Plan B for AIG
The federal bailout needs a private rescue.
The survival of a great American business may now depend on whether private investors will be allowed to succeed where government seems to be failing. We're referring to insurance giant AIG, which under the terms of a federal bailout is threatening to become a loser for taxpayers. Maybe it's time for the feds to consider Plan B.
With its September 16 rescue of the world's largest insurer, the New York Federal Reserve has managed to put taxpayers on the hook for more than $120 billion, but on terms so onerous that AIG may have to be sold in pieces at firesale prices. Most of the taxpayer exposure comes from an $85 billion revolving credit facility, in return for the government taking almost 80% of AIG's equity.
* Free AIG 10/02/2008 – The Fed takeover looks like an increasingly bad deal.
* The Fed and AIG 09/18/08 – Nationalizations and the financial panic.
The Feds are charging AIG more than 10% interest on the entire $85 billion, even if the company doesn't borrow that much. The interest rate on money actually borrowed is more than 14%. One AIG shareholder likens it to a financial counselor advising someone struggling to pay the 6% interest on his mortgage to solve the problem by running up debt on his credit card. That's why the New York Federal Reserve recently had to bail out the bailout, lending another $37.8 billion at more attractive terms.
But the first transaction is still crushing the company, forcing a virtual liquidation. According to a source familiar with the company, AIG is suffering declines in renewals among corporate customers as it loses business to competitors. An AIG spokesman says, "Renewals worldwide are strong, but there are variations depending on the region and line of business." No one disputes, however, that interim CEO Ed Liddy's job is not so much to run the business as to prepare various AIG subsidiaries for quick and dirty sale, though there's no guarantee that the prices he gets will protect taxpayers from losses.
We have little sympathy for a company that sought government assistance, except that in this case shareholders were never permitted to vote on the deal. The shareholder with the largest stake, former CEO Hank Greenberg, says the firm would have been better off in Chapter 11. AIG directors instead had every incentive to choose a transaction with the government -- even on horrible terms -- over bankruptcy. That's because a bankruptcy filing would have stripped directors of legal protection.
Boris Feldman, an attorney at Wilson, Sonsini, tells clients who serve on boards to avoid bankruptcy at almost any cost, because in such scenarios "you have everyone coming at you." Directors, suddenly responsible for their own legal bills, can face suits from trustees, shareholders and bondholders. The only other clear winners in the September 16 deal, besides AIG directors, are the undisclosed counterparties in derivative transactions that the government protected from loss.
There may be a better way. Mr. Greenberg has sketched out a proposal similar to the terms Treasury is now offering large banks -- nonvoting preferred stock for the government, with the company paying 5% to 6% and an option to buy out the government later with a premium for taxpayers. Though it's becoming known simply as the "Greenberg plan," the proposal appears to enjoy broad support among large AIG shareholders and, we suspect, employees as well. Other shareholders may have competing ideas that would leave the company healthy enough to ensure that taxpayers get their money back.
I think the new "Obama" administration will be more willing to help AIG then the Paulson. Pellose owns AIG stock too!
Paulson has already heard this and has not respond to this at all! In other words; he does give a dam! He out in two months and he going back to Goldman; similar to Ruben with Citi.
Forbes new artile agrees with WSJ
First, while the government has its 80% equity stake in AIG, its motivations to exercise those warrants are quite different from those of a normal investor. The ideal outcome for the government is that AIG would be able to dispose of its toxic holdings and obligations while keeping core insurance business intact. Along the way, AIG would be able to service its debt and in the end emerge intact, with the warrant position remaining on the shelf. In a normal situation, the warrant holder would want to exercise the warrants for a profit. If the best-case scenario proves true, the potentially massive dilution does not occur and AIG shares are enormously undervalued (assuming our rough operating and net-income estimates).
If you are correct the taxpayers would revolt and in true Islamic fashion would wan't beheadings. I still can't believe that the brightest financial minds (on the government's side) would throw over $125 Billion of taxpayer dollars into a black hole with the hopes of really only collecting the interest. I still think "orderly liquidation" means being able to sell adequate assets at AIG's set pace so as not to create distressed sales of assets that would only bring in pennies on the dollar.
I've been posting here from the get-go that Paulson intended from the beginning, and so stated, that the purpose of the AIG plan was to allow an "orderly LIQUIDATION of the Company." That is a far cry from what Liddy is saying. I don't trust Liddy. He knows little if any more than we do. He doesn't know what he needs, what he can get, what his exposure is, and how it will all end. Paulson wanted just one thing: as long as AIG had viable assets, he wanted to allow AIG to die a slow death while making good on as many of its toxic waste obligations as possible. There is still virtally no transparency here about AIG's situation. As long as that remains the case, buying this stock here is a true gamble. Nothing wrong with gambling, so long as you recognize that that's what it is.
Paulson was preaching the "capitalist" credo. He misjudged the situation. He did not want to inject money into the banks, now he does. He now understands what the demise of Lehman is cosing to the world. He will not do this again. I believe that he trusts Liddy but has to act consistant with Congress. He will modify the agreement as soon as he can find a good reason to do so. The "Third" Treasury too could do the trick...
If orderly liquidation is the goal of the deal, shareholders may well be better off going bankrupt. They used all kinds of gimmicks and exceptions to deny the shareholders a vote.
It is possible for the Fed to make money on the deal w/o being its so excessively punitive to shareholders.
"Paulson wanted just one thing: as long as AIG had viable assets, he wanted to allow AIG to die a slow death while making good on as many of its toxic waste obligations as possible"
We are going to have a new president in Jan. Whatever you believed Paulson's intention for AIG, if he is not re-appointed then there might some changes.
I think that Liddy's plan is ambitious, in the absence of him giving us more specifics, given the current environment. But I saw in an article that they only had borrowed just over $50 bil of the total for security on the CDS. I think a good chunk of the rest was taken out for the securities lending agreement, which can be covered by the second facility. This means they only have to come up with $50 bil plus interest cash from assets sales and CDS runoff to pay down the "$85 billion" loan. The $37.5 can stay outstanding longer and not impact the viability of the company.