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Five Lessons from the Second AIG Bailout
Posted Nov 11, 2008 09:49am EST by John Carney in Newsmakers, Recession, Banking
From ClusterStock, Nov. 11, 2008:
The news that the Treasury Department and the Federal Reserve caved in to AIG's demands for a more generous bailout is a bad omen for bailout. It shows every company involved in the bailout--from investment banks, to commercial banks, to private banks, to insurance companies, to automakers--that they should take the money now and not worry about the strings attached or the costs: those can always be cut later.
The original $85 billion bridge loan facility to AIG was officially intended as allowing for an orderly sale of AIG assets. Behind the scenes government officials were saying that this wasn't a rescue of AIG, it was a liquidation. AIG was going to pay hefty interest on the loan, partly to make sure taxpayers would get a return for their investment in the company and partly to get AIG to pay off the loans as quickly as possible. It only took AIG two months to rework the deal into a long term loan with a relatively low interest rate. What's more, the government is now going to buy up assets, cancel liabilities and make an equity contribution.
What are the lessons for other recipients of bailout bucks?
First of all, don't worry about the promises you've made to the government about dividend payments. When the going gets rough, just explain to the government that you can't afford to make them.
Second, don't worry about restrictions on bonuses. You'll be able to recut this deal later. Just tell the Treasury you'll lose your key people if you can't pay them well enough.
Third, don't worry about limits on dividends to shareholders. Simply claim that those restrictions are preventing you from raising necessary private capital.
Fourth, don't worry about restrictions on what you can do with the money. Don't make loans under pressure from the government. Don't sell off troubled businesses. Make acquisitions. Invest in Chinese infrastructure. These Treasury guys are spineless. They'll never stop you. What's more, government officials have no upside incentive to police you. This is basically unencumbered cash.
Fifth, there's always more money. Once the government has invested billions in your business, the marginal cost of adding additional dollars compared to the loss from your failure guarantees that you'll always be able to get more money from the government.
Congratulations to everyone on your future ability to recut the deal with the government. And when we say "everyone" we mean everyone except the taxpayers. You're out of luck.
85 Comments
Harold - Tuesday November 11, 2008 10:17AM EST
People.....It's NOT getting any better. I say this all the time. It started in the USA as a bad cold. It went to Europe as the FLU. Now Asia has it as colitis of the colon. When the stock market has a rally every so often, it's NOT a come back. It is falicy. Warren Buffet said it best. "I may have made the biggest mistake of my life". This statement speaks volumes.
Yahoo! Finance User - Tuesday November 11, 2008 10:19AM EST
keep the bailouts coming....we just keep printing money
__A_YAHOO_USER__ - Tuesday November 11, 2008 10:21AM EST
Not my problem......It is the Fault of the three idiot Chairman of SEC MR.COX.MR. SECTARY PAULSON AND MR.BEN BERNANKE......TELL GIVE THE MONEY TO US INSTEAD AS TAX REBATES 200 MILLION AMERICAN NEED THAT INSTEAD...
Peter - Tuesday November 11, 2008 10:24AM EST
Harold, I heard the same thing by Warren Buffet. This is the man that Obama had on his board of advisors last week for a economic meeting. We can only pray Warren Buffet does NOT get a post in Obama's administration. I think we will see a 500 point drop today. Any news on Americal Express? Are they OK? LOL.
__A_YAHOO_USER__ - Tuesday November 11, 2008 10:25AM EST
I DONT KNOW WHY THE STIMULUS IS ONLY FOR FINANCIAL INSTITUTION LIKE AIG........WHY NOT RETURN IT BACK TO US AS A TAX REBATES A TRILLION REBATES WILL MAKE THE DIFFERNCE. I THINK EVERYBODY IS HAPPY IN THAT.....THAN TO GIVE IT TO THE PIG...
Yahoo! Finance User - Tuesday November 11, 2008 10:27AM EST
Did anyone see on ABC news last night that those bastard executives at AIG were caught again at a fancy resort? The ABC news guy tried to interview one and he just looked and walked away like nothing bad happened!!!! What a bunch of overpaid, useless bastards!!!!!!! No shame whatsoever!!!!!!!! As part owner, I'd like to see them all fired!!!!
Yahoo! Finance User - Tuesday November 11, 2008 10:30AM EST
Lesson Six - Taxpayers will get it up the behind every time!
Harold - Tuesday November 11, 2008 10:32AM EST
LOL. Pietro, you're very optimistic with 500 pts. drop today. I was banking on a trading halt by 2 pm for 1 hour. This market is going to surpass 1200 drop.
Robert - Tuesday November 11, 2008 10:35AM EST
Socialism under the Bush administration, unbelievable! We are rewarding bad behaviors with a bailout and then a revised Bailout. Hell, because I saved my money and acted responsibly now I Get to pay for the other guys (corporations) mistakes? Maybe I should Just stop paying my mortgage so I can get a sweet low interest government bailout? Citibank just announced they are stopping foreclosures and they lay off my friend who is A veteran to pay for this action. Happy veterans day! This is ass backwards.
Yahoo! Finance User - Tuesday November 11, 2008 10:37AM EST
I like the spirit of management at AIG. Always have. Now they’re partying again on the taxpayer’s tab. Right-on! You guys are my heroes!
RovshanM - Tuesday November 11, 2008 10:41AM EST
Don't worry guys. I think AIG will be success and recommend to purchase AIG's stocks. I believe and you believe that the price of its stock will be $5 as soon.
BuickWagon - Tuesday November 11, 2008 10:42AM EST
Pietro and Harold, I thought Warren Buffett said that about letting his wife walk out on him.
First L - Tuesday November 11, 2008 10:43AM EST
Let AIG go bankrupt then buy it for 15 cents on dollar. Split it up into basic prats and sell each off to similar but stronger businesses. Get rid of lobbyists that the politicians owe like favors and let them stand on their own. The downfall of a democracy is lobbyists and political life tenors. To save our original democracy: eliminate lobby handouts direct and indirect and set term limits flat rates for end of term compensation.
Harold - Tuesday November 11, 2008 10:51AM EST
LOL. Was I wrong about the 500 point drop by the end of day today? Look at the numbers. LOL.
Yahoo! Finance User - Tuesday November 11, 2008 10:53AM EST
Don't trust AIG, they are hosing the tax payer.
david - Tuesday November 11, 2008 11:00AM EST
Hey Guys Happy Vetern's Day Anyone else at least "happy" about still having most of their body parts, though broke? 11/11 If anyone even knows what that means.
MR. GROVER - Tuesday November 11, 2008 11:09AM EST
There's nothing like paying someone to insure you with your own money. I once thought we were a bunch of suckers, now I'm sure of it.
Calco Creek - Tuesday November 11, 2008 11:10AM EST
Pierto, Maybe Warren Buffet made a mistake, don't we all? At least he has the integrity to admit it! Even though I prefer George Stigler, but if Buffet, gets the treasury post (I wonder why would Buffet even consider it), we will still be far better off than Paulson and his cronies! If only these silly rallies would stop and everybody concedes it's going down, then we will hit the bottom soon. From their, we know where to go instead of getting sick to our stomachs because of these roller coaster rides.
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Gusserson - Tuesday November 11, 2008 10:12AM EST
"These Treasury guys are spineless"