By Pam Martens and Russ Martens: September 16, 2022 ~
Yesterday, mainstream media was touting that the largest Initial Public Offering (IPO) of the year, Corebridge Financial, had just finished its first day of trading. The IPO was priced at $21 and closed at $20.73 (ticker: CRBG), not an illustrious start.
Corebridge Financial is the life insurance and annuity business of the giant insurer, AIG. In 2008, AIG required a $180 billion bailout from the U.S. government because of its derivatives and stock loan deals with the big trading houses on Wall Street – many of the same ones that are now underwriting this IPO.
If that’s not enough to make you suspicious, consider the fact that the word “derivatives” is mentioned 371 times in the prospectus for Corebridge Financial. (More on that in a moment, but first some background.)
When the Financial Crisis Inquiry Commission wrote its final report for Congress, mapping out the major causes of the Wall Street financial collapse in 2008 – the worst since the Great Depression – it devoted an entire chapter to AIG. Two emails in that chapter stand out. One email was sent on the evening of September 12, 2008 – three days before Lehman Brothers filed bankruptcy. It came from Hayley Boesky of the New York Fed and was directed to William Dudley, an Executive Vice President at the New York Fed at the time who oversaw its trading operations. Dudley would become President of the New York Fed on January 27, 2009 when its then President, Tim Geithner, was tapped by President Obama for Treasury Secretary. The email read:
“More panic from [hedge funds]. Now focus is on AIG. I am hearing worse than LEH [Lehman Brothers]. Every bank and dealer has exposure to them.”
Another email followed just before midnight. It came from New York Fed Assistant Vice President Alejandro LaTorre and was directed to Geithner, Dudley, and other execs at the New York Fed. The email read:
“The key take-away is that they [AIG] are potentially facing a severe run on their liquidity over the course of the next several (approx. 10) days if they are downgraded [by their credit rating agencies]. . .Their risk exposures are concentrated among the 12 largest international banks (both U.S. and European) across a wide array of product types (bank lines, derivatives, securities lending, etc.) meaning [there] could be significant counterparty losses to those firms in the event of AIG’s failure.”
On the same day that Lehman Brothers declared bankruptcy, Monday, September 15, 2008, the rating agencies brought down the hammer on AIG. The ratings downgrades were even worse than anticipated. AIG’s share price collapsed in one trading session by 61 percent to $4.76. By Wednesday of the same week, AIG’s stock traded at an intraday low of $1.99.
The Financial Crisis Inquiry Commission report notes that AIG’s “previous eight years’ profits of $66 billion would be dwarfed by the $99.3 billion loss for this one year, 2008.”
After much public uproar, a chart would eventually be released showing that more than $90 billion of government bailout funds earmarked for AIG went to pay off its derivatives and stock lending agreements with the big trading houses on Wall Street. (See the chart here.)
The Financial Crisis Inquiry Commission summed up its analysis of what went wrong at AIG as follows:
“The Commission concludes AIG failed and was rescued by the government primarily because its enormous sales of credit default swaps were made without putting up initial collateral, setting aside capital reserves, or hedging its exposure—a profound failure in corporate governance, particularly its risk management practices. AIG’s failure was possible because of the sweeping deregulation of over-the-counter (OTC) derivatives, including credit default swaps, which effectively eliminated federal and state regulation of these products, including capital and margin requirements that would have lessened the likelihood of AIG’s failure. The OTC derivatives market’s lack of transparency and of effective price discovery exacerbated the collateral disputes of AIG and Goldman Sachs and similar disputes between other derivatives counterparties. AIG engaged in regulatory arbitrage by setting up a major business in this unregulated product, locating much of the business in London, and selecting a weak federal regulator, the Office of Thrift Supervision (OTS)…
“AIG was so interconnected with many large commercial banks, investment banks, and other financial institutions through counterparty credit relationships on credit default swaps and other activities such as securities lending that its potential failure created systemic risk. The government concluded AIG was too big to fail and committed more than $180 billion to its rescue. Without the bailout, AIG’s default and collapse could have brought down its counterparties, causing cascading losses and collapses throughout the financial system.”
With that as background, consider the following paragraph that appears in the current prospectus for the IPO of AIG’s spinoff, Corebridge Financial:
“…we may be required to post additional collateral in respect of our reinsurance and derivatives liabilities due to regulatory changes from time to time. The need to post this additional collateral, if significant enough, may require us to sell investments at a loss in order to provide securities of suitable credit quality or otherwise secure adequate capital at an unattractive cost. This could adversely impact our business, results of operations, financial condition and liquidity.”
Caveat emptor, let the buyer beware.