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

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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travel
The Real Bay of Pigs: Big Major Cay in the Bahamas
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When most people visit the Bahamas, they’re thinking about a vacation filled with sun, sand, and swimming—not swine. But you can get all four of those things if you visit Big Major Cay.

Big Major Cay, also now known as “Pig Island” for obvious reasons, is part of the Exuma Cays in the Bahamas. Exuma includes private islands owned by Johnny Depp, Tyler Perry, Faith Hill and Tim McGraw, and David Copperfield. Despite all of the local star power, the real attraction seems to be the family of feral pigs that has established Big Major Cay as their own. It’s hard to say how many are there—some reports say it’s a family of eight, while others say the numbers are up to 40. However big the band of roaming pigs is, none of them are shy: Their chief means of survival seems to be to swim right up to boats and beg for food, which the charmed tourists are happy to provide (although there are guidelines about the best way of feeding the pigs).

No one knows exactly how the pigs got there, but there are plenty of theories. Among them: 1) A nearby resort purposely released them more than a decade ago, hoping to attract tourists. 2) Sailors dropped them off on the island, intending to dine on pork once they were able to dock for a longer of period of time. For one reason or another, the sailors never returned. 3) They’re descendants of domesticated pigs from a nearby island. When residents complained about the original domesticated pigs, their owners solved the problem by dropping them off at Big Major Cay, which was uninhabited. 4) The pigs survived a shipwreck. The ship’s passengers did not.

The purposeful tourist trap theory is probably the least likely—VICE reports that the James Bond movie Thunderball was shot on a neighboring island in the 1960s, and the swimming swine were there then.

Though multiple articles reference how “adorable” the pigs are, don’t be fooled. One captain warns, “They’ll eat anything and everything—including fingers.”

Here they are in action in a video from National Geographic:

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Pop Culture
The House From The Money Pit Is For Sale

Looking for star-studded new digs? For a cool $5.9 million, Top10RealEstateDeals.com reports, you can own the Long Island country home featured in the 1986 comedy The Money Pit—no renovations required.

For the uninitiated, the film features Tom Hanks and Shelley Long as hapless first-time homeowners who purchase a rundown mansion for cheap. The savings they score end up being paltry compared to the debt they incur while trying to fix up the house.

The Money Pit featured exterior shots of "Northway," an eight-bedroom estate located in the village of Lattingtown in Nassau County, New York. Luckily for potential buyers, its insides are far nicer than the fictional ones portrayed in the movie, thanks in part to extensive renovations performed by the property’s current owners.

Amenities include a giant master suite with a French-style dressing room, eight fireplaces, a "wine wall," and a heated outdoor saltwater pool. Check out some photos below, or view the entire listing here.

The real-life Long Island home featured in “The Money Pit”
TopTenRealEstateDeals.com

The real-life Long Island home featured in “The Money Pit”
TopTenRealEstateDeals.com

The real-life Long Island home featured in “The Money Pit”
TopTenRealEstateDeals.com

The real-life Long Island home featured in “The Money Pit”
TopTenRealEstateDeals.com

The real-life Long Island home featured in “The Money Pit”
TopTenRealEstateDeals.com

The real-life Long Island home featured in 1986's “The Money Pit”
TopTenRealEstateDeals.com

The real-life Long Island home featured in 1986's “The Money Pit”
TopTenRealEstateDeals.com

[h/t Top10RealEstateDeals.com]

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