American International Group unwinding

There is a certain morbid fascination in watching the financial storm unwind

Calculated Risk remains one of the best econ blogs, but the volume on it now is so large that it is impossible to read or even more than glance at.

Krugman's Conscience of a Liberal is more concise and always interesting.

Steve at Information Processing also has an interesting physics based perspective.

But, I have been pondering the AIG "rescue" - or rather orderly slow bankruptcy with federal control during the unwinding and disposing of assets.
Why?
Why could Lehman with 613 billion, or whatever, in debt, derivatives or obligations be allowed to go splodge, but AIG had to be let down slowly.

Well, AIG's core business is annuities - guaranteed income from fixed principal - with the company guaranteeing a certain percentage return essentially in perpetuity.

But, the principal of fixed income annuities is not absolutely guaranteed.

"You can enjoy peace of mind knowing a fixed annuity from AIG Annuity offers protection against a volatile market. Your annuity will never earn less than the guaranteed minimum interest rate stated in your contract, and your earnings are guaranteed even if the stock market is down. Fixed annuities from AIG Annuity are protected from market exposure since they are issued and guaranteed by AIG Annuity. Please note that this and all guarantees mentioned are subject to the claims-paying ability of the insurance company."

I don't think (but I don't know for sure) that state insurance regulators cover this - they cover payment on policies by regulated insurance companies - while the policies are being sold or terminated - but I don't believe the guarantee principal of fixed income annuities.
So, if AIG went into bankruptcy, the principal of the annuity holders doing business with their subsidiaries might be lost in part.

This is retirees who cashed their private retirement plans into income annuities, and trust fund kids.
This is the core political base that people in DC understand must not be fucked with.
So AIG will be held up with federal funds long enough for annuities to be moved to other companies, and AIG's subsidiary businesses sold or liquidated with losses concentrated in the holding company.

In the meantime, in case you hadn't heard, one of the larger money market funds suspended withdrawals - they took losses large enough that their depositors are going to take a (small) loss of principal. That fund is finished it can only liquidate and return peoples' money (as I understand it), when it reopens for trade.

This is very, very bad, and is probably a primary cause of short term treasury rates going to near zero - people with short term cash needs are looking for anything that will preserve their principal in the short run while the storm blows through, independent of whether they actually get any interest or profit.
If there is a run on the money market funds, which is close to being the case, the principal loss becomes a self-fulfilling prophecy, as withdrawals force sales of fund holdings which crashes the prices of the holdings.

Do you know what the holdings of your money market fund are?
Mine is listed on page 356 - mostly Fed Bank holdings with some heavily diversified short term corporate bonds.
So are most, but which bonds...?

so life-threatening has the situation at Halifax/Bank of Scotland become that it has been forced to seek a rescue takeover