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AIG: Now that you own it, learn about it!

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First of all—what is AIG?

AIG is American International Group, the largest insurance company in the world. It's not just an insurance company, however; its business is divided into four divisions: general insurance, life insurance and retirement services, financial services, and asset management. It was started in 1919 in Shanghai.

How did it (almost) collapse?

Like many other banks, AIG lost a lot on its mortgages, including $18.5 billion in the past three quarters—all part of the subprime collapse. Its share price has dropped 79% this year. But bad became worse this Monday when AIG received a downgrading of its credit rating. What's a credit rating? All securities are given a rating that tells you how much risk is associated with your investment into that security. Depending on the rating, the company must have a certain percentage of money on hand. The ratings, given by agencies like S&P and Moody's, are a lot like school grades "“ A's are good (need less money on hand), B's are okay/bad (need more money on hand), and C's are junk (need even more money on hand). So S&P & Moody's downgraded AIG, which meant it needed to post $14.5 billion in collateral to support its trading contracts. AIG couldn't sell its assets off quickly enough to get that money. Seeing its impending doom, AIG tried to rally the rest of the banks (JPMorgan & Goldman) to lend them the money.

That didn't work, so the Fed had to step in order to keep it from total collapse. The Fed has promised to lend up to $85 billion to AIG.

But I thought the Fed wasn't going to bail anyone out anymore.

Well, yes, that's what they said. And they definitely stuck to their word when they let Lehman slide to its demise this weekend. However, AIG is more than just an investment firm. It's such a huge insurer (the largest in the world in terms of assets), and was such a huge player in the Credit Default Swaps (CDS) market, selling off risk to other financial players around the globe. If it collapsed, it would have shaken the global financial world.

What are Credit Default Swaps?

Okay, say I invest $10M into a bond for General Motors, but I'm now afraid that GM may see financial trouble. Instead of just selling my bond off, I can enter into a sort of insurance policy with a big bank, say AIG. I pay AIG a small premium every quarter. If GM remains fine, then AIG does nothing. If GM does see financial trouble and I lose money on my bond, AIG will pay me what I lost on my bond. Likely, this will be a lot of money, relative to the small premiums I pay. Once this happens, the contract of the "swap" terminates. This is all fine and great, except for the fact that the CDS market isn't regulated—thus I could enter into a contract with a bank that doesn't have the resources to cover the loss of my GM bond. The CDS market totals $62 trillion, in which AIG plays a central role. Since just about every bank, insurer, and institutional money manager has some sort of exposure to CDS, they all have some sort of exposure to AIG. Hence, the necessary bailout.

How does the bailout work?

Well the Fed doesn't just hand over the money when they do these bailouts. It has promised a two-year loan for up to $85B. In return, it gets a 79.9% equity stake in the company in the form of warrants (a warrant is basically a call option issued by the corporation—allowing the Fed the option of buying common stock in AIG at a specific price) called equity participant notes. Interest on their loan is at Libor (the London Interbank Offered Rate—it's basically the London equivalent of the US Federal funds interest rate, and is often used as a benchmark for short-term lending) + 8.5 percentage points. That's about 12% (now), which is very high interest.

So AIG has to make good on the loan in the two-years either through general operations (not likely) or through sale of its various assets or branches of business. AIG has about $1.1 trillion worth of assets, and the Fed plans to sell them off in an orderly manner.

Why so much money?

Though AIG only needed $14.5 billion after the credit downgrade this week, the $85B loan was designed so AIG would be left with little debt and it could take on whatever the next few quarters has in store.

Does this matter to me?

Yes—now you own part of AIG! Well, kind of. That $85 billion is comprised of your tax dollars. Yep, your tax money is now going to protect bad investments. Investments that packaged up your debt into various securities, and sold it off to another party, who sold it off to another party, who sold it off all over the world.

However, since the Fed is LENDING the $85B to the corporation (unlike the Fannie & Freddie deal) the government could make some serious money off the high interest rate. That is if, by some sort of divine intervention, the market, and thus AIG, rebounds. The Fed is making it clear that the taxpayer will only see positive effects of the bailout.

But will the taxpayer be affected?

Who knows. It may be true "“ the Fed and the Treasury may make some money off AIG due to the high interest rate, but will I ever see that money? . It's certainly a good way to assuage the public's fears.

Will the bailout work?

It should. See, certain branches of AIG are doing just fine. Its aircraft leasing business, for example, is the second largest in the world and is estimated to bring in between $7 and $10 billion.

And who's to blame?

That's for next time.

Be sure to read more of what Diana learned today here.

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Stones, Bones, and Wrecks
A Chinese Museum Is Offering Cash to Whoever Can Decipher These 3000-Year-Old Inscriptions

During the 19th century, farmers in China’s Henan Province began discovering oracle bones—engraved ox scapulae and tortoise shells used by Shang Dynasty leaders for record-keeping and divination purposes—while plowing their fields. More bones were excavated in subsequent years, and their inscriptions were revealed to be the earliest known form of systematic writing in East Asia. But over the decades, scholars still haven’t come close to cracking half of the mysterious script’s roughly 5000 characters—which is why one Chinese museum is asking member of the public for help, in exchange for a generous cash reward.

As Atlas Obscura reports, the National Museum of Chinese Writing in Anyang, Henan Province has offered to pay citizen researchers about $15,000 for each unknown character translated, and $7500 if they provide a disputed character’s definitive meaning. Submissions must be supported with evidence, and reviewed by at least two language specialists.

The museum began farming out their oracle bone translation efforts in Fall 2016. The costly ongoing project has hit a stalemate, and scholars hope that the public’s collective smarts—combined with new advances in technology, including cloud computing and big data—will yield new information and save them research money.

As of today, more than 200,000 oracle bones have been discovered—around 50,000 of which bear text—so scholars still have a lot to learn about the Shang Dynasty. Many of the ancient script's characters are difficult to verify, as they represent places and people from long ago. However, decoding even just one character could lead to a substantial breakthrough, experts say: "If we interpret a noun or a verb, it can bring many scripts on oracle bones to life, and we can understand ancient history better,” Chinese history professor Zhu Yanmin told the South China Morning Post.

[h/t Atlas Obscura]

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language
6 Eponyms Named After the Wrong Person
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Salmonella species growing on agar.

Having something named after you is the ultimate accomplishment for any inventor, mathematician, scientist, or researcher. Unfortunately, the credit for an invention or discovery does not always go to the correct person—senior colleagues sometimes snatch the glory, fakers pull the wool over people's eyes, or the fickle general public just latches onto the wrong name.

1. SALMONELLA (OR SMITHELLA?)

In 1885, while investigating common livestock diseases at the Bureau of Animal Industry in Washington, D.C., pathologist Theobald Smith first isolated the salmonella bacteria in pigs suffering from hog cholera. Smith’s research finally identified the bacteria responsible for one of the most common causes of food poisoning in humans. Unfortunately, Smith’s limelight-grabbing supervisor, Daniel E. Salmon, insisted on taking sole credit for the discovery. As a result, the bacteria was named after him. Don’t feel too sorry for Theobald Smith, though: He soon emerged from Salmon’s shadow, going on to make the important discovery that ticks could be a vector in the spread of disease, among other achievements.

2. AMERICA (OR COLUMBIANA?)

An etching of Amerigo Vespucci
Henry Guttmann/Getty Images

Florentine explorer Amerigo Vespucci (1451–1512) claimed to have made numerous voyages to the New World, the first in 1497, before Columbus. Textual evidence suggests Vespucci did take part in a number of expeditions across the Atlantic, but generally does not support the idea that he set eyes on the New World before Columbus. Nevertheless, Vespucci’s accounts of his voyages—which today read as far-fetched—were hugely popular and translated into many languages. As a result, when German cartographer Martin Waldseemüller was drawing his map of the Novus Mundi (or New World) in 1507 he marked it with the name "America" in Vespucci’s honor. He later regretted the choice, omitting the name from future maps, but it was too late, and the name stuck.

3. BLOOMERS (OR MILLERS?)

A black and white image of young women wearing bloomers
Hulton Archive/Getty Images

Dress reform became a big issue in mid-19th century America, when women were restricted by long, heavy skirts that dragged in the mud and made any sort of physical activity difficult. Women’s rights activist Elizabeth Smith Miller was inspired by traditional Turkish dress to begin wearing loose trousers gathered at the ankle underneath a shorter skirt. Miller’s new outfit immediately caused a splash, with some decrying it as scandalous and others inspired to adopt the garb.

Amelia Jenks Bloomer was editor of the women’s temperance journal The Lily, and she took to copying Miller’s style of dress. She was so impressed with the new freedom it gave her that she began promoting the “reform dress” in her magazine, printing patterns so others might make their own. Bloomer sported the dress when she spoke at events and soon the press began to associate the outfit with her, dubbing it “Bloomer’s costume.” The name stuck.

4. GUILLOTINE (OR LOUISETTE?)

Execution machines had been known prior to the French Revolution, but they were refined after Paris physician and politician Dr. Joseph-Ignace Guillotin suggested they might be a more humane form of execution than the usual methods (hanging, burning alive, etc.). The first guillotine was actually designed by Dr. Antoine Louis, Secretary of the Academy of Surgery, and was known as a louisette. The quick and efficient machine was quickly adopted as the main method of execution in revolutionary France, and as the bodies piled up the public began to refer to it as la guillotine, for the man who first suggested its use. Guillotin was very distressed at the association, and when he died in 1814 his family asked the French government to change the name of the hated machine. The government refused and so the family changed their name instead to escape the dreadful association.

5. BECHDEL TEST (OR WALLACE TEST?)

Alison Bechdel
Alison Bechdel
Steve Jennings/Getty Images

The Bechdel Test is a tool to highlight gender inequality in film, television, and fiction. The idea is that in order to pass the test, the movie, show, or book in question must include at least one scene in which two women have a conversation that isn’t about a man. The test was popularized by the cartoonist Alison Bechdel in 1985 in her comic strip “Dykes to Watch Out For,” and has since become known by her name. However, Bechdel asserts that the idea originated with her friend Lisa Wallace (and was also inspired by the writer Virginia Woolf), and she would prefer for it to be known as the Bechdel-Wallace test.

6. STIGLER’S LAW OF EPONYMY (OR MERTON’S LAW?)

Influential sociologist Robert K. Merton suggested the idea of the “Matthew Effect” in a 1968 paper noting that senior colleagues who are already famous tend to get the credit for their junior colleagues’ discoveries. (Merton named his phenomenon [PDF] after the parable of talents in the Gospel of Matthew, in which wise servants invest money their master has given them.)

Merton was a well-respected academic, and when he was due to retire in 1979, a book of essays celebrating his work was proposed. One person who contributed an essay was University of Chicago professor of statistics Stephen Stigler, who had corresponded with Merton about his ideas. Stigler decided to pen an essay that celebrated and proved Merton’s theory. As a result, he took Merton’s idea and created Stigler’s Law of Eponymy, which states that “No scientific discovery is named after its original discoverer”—the joke being that Stigler himself was taking Merton’s own theory and naming it after himself. To further prove the rule, the “new” law has been adopted by the academic community, and a number of papers and articles have since been written on "Stigler’s Law."

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