Rigged

Massive Bank Shareholder Dilution Ahead

Let's put some perspective on your statement of "Can the likes of Bank of America (BAC) and Citigroup (C) continue to skyrocket with the US government diluting the private investors by converting TARP loans to common stock?".....Yes, the banks have really "skyrocketed" from a whoppying negative 95% to a negative 75% or negative 50% for the last year. Could it just be that the appropriate long term valuation is somewhere between being down 95% to being down 50%?

Earnings Preview: Bank of America

Why are reporters/posters like you only quotes analysts that predicted that the banks earnings are not sustainable or points to a worser case scenario. Why not quote any of the analysts (like Bove) who indicate that banks stocks are a good deal now. The "negative" analysts have been wrong for the past 6 weeks.... if one have listened to them, one could not ride BAC from $3 to the high $10s today. Could it be that these analysts (like Mayo) may have missed the boat and are just plain late to the "short' party?

Replace Ken Lewis with a Lawyer? What a Swell Idea

Your post lacks any basis or support facts. If you can point out what Moynihan's weaknesses (or lack of experience) are then you can make your point. Just because one is a lawyer does not mean that one does not have any business sense or one does not have any leadership abilities. There is nothing in your post to support that Moynihan is not up to the task...except for being a lawyer. What if a lawyer has technical degree and an MBA and also has run a bunch of businesses? Do you homework please.

A Cool $200 Billion for Bank of America?

Its misleading to say that BAC has taken $163B of bail out money in 2 rounds. BAC took $45B. The remaining $118B is a Govt guarantee which BAC paid a premium of a few billions for . The Govt. guarantee is the same as BAC buying a premium for insurance. It does not mean that BAC has received the $118B. If a company paid $5B for $100B of insurance, I would not say that the company has received $100B.

BofA, Wells Fargo: No Equity After Accounting for Bad Loans

Also...M2M2 has only been implemented for the last couple of years...and look where it has gotten us....a big bubble (with inflated value) on the up side and now a big recession (with depressed value) on the down side.

People are talking like if we do away with M2M, we dont have another system or model in place to do valuation. How about using the models that we have been using for the banks for the past 50 years or so? Like cash flow models, annuity models, and present value of cash flow, etc....

BofA, Wells Fargo: No Equity After Accounting for Bad Loans

In M2M even PERFORMING loans (i.e. bank getting positive cash flow from interest payments) are being forced to mark down to the current depressed market value. So banks are forced into take writedowns on PERFORMING loans that are actually making money for them.

If you have a rental property that is making you a positive cash flow of $300 per month. Would you sell it at a current market value if it means you will lose money (i.e. having to put up some extra money to cover the difference in the mortgage owed and the sale price?)

Why AIG Had to Be Nationalized

What if AIG proposed the following? Wouldn't this be better than nationalization for tax payers?

- Govt. would buy some of AIG assets at fair market value (non distressed valuation...it could be based on profits/cash flow/revenues, etc.)

- In exchange Govt would reduce the loan that AIG owes to the Govt by the amount that the Govt is paying for the assets. Govt. would realized any appreciation in its share of the assets if and when it can be resold to third parties (via regular sale for IPOs).

- In effect, Govt would be buyer for the assets that AIG is selling and paying it with the existing Govt loan to AIG.

Example, AIA Asset (Asia Life).

- AIG value this at $20B to $40B. Lets say fair valuation (non distresed is $30B).

- AIG sells 49% to Govt. at $15B. The principal of the loan from Govt to AIG would be reduced by this $15B amount.

- Govt. would get 49% of the earnings from AIA moving forward.

- Govt. could sell this 49% stake at a later time if market conditions improve.

- AIG and Govt could decide to IPO AIA and Govt would get its 49% back through the IPO.

How this would help AIG? It would be similar to AIG selling AIAI to a third party at a fair valuation and paying back the Govt.

How this would help Govt? Govt. would now owe 40% of a profitable business with earnings. Govt. gets paid back on the loan. There is potential for appreciation in asset value or at a minimum the asset would still have a positive valuation . Govt's liability would be reduced by $15B (example used for AIA).

Without doing it this way, Govt may never get paid back. At least this way the Govt gets its hand on the profitable assets.

The Tyranny of the Shareholders

Any deals (or renegotiation) that would make AIG's financial more attrative is a better situation for the Govt. in the long run. AIG will be able to attract more private equity investment, retain on the value of the assets that it will be selling (on it own terms) and the Govt. would get their money back faster. The Govt. needs a "viable" AIG for it to get paid back.

AIG: The Fed Is a Really Bad Trader

"Now comes the part where the Fed makes a really bad trade for itself (and for the taxpayers) in its effort to bend over backwards to protect the banks. Under the terms being offered, the Fed will purchase these CDOs (which are worth who-knows-what on the dollar) at par value! And here's the kicker; according to the WSJ the banks get to keep the collateral AIG had to post, much of which came when the government made funds available to AIG in September!!"

Could you have misinterpreted the information above? Maybe it should be "the banks get to keep the colleteral AIG had to post and with them getting 50 cents on the dollar they are made whole = par?" Otherwise, you seem to imply that the banks will get "par" plus collateral which would not make any sense at all.

AIG: Paulson's Folly

You missed the point completely.

The way the first "bailout" was structured, it was so onerous that AIG continued to face downgrades and further downgrade. The FEDs charged too high an interest and took 80% without any capital investment (since all the money was provided as a loan). The rating agency saw through the terms of the first bailout and all agreed that it is not good for AIG (i.e. how can AIG get enough revenue to pay the ongoing interest and thus AIG has no leverage in selling assets). Thus they continued to downgrade AIG and thus causing more collaterals to be required which then caused more downgrades...etc...

With the new deal, AIG financials (operating cash flow, cash on hand, etc.) have been upgraded. The agency will now be able to say that the new terms gives AIG a reasonable chance to continue to operate and pay the interests to the FEDs from its ongoing revenue. AIG will also be able to pay the FED back the principals when it has asset sales. This will mean that the rating agencies will be less inclined to downgrade AIG further.

Now that the new term is 5 years, AIG will have leverage in dealing with 3rd parties when it sell its assets. With the FED owning 80% of AIG, this would benefit the FED also.

Why Would Treasury Cut AIG's Interest Payment?

If the deal (bailout) is restructured and AIG's stock price goes up to $10 per share (from $2s today). That means that Wall street likes the deal. AIG is more attractive to investors. With the FED still owing a large stake in AIG (TBD based on the restructured deal), how is this bad for the FED and tax papers?

Why Would Treasury Cut AIG's Interest Payment?

In addition to my post above, I think that when the FED did the $85B line-of-credit, they wanted to look "tough" since they have just let Lehman go and everyone thought that their would be no more bailouts. After seeing the true effect of Lehman's bankruptcy and the FED deciced that they need to bail out AIG....but they need to show the public and taxpapers that its not really a bailout for AIG's as a company or for shareholders....hence the "tough" stance.

All that should be changed now since now the FED is bailing out everybody.

Why Would Treasury Cut AIG's Interest Payment?

Lowering the interest rates will make AIG cash flow and financial looks better. This would then may result in some credit upgrades and remove the needs for collateral.

Your assumption that under the current model AIG is less likely to default is not correct. If it was, the credit agencies would not be downgrading AIG and is looking to do more downgrade. The credit agencies only see the terms of the $85B line-of-credit and they are looking the other way regarding your assumption that everything at AIG is backed by the the Govt.

You must agree that this loan at 8.5% + libor for drawn portions and 8.5% for undrawn portion is onerous and not consistent with any other Federal loans in place. Even if you go back to the old Chrysler bailout. Or if you look at FNN or FRE or what is offer under TARP.

If AIG financial and operating cash flows looks better, maybe it can raise capital on the open market (for its remaining 20%) and it will have more leverage in selling off assets to pay the Govt.

Its a win-win for the Fed and AIG shareholder if the $85B loan is under better terms. AIG market cap goes up because its a loan that AIG can realistically pays off. With AIG market cap going up the Govt.'s 80% shares goes up also.

What's Wrong with the AIG Bailout Model?

Sieraromero -- The terms of the "bailout" are as follows:

- $85B line of credit for 2 years.
- AIG pay a 2% upfront commitment fee (reasonable..its like paying 2 points)
- AIG pays 3% + Libor = 11.5% for any balance that it draws on (a little high but still ok)
- AIG pays 8.5% on all UNDRAWN line of credit..(a little harsh here..Why call it a line of credit if you going to have to pay on the undrawn balance at 8.5%)
- AND...Govt get 79.9% preferred share (without giving the existing shareholders an "effective" vote since their vote are diluted now.)

Govt indicated that if AIG fails the financial system may collapse...Wouldn't that mean that it will hurt ALL taxpapers? So Govt do this to bail out AIG? But who really gets pay out at AIG? Not the shareholders, the CEO is gone...Isn't it really the Govt bailing out the financial system and taxpapers at AIG's shareholders' expense?

What's Wrong with the AIG Bailout Model?

I am just saying that shoulding shareholders get to decide? If its such a "good" deal while also helping out to steady the financial systen..what's the govt. afraid off in letting the existing shareholders vote on the plan? Keep in mind all the creditors of AIG (like bondholders who made a bad investment too) gets bailed out 100%.