Just when one thought every imaginable taxpayer bailout scheme had been seen, experienced and in many cases, forgotten, here comes AIG once again. The specifics come from Deutsche Bank's Joshua Shanker initiation of coverage report on AIG (naturally with a Buy rating, $34.00 target price), where within the fine print he notes: "the company believes there may be bargains available from buying RMBS securities from European banks seeking better positioning under Basel III requirements. " Prudently, he adds: "We note that increased yield, in this regard, also carries with it increased risk." Translated this means that AIG is about to do for European banks what the ECB so far has been unwilling and/or unable: namely to transfer the risk associated with European banks' massive ongoing exposure to the continuously collapsing US housing market back to the US taxpayer, in the form of AIG, which was bailed out once, and which will certainly be bailed out again, when the time comes.
As a reminder, AIG was rejected by the New York Fed in its attempt to repurchase the very same loans that were part of the package that sent the company into bankruptcy, only to be rescued in the last minute by Hank Paulson, who flipped on his decision to kill Lehman (thus making Goldman the Wall Street fixed income OTC monopolist) by providing hundreds of billions in order to unwind Joe Cassano's massive wrong way bet.
As for how much RMBS will AIG soon transfer from European taxpayer "backstopping" and back to US? Roughly $21 billion worth.
From the relevant section in the DB report:
Optimization of investment portfolio
This plan is somewhat vague. We believe, in its truest sense, the company should always be optimizing its investment portfolio for best returns and, as with strategic execution, it is a status quo issue. However, there is also an aspect of redeploying capital for higher yields that may not be strictly "optimization." When the company outlined its initial ROE improvement plans, it intended to repurchase its former MBS portfolio—known as Maiden Lane II—from the government. AIG pledged the majority of this pool to the government as collateral during the credit crisis rescue. Postrestructuring, AIG intended to repurchase these securities now yielding 8-9%. Given AIG's former ownership of these securities, management felt that the company understood the underlying risks well. The company indicated that successful repurchase of Maiden Lane II was not included in its ROE expansion plans. Ironically, AIG was not successful in its repurchase plans as a competitive bidding process sold these securities to other buyers. Now, the company intends to use the allocated capital to seek higher yields elsewhere. It seems this had to be contemplated in an asset reallocation plan to some extent. Regardless, the company believes there may be bargains available from buying RMBS securities from European banks seeking better positioning under Basel III requirements. We note that increased yield, in this regard, also carries with it increased risk.
Note the part: "Given AIG's former ownership of these securities, management felt that the company understood the underlying risks well." Oh yes, the company which went bankrupt by holding on to these securities, certainly understood the "underlying risks." What it however understands all too well, is that no matter what toxic biohazard it onboards now, and no matter how undercapitalized it could become, Uncle Sam will always be there to bail it out for ever and ever. Thank you Bernanke Put.