If you’re anything like me, trying to figure out exactly why the economy tanked is no easy task. That’s why I’ve been listening to Marketplace almost daily for the past few months and, more recently, Planet Money, an NPR podcast where they try to explain the situation to everyday people like you and me. I think they do an excellent job because they, like me, were complete neophytes on these issues when it all started. We’re learning together.

This morning I read an article in The New York Times about the government restructuring the bailout of AIG and it raised a question for me. I sent it in to Planet Money and hopefully they will answer it for me. But I also wanted to share it here, in case they don’t and someone who reads this can help me understad:

I was reading an article in The Times just now about the government restructuring its bailout of AIG so that now we’re buying $40 billion worth of preferred stock. Apparently, the CDOs that AIG owns will be purchased by a separate entity set up by AIG in order to get those toxic assets off the company’s balance sheet. According to The Times:

A.I.G. would contribute $5 billion to the entity, which would buy $70 billion of the securities at 50 cents on the dollar, or $35 billion. The remaining $30 billion of the purchase price would come from the government.
As I read that, it means that We the People will own the vast majority of a company created to hold insurance on bonds that, in this economy are more likely than not not to be paid back. So if I understand everything I’ve learned about CDOs on Planet Money, that means the new entity (ie: the federal government, ie: you and me) is going to be on the hook to pay back all the people/institutions that bought insurance via those CDOs. And, as I understand it, buying those CDOs and providing that insurance is what got us all into this mess in the first place (see: those poor Wisconsin schools and that German/Irish bank).

So, while I understand the need to prop up the economy by bailing out these massive instittuions that purchased all these CDOs and then had to start paying them back, how is it a good idea for the government to own these CDOs and now be on the hook to payback investors if the bonds included in them start to fail? If that risk is realized, doesn’t that just compund the problem, except now it’s the government that needs a bailout?

On top of that, at Planet Money, I read that people don’t want to buy these CDOs for 10 cents on the dollar, but in that Times article, it says the government is paying AIG 50 cents on the dollar for $30 billion worth of the CDOs or toxic assets. I don’t get that either.

This entry was posted on Monday, November 10th, 2008 at 10:26 am and is filed under Check this out. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.