In case you lost track of this sorry affair, AIG, the biggest ward of the state in human history, continues to get the kid glove treatment. The IMF, doing the dirty work of the Washington Consensus, has repeatedly imposed far more pain on over-indebted countries than US government on the failed insurer.
AIG originally agreed took a deal from the Fed that was on the same terms as a private sector funding that failed to raise enough dough: effectively 11.5%, secured by all the subsidiaries of the company. The plan, which management agreed to, was that the divisions would be sold and the proceeds would repay the borrowings, and management was confident it could do so.
Now this was a dandy solution to a bad situation. And no, I’m not being ironic. The remedy was suitably punitive. No executive would want to get in a AIG type mess and be required to dismantle his company. The interest rate was high, thus keeping pressure on AIG to move expeditiously as well as providing taxpayers with a decent return. And from a systemic risk standpoint, breaking up AIG was a plus, since it would cut a TBTF entity down to size.
But AIG was able to slip the leash. Its cheery assurances that it could divest divisions proved hollow. It came back to Uncle Sam and managed to get both more money and a reduction in interest rate. In deal land, this is called a free concession and is a sign of chumpdom (the Treasury press releases tried to imply that the government got more, but when you already have a senior lien on all the assets, there’s nothing more to get, save maybe throwing out the board, which would have been a good gesture). The argument was that the interest payments would damage AIG, but all that suggested was that the interest payments be deferred, not reduced. Oh, and in case you weren’t paying attention, the financial deal was retraded not once, but three times.
Your diligent Administration also installed three trustees to oversee AIG, and since they were all professional board members, they were the last people you’d expect to rock the boat by asking Elizabeth Warren style tough questions. They were thus easily rolled when new CEO Robert Benmoshe took the reins and retraded the deal yet again, with the imperial announcement that AIG would not seek to repay the loans via divestiture. This was an act of unbelievable intransigence; no private sector majority owner would tolerate such backtalk from a hired hand.
Yet not an official word was said in opposition, since the Administration bought or hid behind the canard that Benmoshe would be hard to replace. And given that AIG has a lot of cross-company exposures (divisions lending to each other) one wonders whether dismembering the company might yield more accounting improprieties, which would mean the divisions were worth even less than thought, which would reveal that the taxpayer loans were unlikely to be repaid in full.
Tonight, the Wall Street Journal reports yet another retrade of the AIG financing: that the government is going to convert its preferred shares to common, and seek to sell its stake over time. But why should the government swap out of preferred, which pays a dividend (well, is supposed to pay a dividend when and if earned) for common when the equity sales are not imminent? This is simply yet another sop to AIG.
This latest scheme is being positioned as a way to accelerate repayment, when it’s another version of extend and pretend. Look at the happy talk courtesy the Wall Street Journal:
American International Group Inc. and its government overseers are in talks to speed up an exit plan designed to repay U.S. taxpayers in full while enabling the giant insurer to regain independence, according to people familiar with the matter.
Under the plan, which could commence as early as the first half of 2011, the Treasury Department is likely to convert $49 billion in AIG preferred shares it holds into common shares, a move that could bring the government’s ownership stake in AIG to above 90%, from 79.8% currently, the people familiar said. The common shares would then be gradually sold off to private investors, a move that would reduce U.S. ownership and potentially earn the government a profit if the shares rise in value….
But if it could be pulled off, an exit would be seen as a victory for the government and the company.
Yves here. Notice another sleight of hand at work. All the restructurings have succeeded in lowering the benchmark for success. An investor doesn’t simply want to get his money back; he wants a suitable risk adjusted return. That would have been 11.5% for the first two years of the loan. AIG won’t provide anything resembling either proper compensation or a Bagehot-style penalty rate.
Note that the article later does provide some caveats:
The market value of AIG stock held by investors is currently about $5 billion, down from over $100 billion in early 2008 before the bailout….
There’s risk in moving too fast. If AIG isn’t financially strong and its businesses aren’t stable when the Treasury tries to sell its shares, the company could spiral downward again—an outcome the Treasury is trying to avoid. AIG’s restructuring already has experienced setbacks, such as failed deals to sell major assets in recent months.
The timing of the government’s exit from AIG could also depend on how major credit-rating firms view AIG’s strength as a stand-alone company without federal support, and whether it can maintain a single-A investment-grade rating on its own. Rating agencies recently signaled that absent government support, AIG’s rating would currently be below investment grade, but it could improve if AIG completes key asset sales in coming months.
Funny, isn’t it, how creative and accommodating the Treasury can be when dealing with large distressed firms, and its skill seems to evaporate when contending with underwater homeowners.