the former, it’s a perfect opportunity for the government to go further into debt so it can fund its spending programmes while claiming it is helping to strengthen the Australian banking system.
And in the case of the latter, the banks will get hold of more of your money on which it can charge a fee to ‘manage’ and will then be forced to invest in sovereign debt.
Whichever way you frame it, the taxpayer and the individual gets stitched up like a kipper.
According to the story in the AFR, the NAB has suggested raising the superannuation guarantee to between 12% and 15%. As we mentioned last week, that would result in a massive increase in funds flowing through to the funds management industry.
Assuming the average salary in Australia is around $62,000, that works out to around $9,000 per annum per worker going straight to the funds management industry based on a 15% contribution.
That’s $9,000 that should be in your pay packet which is instead going straight to MLC, AXA, AMP and the rest.
Is it any wonder the NAB is so keen to rip 15% of your salary away from you in the name of helping you in retirement? Helping themselves more like.
Sure, we’re not suggesting that all this money will find its way into investments like AIG, but the money will find its way into equally unprofitable investments such as bridges, schools and roads.
All of which will be built not based on the return, but based on the need to create jobs and the fees the fund managers can rip from them.
The quote attributed to the NAB CEO in the AFR report gives the game away:
“Now if we can get superannuation as an example up to 12 to 15 per cent, I think it will bias domestic managers towards greater fixed income products, which will flow its way into supporting the banks, making us therefore rely on Australian savings and not foreign savings.”
Maybe you think that sounds reasonable for the banks to rely on domestic savings rather than foreign savings.
Don’t believe a word of it.
What the banks are more interested in is a guaranteed funding source so they don’t have to do any work to attract the funds.
Look at the panic that set in when their overseas funding was at risk. The local banks needed a bail out from the federal government in order to stay afloat.
But maybe, if they’ve got all your money on the books then they wouldn’t need a bail out in the future. After all, if they’ve got your super money on the books, you’re not in a position to withdraw it are you?
In other words, the banks can take bigger risks knowing their funding is a lot ’stickier’ with your super money than it is with overseas funding.
The banks are just like the kid who makes the right noises to get what they want. As soon as they’ve got it they’ll revert to their old habits – irresponsible lending practices and dodgy investments.
They’ve done it before and they’ll do it again. Only the next time they’ll have even more of your savings to play with.
Other Stuff on the Markets
The S&P/ASX200 slipped 0.34% yesterday, while overnight on Wall Street the Dow Jones Industrial Average dropped 41 points. In Europe the FTSE100 lost 0.74% and the CAC40 fell 0.41%.
The price of gold in Australian dollars is trading at $1,161.72, while in US Dollars it is trading at $1,003.26. And the price of silver in Aussie dollars is $19.49 and in US Dollars it is $16.83.
The Aussie dollar remained steady versus the US dollar and Japanese Yen, trading at USD$0.8627, and JPY79.37.
Crude oil closed overnight at USD$69.68.
For the biggest movers on the market yesterday click here…
{ 5 comments… read them below or add one }
“I don’t know what you’d call it. I suppose it could fall under the banner of ‘Corporatism.’”
It’s called Fascism, actually (or the corporatisation of government):
def; economic system inaugurated by the Fascist regime of Benito Mussolini in Italy. It was adapted in modified form under other European dictatorships, among them Adolf Hitler’s National Socialist regime in Germany and the Spanish regime of Francisco Franco. Although the Italian system was based upon unlimited government control of economic life, it still preserved the framework of capitalism. Legislation of 1926 and later years set up 22 guilds, or associations, of employees and employers to administer various sectors of the national economy. These were represented in the national council of corporations. The corporations were generally weighted by the state in favor of the wealthy classes, and they served to combat socialism and syndicalism by absorbing the trade union movement. The Italian corporative state aimed in general at reduced consumption in the interest of militarization
In my books, this treatment misses the essence of what AIG is, and what purpose it has served. May I suggest:
AIG is where GS and JPM have been planting their favourite little financial derivatives time bombs, or should we call them sleeper bombs, that they explode at will, if and when, it suits them and need taxpayer wealth transfer when their schemes and scams blow up in their faces and face wipeout.
Now, if you take this as your starting point, you might start getting closer to the way things actually work.
“”The Italian corporative state aimed in general at reduced consumption in the interest of militarization”"”
which lead to war ,, ,,oh great stuff
This is a really interesting and informative article that is thought provoking. There seems to be pretty much nothing that the ordinary hard-working, politically interested person can do but be aware and handle their own finances to the best of their ability.
That’s it, Marilyn. What else can/should one do?
Unless, of course, one is ???brave/foolish??? enough to believe in a revolution.
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