Tuesday, February 24, 2009
The ongoing AIG debacle
I have to tell you, in all my years of private sector dealings, when a company comes back for more money, particularly when it has missed targets (as AIG did, it claimed the initial loan would be sufficient), the new money, be it debt or equity, comes on vastly more costly terms. And it is simply unheard of to revise an initial deal to be more company friendly. I do not know why the travesty of the kow-towing to AIG's faux needs has not resulted in more ridicule.
What moron negotiated this deal? Why does AIG have an option? AIG is a ward of the state, it really ought to be nationalized, but instead we preserve the fiction that it is a private entity, which means it can loot the public by paying large numbers of executives "retention bonuses". The US debt per AIG employee is $1.4 million. With that level of required repayment, AIG should be on a choke hold. But instead, we allow them latitude that seems completely unwarranted.
And why does "liquidity" matter? This again goes back to the fiction that it is a viable entity. Liquidity in a business backstopped by Uncle Sam is an irrelevant concept. Since the taxpayer will pay whatever it takes to keep AIG afloat, niceties like ratings and liquidity are bogus concepts (if we were in an ideal world, someone at Treasury should have told the rating agencies to quit publishing ratings, but oh no, having no ratings to fall back on would lead to confusion and would hurt AIG. Anyone still owning AIG bonds post the bailout is an adult able to assess the risks, and are not entitled to special treatment. There has been plenty of time for widows and orphans to get out.
I couldn't agree more. Let's put AIG out of our misery.
7 Comments:
By 
, at
Tue Feb 24, 10:28:00 AM:
I can't understand why the company continues to exist wither. The healthy pieces should long ago have been sold off, and the ugly parts executed. And now, Citibank wants in to the AIG treatment! The auto companies too! Chop off these economic anchors holding us back, for crying out loud, and let them sink beneath the waves! Meanwhile, lets get on with improving the rest of our economy instead of focusing all of our time on the losers.
By , at
Tue Feb 24, 10:28:00 AM:
That's "either". not "wither" in the first sentence.
By 
Escort81, at
Tue Feb 24, 12:19:00 PM:
The initial theory behind not letting AIG fail was that it had so many counterparties in its CDSs and other derivatives and other insurance policies, etc., that a sudden failure would lead to a complete collapse of the financial system. It was different from Lehman in this respect, it was believed at the time. Has enough time elapsed since September 2008 to unwind many of those counterparty transactions and minimize the risk of systemic failure? Probably. Perhaps the Fed should order AIG to wind down its affairs in the next 90 days to complete an orderly liquidation. There will be lots of buyers for the healthy pieces, maybe enough to get the bondholders a narrow majority of their money back.
Anyone who has been in VC, private equity or a corporate manager in charge of a new division or acquisition knows that gnawing, sinking feeling: am I throwing good money after bad? The orphan keeps coming back saying, "Please sir, may I have some more," except it is not a musical, it is not Dickens, it is real life with real money with lots of zeros attached -- and in the case of AIG, lots and lots of zeros.
By , at
Tue Feb 24, 01:13:00 PM:
I don't think it should matter. AIG sold credit default swaps by the bucket load, and now the government is left propping up a goodly number of the companies whose solvency was the subject of those swaps. In other words, AIG's obligation in some part has explicitly been assumed by the US government. Presumably our goal should be to minimize the future risk of extending even greater government make-well payments on other, future insolvencies. Let's at least consider drawing the line right where it already is, and let the other CDS's unwind messily. How much would one path cost versus the other? In the meantime, we shouldn't keep up the fiction that AIG is an operating company-- sell off the healthy parts, which will do better without the unhealthy parts anyway, and deal with the swaps business on it's own.
By Mrs. Davis, at
Tue Feb 24, 08:59:00 PM:
It seems like AIG ought to be ripe for separating into a good co and a bad co. Do it. Figure out what the liability is for bad co and budget for it and figure out when to sell good co. That might be a while, but good co should operate like a real company and turn in good numbers to prepare it for spin out.
By , at
Wed Feb 25, 01:26:00 AM:
...and GM
...and Chrysler
...and Citi(can't re)Group
By , at
Wed Feb 25, 02:57:00 AM:
The government is too stupid to understand the obvious: the size of the bank is irrelevant. What is needed to be saved to keep the system from collapsing is to guarantee that the depositors stay whole. They, the senior lenders are what is important to preserve, not the individual banks themselves. Bush screwed up or rather likely was hustled by the Secretary from Goldman Sachs, Paulson. The government should have raised the FDIC coverage to ten million per account for a two year period to prevent a panic run while letting the bad banks be liquidated.
AIG is/was in effect the bookies bookies bookie. It had to saved initially to prevent a sudden collapse but once the government backstop was in place it too should have been allowed to be liquidated in an orderly manner.
The lesson here is the same lesson never learned from previous banking and financial scandals:moral hazard.
The guilty need swift and harsh punishment with no reprieve to encourage the rest. The shareholders and bondholders need to be punished for assuming anything is too big to fail and the tax payers need punishment for allowing congressional thieves to make such implicit guarantees. Freddie and Fannie being the most egregious congressional examples. And no to bailouts of flippers and fools who bought way over their ability to service the loans, the stupid need to be removed from the financial gene pool. Besides it this does is reward the stupid, punish the thrifty, punish the first time buyers and the renters for no worth while reason. The crap has to clear before the markets can function again.
Ultimately to prevent this banking crises from happening again is to make the FDIC a minimum amount of coverage, not more than 25 thousand per account and taxpayer id with the provision the depositor, the senior lender can purchase at an actuarial sound rate all of the coverage they desire up to a very large amount, perhaps in the hundred million dollar range in totlal with an appropriate co-insurance deductible. Without the fear factor to discipline the senior lenders in to looking for the safest of banks for the big money we have the perverse incentive of shopping for the worst of banks to purchase money markets and CD's since they offer the highest yields (as long as you stay under the current coverage limits).
The underlying problem is the expectation from government and the political pressure to make finance something that it is not and never should be; a vehicle for those who do not and will not ever qualify for lending a recipient of loans. Banking should never be a form of welfare.
