Tuesday, March 17, 2009

AIG and the Financial Bounce

The DJI bounced up again today, almost to 7400. Financial stocks, including Citigroup and Bank of America, continue to do well.

As far as I know, Citi and BoA haven't accounted for their success. For all I know they could in fact be following a high-risk path to profitability.

But I just thought of another explanation. We know AIG made billion dollar payments to domestic and foreign banks. Neither Citi nor BoA have been mentioned as counterparties, but this BusinessWeek article does list Merrill Lynch, which is now part of BoA. The article goes on to point out that much of these payments will likely be passed on to other domestic banks.
Adam Lerrick, a fellow at the American Enterprise Institute, argues that viewing AIG's counterparties as the final beneficiaries of the government bailout is overly simplistic and probably not correct. It would not be unusual for the banks named in the report to have turned around, Lerrick says, and written a second round of contracts with yet other banks, quite possibly different U.S. players such as Merrill Lynch. In today's financial system, Lerrick argues, it would be impossible to be certain that the taxpayer bailout didn't eventually come largely back to supporting other U.S. firms.
If that's true (and I have no reason to doubt it), then I wonder how much of the financial sector's recent profitability derives from these AIG payments, which come from taxpayer-funded bailouts? And if these payments are driving Citi's, BoA's, and others success, can that really be called a profit? Or is it just "give a bank a bailout, and they'll profit for a quarter"?