Sports fans, your humble blogger earnestly endeavors to keep up with the machinations of of big financial firms to extract rents from the poor chump taxpayer, usually by invoking scary images of the financial version of nuclear winter. Since we seem to be heading there anyhow, I’m at a loss to explain why these tactics should have such sway with the officialdom, save that they labor under the delusion that their efforts are having a positive effect.
The latest canard is the pretense at negotiations with AIG. If you recall, AIG, which is regulated by a host of countries at the insurance subsidiary level, came begging to Uncle Sam because it had a credit default swaps unit at the holding company level that had written unhedged policies that looked pretty certain to crater the parent company. Even though the subsidiary companies are well regarded (in many cases very well regarded) they cannot readily upstream cash to the parent. The only way to realize value is by selling them, and this isn’t a great environment for doing that.
What has been appalling about AIG is that Uncle Sam initially imposed a suitably puntitive deal but then for reasons that remain a mystery, relented . Since the federal government is NOT a regulator of AIG, there was no reason to expect the authorities to step in, save Ben Bernanke and Hank Paulson’s attentiveness to the needs of the financial sector generally. AIG has globe-spanning operations, and there is no good reason why the US public should be stuck with the consequences of their lousy risk management decisions. But not only did AIG get considerably more in loans in version 2.0 of its deal with the US government, but the terms on its initial loans were improved considerably.
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.
And it only gets worse. AIG is on the verge of getting even more fawning treatment from a “sympathetic” government. Do little guy deadbeats get such kid glove treatment?
American International Group Inc., the insurer bailed out by the U.S., may restructure its rescue package for the second time in four months as the recession drains the value of mortgage-backed bonds and corporate debt.
AIG may announce that it is converting the government’s preferred shares into common stock to relieve pressure on the New York-based firm’s liquidity, a person familiar with the situation said yesterday. AIG pays a 10 percent dividend on preferred stock, and none on common shares
Yves here. 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. Back to the article:
Details of a new rescue package may be announced when AIG posts fourth-quarter results, said the person, who asked not to be identified because talks with the government are private. Results may be disclosed next week…
The government is “sympathetic” to AIG’s circumstances and the turmoil affecting would-be buyers and may change rules governing the sale of assets, the person said.