The Nationalization of AIG

Why don't we just do it all now and get it done with? Why piece by piece?

Let's have the government run insurance companies, auto companies, banks, mortgage companies, home builders, brokerages, gas stations, and for good measure let's throw in pizza parlors.

Here is the rumor (it's true).

Bloomberg is reporting Treasury Said to Be Considering AIG Conservatorship.

The U.S. Treasury is considering taking over American International Group Inc. under a conservatorship as one option to address the insurer's crisis, according to two people briefed on the discussions.

Executives from AIG, bankers and Treasury and Federal Reserve officials are meeting today on the company's situation at the New York Fed. A number of options are under being discussed to fill a shortfall of $75 billion to $100 billion in funding, one of the people said. The talks are continuing, he said.

Goldman Sachs Group Inc. and JPMorgan Chase & Co., which have been leading efforts to find a private-sector solution, informed the Fed that such an effort would be difficult, the person said. Under another option, the Fed would extend a loan to New York-based AIG, according to a person informed of the matter.

Notice how shortfalls have increased from $40 billion, to $70 billion, to $100 billion. Is there any reason for it to stop there?

Two Scenarios

1) AIG has been fraudulently tapping its insurance subsidiaries

2) AIG simply screwed up its main corporate office

If it's #1 there should be prosecutions, if it's #2 then AIG should be allowed to go under. The Fed can deal with the aftermath. Nowhere should taxpayers be footing the bill for stupid corporate mistakes.

While typing this post futures suddenly reversed by about 20 points in a matter of minutes. Bloomberg just announced the Treasury is going to take AIG into Conservatorship.

Here is the Bloomberg report: Fed Readies A.I.G. Loan of $85 Billion for an 80% Stake

In an extraordinary turn, the Federal Reserve was close to a deal Tuesday night to take a nearly 80 percent stake in the troubled giant insurance company, the American International Group, in exchange for an $85 billion loan, according to people briefed on the negotiations.

All of A.I.G.’s assets would be pledged to secure the loan, these people said, and in return, the Fed would receive warrants that would give it an ownership stake. Stock of existing shareholders would be diluted, but not wiped out.

If the Fed takes a controlling stake, it is likely that it would want to replace A.I.G.’s board as well as its chief executive and chairman, Robert B. Willumstad.

Conservatorship or Nationalization?

If you guessed Nationalization you guessed correctly. It is highly unlikely this will be "temporary". As with Fannie and Freddie, common shareholders are going to get wiped out and taxpayers are going to be on the hook. It will not stop at $85 billion. Lord only knows what this will cost.

Comments

[joe verneka:]

Welcome to the United States of Zimbabwe. Maybe President Bush can extend his term to "life" also. Nationalization is something that investors worry about when investing in the third world, not the so called leader of the free world. Americans should be ashamed.

2008 Sep 16 10:13 PM

[Jackson Cash:]

United Socialist States of America -- move over Russia and China, we're right behind you!!

2008 Sep 16 10:50 PM

[What A Farce:]

What about the CDS situation?? Like for FNM/FRE, wouldn't this constitute a credit event for purposes of the CDS?

2008 Sep 16 10:59 PM

[Abstract Ba...:]

It seems there can be only one way they will play this out. They pushed marking to market Fannie and Freddie's debt until the end of '09 and now they have pushed AIG's out until the end of '10. It's unpalatable and not in the plan to put FNM's/FRE's debt in the government budget and they will liquidate AIG and never exercise their option for 80% ownership(of the debt most importantly). They simply will have to print/inflate massively in all sections of the economy over the next 2(or n with extensions) years to trivialize this insurance debt with all the global economic consequences that could/will entail. Get in TIPS soon until of course they cancel the program as insolvent!

2008 Sep 16 11:05 PM

[businessguy88:]

Please note that this technically is not a nationalization. The Fed is a private corporation. And yes they're using US Dollars to prop up this company. The Federal Reserve Act is the worst law in the history of this country.

2008 Sep 16 11:37 PM

[The-Honest-...:]

Hey,

are you sadists?

Do you have any idea what would happen if AIG failed? The FED did the right thing, it's even foolish to discuss the merit of the deal.

2008 Sep 16 11:55 PM

[Romeo Fayette:]

You know what, I hate socialism too. BUT, I think the government is doing pretty good to pick and choose its spots to intervene. Yeah, we should criticize the lawlessness that got us in an overleveraged, derivative driven state, but now that we're here, what else can the government do? The onus falls on the taxpayer one way or another.
Yes, FNM/FRE were out of control, but letting them fail had consequences. The impact upon our housing market and financial system is obvious. Consider, also, all the Foreign Investment and Soverign Wealth Fund monies held in GSE debt. Such investment finances our national debt. Defaulting on that debt threatens the continual inflow of FDI. How does that suit our taxpayers?
The disappearance of AIG would also have chain-reaction economic resonance. LEH... not so much.
I'm just going to end it here: bottom line, the taxpayers are better off with the FNM/FRE takeover; same with AIG (not to mention that shareholders have only been diluted, not wiped out as Mr. Shedlock remarks). Add on top of that the unrealized gains 1) the FRB already enjoys from its AIG equity stake, 2) the FHFA will enjoy from its FNM/FRE equity.

2008 Sep 17 12:29 AM

[bsharvy:]

" I think the government is doing pretty good to pick and choose its spots to intervene. Yeah, we should criticize the lawlessness that got us in an overleveraged, derivative driven state, but now that we're here, what else can the government do? "

What else the government can do is: Be fair. Tell bond/stock holders of Lehman that the government should pick & choose who to screw and who to rescue. Tell the shareholders of smaller mortgage insurers that its OK for the government to rescue the bigger, richer corproations, but the little guys can eat it.

BTW, corporate welfare isn't socialism.

2008 Sep 17 12:43 AM

[Vobogeck:]

Who let the geniuses at the investment banks securitize mortgages to people with no income in the first place? The lax US regulators, acting for the government. Who should pay? The US government.

It is a shame that the US exported these junk securities all around the world, and it is a shame that the geniuses at the investment banks don't have to repay their bonuses.

Wall Street, the financial capital of the world, says CNBC.

More like the financial laughing stock of the world...

2008 Sep 17 12:50 AM

[debtacid:]

So I guess we are in for a huge pump tomorrow to celebrate the AIG bailout! Got to get all the sheeple on the bailout bandwagon! The people may be suffering but they will be happy to see that the crooks who caused this mess are doing just fine. Oops! it’s an election year. Maybe we should let Wall street suffer a little to show we are all in the same boat? Nahh…

2008 Sep 17 01:28 AM

[Kiisu:]

"it's even foolish to discuss the merit of the deal"

Really?

All statements must be viewed with skepticism and be subject to scrutiny. Central or authoritarian regulation of debate, study and inquiry makes truth difficult if not impossible to find.

If it is foolish to discuss the merits of anything, then we are in worse shape than I had imagined...

2008 Sep 17 01:36 AM

[mlyn:]

Herbert Greenberg was on the Charlie Rose Show. He was former Chairman and CEO of AIG until he was forced out in 2005 by Eliott Spitzer. His company has a 12% shareholder interest in AIG. He described AIG as a national asset because of its extensive insurance and finance interests around the world. He said risk management under his watch never would have led to a mark down in the rating.

2008 Sep 17 02:29 AM

[fxtrader07:]

i wonder what the ratings agencies will do now. upgrade?
it's all a frace - especially the ratings agencies. They should be abolished alltogether. The continue to add negative value to the markets

2008 Sep 17 03:52 AM

[fxtrader07:]

Actually the u.S. govt got itself a very very sweet deal. For a loan(!!!) they get a 79.9% equity stake(!) in a profitable company that has trouble only in one segment of its operations. And, given sufficient time, these troubles will ease and cause a huge write-up of many billion $ that had been written down on mark-to-market accounting. It#s almost unbelievable that AIG agrred to this deal and rejected others before. C'on, they will be able to repay the loan which is covered by all of AIG's assets anyway. This is no bail-out, this is expropriation of the shareholders of AIG by the govt.

2008 Sep 17 04:35 AM

[bsharvy:]

It's probably a meaningless stake, since all those profitable assets have to be sold to pay the debt. The main thing is get the $85 billion back. If there's a profitable company left at the end, that's gravy.

2008 Sep 17 04:53 AM

[farmer448:]

I find it funny that the great free marketers, the republicans, always screw up the economy. Remember the 1970's with tricky dicks wage and price controls. Then in the 1980s we had the resolution trust where the government let the S&Ls self-regulate. Now in the 21st century, the heads I win tails the taxpayer looses game is being played by the republicans with the unregulated financial instruments.

It is time for the voter to take government back from the corporation.

2008 Sep 17 09:31 AM

[TinyTim:]

He described AIG as a national asset

now we're getting somewhere re pick & choose.
The Fed is protecting SWF's which could sink the USA in an instant.
Except they would feel the pain too.

2008 Sep 17 12:42 PM

[kurt walter:]

Don't complain about Hugo Chavez taking over businesses. The USA is doing the same crap.

2008 Sep 17 06:06 PM

[Romeo Fayette:]

It's only killing the shareholder if AIG defaults on the repayment of the Fed's $85b loan! The warrents for that 80% stake are collateral for the loan that the Fed can exercise upon nonperformance. If you're still an AIG shareholder and AIG can't shed assets to repay the loan, you--the shareholder--deserve to take a hit for investing in an inept firm!


On Sep 17 04:35 AM fxtrader07 wrote:

> Actually the u.S. govt got itself a very very sweet deal. For a loan(!!!)
> they get a 79.9% equity stake(!) in a profitable company that has
> trouble only in one segment of its operations. And, given sufficient
> time, these troubles will ease and cause a huge write-up of many
> billion $ that had been written down on mark-to-market accounting.
> It#s almost unbelievable that AIG agrred to this deal and rejected
> others before. C'on, they will be able to repay the loan which is
> covered by all of AIG's assets anyway. This is no bail-out, this
> is expropriation of the shareholders of AIG by the govt.

2008 Sep 17 10:50 PM

[greatheller:]

Fools! I hate socialism, including the New deal / Great Society welfare state, as much as anyone. But this is nt socialism, nor is it corporate welfare. This measure was done to prop up the inherently fraudulent Federal Reserve fractional banking system. Whoever said that "credit" is the American Way? This country once had a dollar as good as gold, and no central bank (though there were many attempts to foist one off on the American people). AIG was COMMUNIZED in order to prop up this fractional, "credit" system - NOT to help AIG shareholders. We have been wiped out! The socialist/Keynesian government is terrified of bank runs on their fraudulent system, as well as of the cancellation of millions of insurance policies - which would further undermine systemic "confidence" (hint: strong, solvent entities don't require "confidence" to endure). Please: let ALL AIG shareholders, especially long-term ones, call Congress tomorrow DEMANDING some shareholder protections. At the very least, we, the real owners of AIG, are entitled to the proceeds from the (fire)sale of AIG's enormously valuable illiquid assets - NOT the US Treasury or Fed. Complain to Congress: this is our last chance!!!!!!!

2008 Sep 18 04:11 AM