Foreclosing on AIG: What Can We Learn from This? [View article]
This article in rather misleading. There are in fact potential buyers for the spun off units, including serious interest from Met Life. The American taxpayer is very likely recover some part of the "investment" in AIG.
A side note on SIVs and Enron: in that case, if I recall, Enron executives were creating entities which borrowed money from banks and other lenders, with the loans guaranteed by Enron. The entities then purchased Enron shares with the proceeds. Needless to say, the loan guarantees were not properly disclosed and the entities were not consolidated into Enron's financial statements.
In effect, Enron was taking on debt and calling it equity, which materially changed their capital structure, misleading lenders and investors. This also had the effect of making leveraged bets on their own shares. When the market value of shares started to crater after the dotcom bust, the entities began to default, the scheme fell apart, and the entire company imploded. Pretty clearly an egregious abuse of a legitimate financing strategy. Does that, however, mean that special purpose entities should always and everywhere be prohibited? I think not.
Foreclosing on AIG: What Can We Learn from This? [View article]
A side note on SIVs and Enron: in that case, if I recall, Enron executives were creating entities which borrowed money from banks and other lenders, with the loans guaranteed by Enron. The entities then purchased Enron shares with the proceeds. Needless to say, the loan guarantees were not properly disclosed and the entities were not consolidated into Enron's financial statements.
In effect, Enron was taking on debt and calling it equity, which materially changed their capital structure, misleading lenders and investors. This also had the effect of making leveraged bets on their own shares. When the market value of shares started to crater after the dotcom bust, the entities began to default, the scheme fell apart, and the entire company imploded. Pretty clearly an egregious abuse of a legitimate financing strategy. Does that, however, mean that special purpose entities should always and everywhere be prohibited? I think not.