America Buys AIG 33 comments
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This is amazing. As I wrote the other evening, it is as if we are reading financial science fiction.
If the Federal Reserve Bank of New York plans to write an $85 billion check to AIG (AIG), then Treasury market participants should duck for cover. They will likely raise the money by selling Treasury debt from the System Open Market Account. I have no idea how they would do that, but it would be the largest such sale of securities since the dawn of human history.
Why does the Federal Reserve not control 100 percent of the company? Capitalism punishes bad risk. These jokers took bad risk in spades, so they should be wiped out. The common shareholders should be left with nothing. If this was a good deal for the taxpayers, this would have been a private transaction. The very fact that the Fed is involved speaks loudly to us that no private company believes that this is a prudent loan.
Preferred shareholders? If the deal calls for making them whole, I ask why. There does not seem to be any reason to bail them out.
Bondholders? They should be forced to take a haircut. This is not FNMA (FNM) or Freddie Mac (FRE) issuing debt for 40 years with a wink from the Treasury Secretary and the implied backing of the Government. This was a completely private enterprise. AIG debt could have been purchased earlier today for cents on the dollar. To reward the holders of that debt truly creates a windfall profit.
The Federal Reserve is careening down a very slippery slope. The risks of that joyride are understandable and worthwhile if they exact a financial pound of flesh from those at AIG who so bungled their mission. On the surface, that does not appear to be the case here.
Update: The term of the loan is 24 months. The interest rate is three month Libor plus 850 basis points. The loan is collateralized by all the assets of AIG and its subsidiaries.
The taxpayers now own 79.9 percent of a gigantic insurance company.
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This article has 33 comments:
As far as the common, that leaves 13.5B shares outstanding which will lead to what market cap?
From my perspective, this seems like the govenment has a chance to make out very well on this deal from a communist/capitalist point of view. They are the only ones able to come up with the 85B and if AIG survives, then there 80% shares will be worth a LOT...in addition to getting repaid the 85B.
Kinda like when that Saudi back in the 90s bailed-out C
All right, I've had it! Everyone keeps talking about "the fed" and "the government" like it is some 3rd party. The government is US, it's you and me. It's our retirement, our future, our children's future, our current and future economy, belonging to "we the people of the United States of America" !
Why do "we the people" truly need to spend our hard earned dollars to bail out a company that has made poor decisions with its investments and risks? Since when did this become the job of "we the people"?
Yes, AIG has far reaching tendrils in economies around the world, however, each investor, each country, each individual, each business took a risk when they invested with this company and the investments they have made.
Is "the government" going to pay the individual investors who have lost money on our retirement accounts, our personal savings? No I don't think so. Investment in anything other than a bank involves risk.
If "we the people" continue to bail out corporations who make decisions to hedge themselves in risky and marginal areas we are on our way to a different kind of America. The kind of America where big business is rewarded for bad business decisions because their "tendrils" extend so far.
America needs to focus on bringing in industry and alternative energy and creating an economy that works for "the people" who live and work here in the United States.
The Constitution does not call for the bail out of "corporate entities" this is an outrage! This the absolute slap in the face to those of us who faithfully pay our taxes- to bail out an insurance company with MY MONEY - SHAME ON US, EVERY ONE OF US! We are "the fed" Let everyone know if you are as outraged as I am. This is not what my tax dollars are for!
Yesterday,I bought 300 aig for about $5,but I knew it was a crapshoot...
The market's only been telling people for over a year that there were problems in the credit market.
Lehman can fail, but AIG somehow can't because of potential problems that may result? Where is the actual proof of the financial armageddon that will result from letting people make bad decisions and having to live with it?
Let these companies fail, show them that there are consequences to there actions. If it throws the system in turmoil for a while, at lest it ends the perception that no matter how bad you screw up the government will come to you rescue.
Seems questionable that there wasn't funding available to Lehman Brothers but somehow it's there for AIG. Why should one company be spared and the other left to die when they both made the same bad bets on the same instruments.
If AIG folds, the fallout will ripple throughout the American economy. Yes, some assets (equity & debt) have the risk of default or principle evaporation priced in quite explicitly (or even implicitly). In the case of CDS contracts, these are CONTRACTS, whose prices are derived like options--to put it simply, they're linked to the underlying debt quotes with a time value influence. There's some debate as to the pricing model for CDSs, but no conversation includes the risk of counterparties not honoring their contractual obligation. If AIG folds, both speculative traders of CDSs and [proper] investors who hedge with such credit insurance will lose. These hedgers and speculators include everyone from Morgan Stanley to Jane Doe.
MS failing obvi hurts our economy, the dollar, etc. We have no sympathy for them cuz they're a corporation and the perception is thus that they used such derivatives more often to speculate than to transfer risk. Jane Doe is a one of many taxpayers who took proper measures to protect herself against losing a lot of money upon the occurance of a "credit event."
The end result: Jane Doe/the taxpayer gets hit twice by the disappearance of their insurance premiums & protection, plus the loss of their US$ purchasing power.
If the government doesn't bail out AIG, et al, then our "safe," sacred personal savings in the bank becomes threatened. Why? because FDIC has to honor lots of deposits. FDIC is skimming the bottom of its piggy-bank, and it'll have to turn to the government to raise cash after another big failure. Thus, the onus falls on the government and the taxpayer one way or another.
I think the crime is that there exist corporations that're so large that they can control so much of our economy. I guess that's just unbridled capitalism, but with anti-trust/monopoly/wh... restrictions, it's amazing that such "crucial" firms exist to whose welfare ours is linked.
But they're not!
If The FED made the loan to AIG, just who actually owns the 80% stake in AIG now? Is it truly the government, or is it the FED? There IS a difference between the two.
If the US Treasury had made the loan, then yes, the government would be expected to own the shares.
Also....a thought from the "don't trust bankers" club:
Any guesses as to who was buying up AIG bonds at 30 cents on the dollar all day? Even money says that many of the FED member banks were in there grabbing fistfulls of the things, either expecting or knowing that they'd be made whole and worth a LOT more by the end of the day.
Triple your money overnight by guaranteeing the bonds you just bought for pennies on the dollar with a loan that got you 80% ownership in the company that borrowed from you.
Good work if you can get it.
Actually, it's too big for a private company to take on, particularly in this market when there is no money to lend. The articles I've read have described this as a collateralized bridge loan to get AIG through this liquidity crisis. Apparently, there is enough assets there to collateralize this when the assets are liquidated in an orderly fashion as opposed to a distress sale. For providing this bridge facility, the government gets 80% of the company. If it works out as planned, it's a good deal and hopefully stops a potential worldwide financial crisis.
(to the melody by Bob Dylan)
Come gather round 'bankers'
Wherever you roam
And admit that the waters
Around you have grown
And accept it that soon
You'll be told to go home
If your job to you
Is worth savin'
Then you better start swimmin'
Or you'll sink like the DOW
For the markets they are a-changin'.
Come hedgefunds and bear traders
Who prophesize and sell short
And keep your eyes wide
The chance won't come again
And don't speak too soon
For the markets still in spin
And there's no tellin' who
That it's namin'
For the markets they are a-changin'.
Come senators, congressmen
Please heed the call
Don't stand in the doorway
Don't block up the hall
For he that gets hurt
Will be he who has stalled
There's financial meltdown outside
And it is ragin'
It'll soon shake your windows
And rattle your walls
For the markets they are a-changin'.
Come Central Bankers
Throughout the land
And don't criticize
What you can't understand
Those OTC derivative books
Are beyond your command
The old road is
Rapidly agin'
Please get out Bernanke and Paulsen
If you must bail out your friends
For the markets they are a-changin'.
it is far easier and less costly to save an existing entity and its jobs than to create and build another one.
if we allow companies to collapse now just because they cannot get to a credit window (this problem they did not create) or because accounting systems have changed (they new this was coming) or the due to the collapse of the investment banking system - when the economy rebounds these jobs and profits will exist outside the USA.
the war has started.
Naziism was a form of fascism. It came from merging government with business. When we merge business with government, is it not still fascism? (I did not say Naziism, which has added racial overtones.)
Second (and a reflection of the above). We have a AAA credit rating because it is expected that a government act in a governmental function, and that only. If the federal government becomes a giant mutual fund, will anyone give us an AAA rating? Even if we optimistically assume, as some posters do, that we got a great deal, what about our next portfolio addition? If Obama wins, do we invest in a Chicago ward heeler's liquor store? Or buy 79.9% of the Arizona Diamondbacks?
Third. This is not a bailout by the Fed and the US government. The whole derivatives trade arose because they were exempted from US government regulation. Why not let the people that paid private people to guard against other people's defaults lose, just as the bank would lose when my mom co-signed my car loan and both of us couldn't pay? They are sweeping a Frankenstein they have created under all of our doors while our back was turned. Note that there has been no hue and cry to regulate Credit Default Swaps.
Last, (and hardly least), a lot less damage could be done, and future follies insured against, by instead nationalizing the Federal Reserve. Of Course they are bailing out Wall Street. The Fed is a corporation federally chartered, but not federally owned. It is owned by the commercial and investment banks that bought its stock in 1913.. Bernanke is not as stupid as he looks. The reason he makes all those "mistakes" to bail out banks is because he, as the chairman of the bank's bank, has a fiduciary duty to act in thestockholder's best interests, not ours. The bank needs to be nationalized. It would not cost much either. See the Federal Reserve Note in your wallet? That means the Fed owes you a dollar. All we would have to do would be to make them pay the note by cancelling out all those treasuries they own. Most of the natinal debt would be liquidated. Any monies left for the bankers could be made subject to seizure to pay judgments on suits filed by us for damage to our businesses and lives by fraud. And if a conspiracy could be proven, we could seize the banks which own the Fed for their actions.
Don't be surprised if there are more bailouts. If their interests and ours diverge, when they screw us in favour of their stockholders it is their duty. So commend Bernanke for doing his duty, don't criticize him. Why would Greenspan, when we had the lowest interest rates in 40 years, tell us to go out and get an adjustable instead of a fixed rate mortgage? I suppose that was just another mistake.
Disagree with "bbzz24", The fed is just like a clean up crew, after the clean up, the business will be returned to the private sector but run by good & honest people. Compare to the communist country, it's like Day & Night.
I bet you don't know anything about that at all.
CrossProfit
You'll be bailed out IF you are:
-Too large to fail (FNM, FRE)
- Have too many complicated + exotic derivatives that could have a domino effect on the financial system (BSC, MER)
- Have bet millions of depositors/ insurance policyholders money in a wild gamble (AIG)
While...
- If the institution hasn't made too many wild bets and not many people and institutions would suffer from your failure, you are not worth rescuing (LEH)
Don't do a petty theft.... Do a HUGE crime...
The AIG has over one trillion dollars worth of assets globally and it will repay the Treasury's loan.
Allowing company to fail would have an impact on 125,000 workers employed by the AIG directly or otherwise.
There was a potential for systemic global risk with unquantifiable financial losses.
Judging by the record short opent interest,we will hear from the bears a lot of "political" nonsense and criticism about the latest financial crisis resolution.
The loan by the Treasury was a great and unexpected response.
Since we do not know the terms of the warrants,depending as to how and when the Treasury Exercises them,we will still likely see a significant rally (common shares) in the period ahead.
The crocodile tears for the taxpayers are reflective of ignorance(intentional or not).This deal will not cost the taxpayer a penny.The Tax payer will make a "usurous" rate of return,Libor plus 800bp.
You seem to be forgetting too quickly who was at the helm: Maurice 'Honest' Greenberg. I still wonder how he and Franklin Raines are not in jail for accounting fraud. The whole Arthur Andersen was indicted, but some well connected CEOs seem to always get a favorable interpretation of the law. And you think that their leutenants are not the same stock?
AIG gets almost the same loan as Freddie/Fannie who in turn have 2.5 times bigger balance sheets each.
And this 'viable business' was just downgraded. Since the Fed had seized it, it would be normal to downgrade it further because all existing debt is junior to the Fed's and fully collateralized by its assets. Even if you count as money good thier CDS, there is still only 90 cents on the dollar left for debt holders.
Just a few personal observations and thoughts (bash away):
I'm really disappointed at how blindly focused our concept of maximizing shareholders wealth has become increasingly focused on the short term and completely thrown out the possibility of long term or the lack of thought put into long term consequences.
This AIG rescue is two fold move by the Fed. 1) To patch up a leak in a massive dam (as they did with Bear Sterns, FNM, FRE). 2) They're getting what they've always wanted - more and more control over the financial system. They're gambling heavily though and again only time will tell what will happen.
Because the bank should've put in its due diligence and secured collateral before it gave you that loan. If you don't pay that car loan, they get that car. It's straight up stealing to sign, sell, then not honor a CDS contract--that has no stipulation or pricing consideration for that contract not being honored.
On Sep 17 02:41 AM will799 wrote:
> Some of the posters think this is a great day because the US government
> got a great deal. This is horrid political theory and horrid economics.
>
>
> Naziism was a form of fascism. It came from merging government with
> business. When we merge business with government, is it not still
> fascism? (I did not say Naziism, which has added racial overtones.)
>
>
> Second (and a reflection of the above). We have a AAA credit rating
> because it is expected that a government act in a governmental function,
> and that only. If the federal government becomes a giant mutual fund,
> will anyone give us an AAA rating? Even if we optimistically assume,
> as some posters do, that we got a great deal, what about our next
> portfolio addition? If Obama wins, do we invest in a Chicago ward
> heeler's liquor store? Or buy 79.9% of the Arizona Diamondbacks?
>
>
> Third. This is not a bailout by the Fed and the US government. The
> whole derivatives trade arose because they were exempted from US
> government regulation. Why not let the people that paid private people
> to guard against other people's defaults lose, just as the bank would
> lose when my mom co-signed my car loan and both of us couldn't pay?
> They are sweeping a Frankenstein they have created under all of our
> doors while our back was turned. Note that there has been no hue
> and cry to regulate Credit Default Swaps.
>
> Last, (and hardly least), a lot less damage could be done, and future
> follies insured against, by instead nationalizing the Federal Reserve.
> Of Course they are bailing out Wall Street. The Fed is a corporation
> federally chartered, but not federally owned. It is owned by the
> commercial and investment banks that bought its stock in 1913.. Bernanke
> is not as stupid as he looks. The reason he makes all those "mistakes"
> to bail out banks is because he, as the chairman of the bank's bank,
> has a fiduciary duty to act in thestockholder's best interests, not
> ours. The bank needs to be nationalized. It would not cost much either.
> See the Federal Reserve Note in your wallet? That means the Fed owes
> you a dollar. All we would have to do would be to make them pay the
> note by cancelling out all those treasuries they own. Most of the
> natinal debt would be liquidated. Any monies left for the bankers
> could be made subject to seizure to pay judgments on suits filed
> by us for damage to our businesses and lives by fraud. And if a conspiracy
> could be proven, we could seize the banks which own the Fed for their
> actions.
>
> Don't be surprised if there are more bailouts. If their interests
> and ours diverge, when they screw us in favour of their stockholders
> it is their duty. So commend Bernanke for doing his duty, don't criticize
> him. Why would Greenspan, when we had the lowest interest rates in
> 40 years, tell us to go out and get an adjustable instead of a fixed
> rate mortgage? I suppose that was just another mistake.
Really simple. Sign a piece of paper to print money we must pay back, charge us interest to do it, then use the money to buy a company where your friends ran it into the ground with fraud and deception (uh, er, I mean accounting off-book "assets"), and stress how we did it for the country.
The Fed's fraud upon the American people will continue until.... we take back ALL the money stolen by the exec's through bonuses/salaries/optio... convict them of fraud, and either lynch 'em or throw away the key.
No deterrent, no change.