Tuesday, September 16, 2008

Taxpayers Bailout AIG


Paulson and Bernanke's wherewithal lasted less than 24 hours, as they've readied an $85 Billion "loan" to AIG.

It's stunning how short-term the thinking has become. We're down to worrying about events occurring within hours, not even days or weeks.

Sound, predictable policy cannot be created in such timeframes. Every decision appears arbitrary, and the problem gets exacerbated whether action is taken or not. Bailout AIG today, but what happens when the next crisis starts? Or the next? Or the next?

15 comments :

Anonymous said...

The Primary Reserve Fund breaks the buck today.

Anonymous said...

The AIG loan is just that. A loan. It has a 24 month term and is collateralzied. AIG is solvent, it is just having a liquity issue. I would not be so hard on Ben and Hank on this one.

Max said...

AIG is solvent, it is just having a liquity issue.

And there's no one in the world willing to lend them a few $$? Yeah, right.

Anonymous said...

Agreed with Anon - AIG needs a bridge loan, thats all. No one is willing to lend them a few $$ because no one HAS a few $$ to lend them. Wall streets new mantra - keep your powder dry!!!

Max said...

Wall streets new mantra - keep your powder dry!!!

There's always money to borrow- at a price. Although the rates AIG is paying the Fed are pretty high, the market would have found some cash to lend. AIG just didn't want to deal with the taxpayers at their back.

Patient Renter said...

and is collateralzied.

Collateralized with what? What's the market cap of AIG versus the size of the loan?

End of discussion.

Anonymous said...

Share price is not telling the whole story in this case. LEH share market cap is nil, yet they just sold $250 million in assets which is greater than their market cap. Relentless short selling can throw things out of wack. When K-Mart went BK the market cap went to almost zero, yet they restructured and were suddenly worth billions.
AIG has some very profitable lines of business that can't lend liquidity to the parent company. These have huge amounts of value. Once AIG can have an orderly sale of its CDS exposure, value will be restored and other units will be sold to pay for the loan.
If they default, the fed gets nearly 80% of the company. The fed can also tell the counter parties too bad so sad.

Patient Renter said...

Once AIG can have an orderly sale of its CDS exposure

I presume that's the plan.

If they default, the fed gets nearly 80% of the company.

Right, but what if that 80% is worth less than what the Fed paid? The point I was making wasn't that AIG is necessarily worth its market cap, but that it could simply be worth less than what the Fed (taxpayers) paid if and when the Fed needs to collect.

The Fed is essentially gambling with taxpayer money, and as recent history shows, gambles can and do go bad.

Max said...

The Fed is essentially gambling with taxpayer money, and as recent history shows, gambles can and do go bad.

More than that, it gives the appearance that these are arbitrary decisions. Without a predictable policy direction, uncertainty grows.

All the analysts trying to quantify what "too big to fail" means are wasting their time. As a BofA stated in their decision to drop AIG coverage:

The situation at this stage is binary and dependent on more political will than analyzable facts. While we see the value of the insurance operations being well excess of the parents liabilities, solving the liquidity issues have now entered the political realm. If the company gets into liquidation or bankruptcy the value could be significantly less than estimated. We acknowledge that the government and Fed could come up with a financing and if the situation gets clarified and lends itself again to fundamental analysis we would reconsider picking up coverage at that stage.

Sold in '05 said...

Not being able to sell their toxic assets, CDOs, MBS, ect. is why they are in trouble in the first place. They can't liquidate them so they can't raise capital to cover their exposure.

With credit markets completely dysfunctional, will they be able to clear this up in two years by selling the toxic garbage or will they have to sell the performing parts of the company to cover their "bridge" loan payments leaving only the waste behind?

CD

Max said...

There's already a run on AIG starting in Asia. They're going to collapse anyway.

Darth Toll said...

anon 8:01

Whether LEH had assets of value is irrelevant, the losses (liabilities) greatly exceeded the assets, therefore a BK is the result. The same could be said for AIG or any company that goes BK. Most companies that go BK have SOME assets of value, but that is beside the point. The losses on the CDS portfolio will greatly exceed the assets of the rest of the entire business. Leverage is a real bitch. Private equity firms as well as IB's, SWF, and others realized this, thus no loans were forthcoming. Unless you are the type that believes it is perfectly ok to run your business on short term debt that you roll over constantly and trying to hide enormous losses indefinitely is a viable business model?

The CDS portfolio, which is mostly just huge losses, will largely wind up on the books of the Treasury, and the good companies of which you speak will be bought for a song by vulture capital firms, probably the very same firms unwilling to give AIG a loan in the first place. More socialize losses, privatize gains, oldest play in the book.

BTW, short selling is a zero sum gain where eventually the short sellers will have to cover (buy back stock). Shorts didn't kill LEH or AIG, regardless of what Fuld says. Massive leverage, arrogant and incompetent management, and huge losses killed them.

There are plenty more of these blowups coming down the pike for basically the same reasons.

Darth Toll said...

Max, where is the run on Wamu?!?!? That's the burning question.

I heard the other day that something like 20-30% of their deposits were over the FDIC limit!!

What are these people thinking? Or are they just not paying attention?

Patient Renter said...

What are these people thinking? Or are they just not paying attention?

The second one, but moreover, most people probably don't even know what F.D.I.C stands for let alone what the insurance limit is.

Shon Bi said...
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