How To Take Over The US Financial System

With the populist paparazzi running rampant, we need to explore a Conspiracy Special today. Let's start with the news of AIG getting a new cash infusion and a fresh approach to mending that firm. AIG is important as it was the first foray of the US government into taking over a non-bank entity. First, AIG announced a $61.7 billion loss for Q4 2008 and became the title holder of "Biggest Loser" on the corporate earnings ledger. They now have lost over $100 billion over 5 quarters.

Last year, they got $150 billion from the US taxpayer and now they are set to receive an additional $30 billion under a new plan. According to Reuters, AIG posed a "systemic risk" that meant government action was necessary to buttress the insurer and ward off the possibility troubles at the insurer could damage the entire financial system, the Treasury and Fed said. CreditSights reports that the $450 billion CDS portfolio has been reduced to $300 billion, but this is clearly not small enough. For their efforts, the US government gets to take preferred interest in AIG subs American Life Insurance and American Assurance Company Ltd.

Getting to the conspiracy, think back to when US Treasury Secretary Timothy Geithner announced his plan to rescue the banking system. One of the key components was putting the top 19 financial institutions through a "stress test" to see how their assets and liabilities would react. If a company didn't pass the test, they would be prompted to raise additional capital before the government would provide them additional funds under TARP 2.

As I (and others) have been writing, this was an unfortunate signaling event to the markets to sell every one of the 19 financial stocks due to the uncertainty. What we didn't know at the time was the extreme stress the FDIC was going to test the banks under: 2009 10.3% unemployment, 2009 -3.3% GDP, and a 2009 47% drop in home prices. (Currently, home prices are down 27%.) The conspiracy theorists believe that this is setting up the financial system to fail.

Why? So they can be rescued by the government using TARP 2 money that gives them wide latitude over controlling the banks. This will aid the government in restructuring the industry to meet social goals instead of profit goals. Given the "Great Re-Ordering" of America's priorities under the Obama budget plan, the theorists believe this is consistent with an over-all plan of the new administration.

I realize this is an extreme view, but the results have been devastating to the financial sector stock prices. Since Geithner announced his plan on February 9th, S&P financials are down 16% and remain under pressure today. Until the cloud of "stress testing" and "nationalization" can be removed from the financial sector, investors will sell these stocks indiscriminately as there is extreme uncertainty over who will survive and who will have their common stock, preferred stock, and debt wiped out.


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Andrew Busch
Andrew Busch

Andrew B. Busch is Global FX Strategist at BMO Capital Markets, a recognized expert on the world financial markets and how these markets are impacted by political events, and a frequent CNBC contributor. You can comment on his piece and reach him here. </</p>