For those of you old enough to remember the Vietnam War, one of its aspects was an effort at what would now be called spin management. When Richard Nixon, who had promised in his 1968 Presidential campaign to exit the conflict but instead escalated it (the movie Patton had a bad effect on his decision process), finally conceded to the will of the American people, he had to come up with a way to present this reversal of course as a victory of sorts. Hence the dubious formulation, “peace with honor,” was born.
Team Obama is trying to present its shameful exodus from what it deems to be a hopeless losing cause, AIG, as a similar victory of sorts. The Journal tells us the US is going to “pare its stake” in the troubled insurer; the New York Times’ formula is “sever ties“; the Financial Times calls it an “exit plan“. But these sanitized phrases deliberately mask what the Administration is so keen to hide: that it has been badly overmastered, whether by incompetence or design, by the world’s biggest deadbeat. And the government’s eagerness to distance itself from a $182 billion sinkhole means it is yet again giving more unwarranted financial concessions.
Recall how we got here: AIG came in desperation to the Fed for a rescue when it somehow noticed it was about to burst aneurysms in its credit default swaps and securities lending operations, and a private sector rescue couldn’t come up with a big enough money transfusion. The Fed provided an $85 billion loan on the same terms as the failed private sector funding: 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.
This would have been a good outcome: the high interest rate was a suitable reward for the risk taken, and the process sufficiently punitive so as to deter future bailouts. No tear should be shed at the prospect of dismembering a poorly run company. Andrew Ross Sorkin’s Too Big to Fail revealed that the company had remarkably poor financial controls; the fact that it also held the investments in many of its subs in physical certificates at head office is another red flag.
But the deal has been retraded a full four times, each time with the Uncle Sam putting up more dough and worsening its footing, through a combination of lowering its interest rate and taking a less senior position. A private sector creditor would do the reverse: more credit would be extended only on more, not less, stringent terms. But the government bought the AIG malarkey that it could not afford the interest rate it had agreed to. The only concession that should have been permitted was to allow interest payments to be deferred rather than lowered, and that should have been accompanied by far more oversight (board seats, more frequent operating reports, etc). And as we have chronicled at length, the government has tolerated the intransigence of the new CEO, Robert Benmosche, who has refused to execute the government program of sale of divisions until the financing is repaid, arguing that AIG is worth more intact. To him and the board members that back him, that is clearly the case.
Admittedly, AIG has hived off some operations. But no one has scrutinized why AIG is not able to dispose of more divisions. Some of the AIG subs have been reportedly been reinsuring each other and there may be other less than savory intra-corporate dealings that if unwound might make some of the divisions less attractive than outsiders believe them to be. So Benmoshe’s theatrics may serve as useful cover for some aggressive accounting.
The latest retrade, announced roughly two weeks ago, is 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. As reader RueTheDay noted:
Swapping preferred shares for common is LUNACY unless they plan on liquidating their entire holding all at once (which apparently they do not). The Treasury gives up their dividend and their place in line amongst creditors. By then trying to divest the common over a period of time, they expose themselves to market risk.
Here is a sketch of the current state of play, courtesy the Wall Street Journal:
The exit plan would involve the Treasury converting some $49 billion in AIG preferred shares it currently holds into AIG common shares that can be distributed or sold to private investors over time…
The conversion, which could take place at about $35 an AIG share, is likely to occur in the first half of 2011 and is expected to happen after AIG repays its secured debt to the New York Fed, the people added. The move would likely raise government ownership in AIG to more than 90% before it is reduced gradually.
The exact price at which the Treasury converts its preferred shares to common shares would determine how much of AIG the government would own as a result, a person familiar with the matter said.
The calculus in settling on a price involves weighing what the Treasury can reap for taxpayers against the desire to keep enough value for private investors so they will be incentivized to hold or buy AIG shares.
Yves here. Note that a recent example of the Treasury coming up with a way to balance the interest of banks versus other constituencies (in this case mortgage borrowers) in the HAMP resulted in a formula that explicitly gave banks license to game the program (they were encouraged to modify deeply underwater mortgages; the one with equity were evidently understood to be attractive foreclosure material). Do we have any reason to think Treasury will do better this time?
The New York Times adds some cautionary notes:
A rapid exit by the government could also lead to a credit downgrade, which would hurt the company’s ability to sell insurance…..
“This market can’t support” a flood of shares, said Christopher Whalen, managing director of Institutional Risk Analytics. “The reality is that the government has become a long-term stakeholder.”
He and others pointed out that while A.I.G. had made progress in its revamping, it had yet to pass certain milestones that would show it was ready to operate without government support. It is still working on two crucial transactions that must close before it can repay the Fed — roughly $46 billion, $25.7 billion of it in preferred stock that must be redeemed, and $19.7 billion of rescue loans.
Analysts said it was hard to see how the insurer would generate that much cash by the end of this year, which parties to the negotiations said was the Fed’s deadline.
Yves again. One has to wonder about the year end deadline. Does it relate to the Fed not wanting to issue another annual report on the Maiden Lane II and III vehicles, entities created by the Fed to fund lending against AIG mortgage and CDO exposures? The Fed had insisted these loans were money good; our analysis of Maiden Lane III suggested otherwise, and another detailed release might make it hard for the Fed to continue to take that position. Audit the Fed is around the corner, so the AIG bailout will be under renewed scrutiny.
Let’s not kid ourselves: all this fancy financial footwork is to divert public attention from the fact that AIG will deliver big losses to the taxpayer. The latest Congressional Oversight Panel report contained estimates of losses on the AIG financing, with estimates from separate government sources ranging form $36 to $50 billion. Do you see this acknowledged ANYWHERE in the New York Times, Bloomberg, or Wall Street Journal? (To its credit, the FT does pick this up). No, which means this propagandizing, sadly, is proving to be quite effective.
In The Three Burials of Melquiades Estrada, Tommy Lee Jones hauls a fragrant corpse across Texas and into Mexico to honor a commitment made to his dead ranch hand. True to Western hero form, Jones carries out his unpleasant duty manfully. The Obama Administration, by contrast, is ditching the dead body and hoping no one will notice.
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“The latest Congressional Oversight Panel report contained estimates of losses on the AIG financing, with estimates from separate government sources ranging from $36 to $50 billion.”
Ouch!
Can we print up one of those giant checks like they hand out to Publishers Clearing House winners and go get Tim Geithner’s signature on it? Then we can hand it over to the head of AIG at his house and watch for the heart rendering reaction. I’m sure Mr Geithner would be thrilled to let the American public see how their tax dollars have been spent.
Just fyi, it sounds like “Three Burials” is a remake of a 2007 Chinese movie “Getting Home” apparently based on a true story of a migrant factory worker carried his friend’s corpse across China because of a promise to make sure his friend was buried in his hometown.
imdb says three burials was released in Feb 2006
Sorry, just got another synopsis shows there’s a lot of difference from Getting Home. Ditch my comment please :-)
So, AIG is to become the AMTRAK of insurance, a government ward in perpetuity. Sort of gives the lie to that blowhard Benmosche’s cocky promise to Congress that taxpayers would be repaid in full, with a profit.
In addition to being the biggest legalized swindle in the history of the country, AIG’s bailout is a largely unexplored mother lode of criminal and civil liability. When does that phase begin?
It’ll never start. The principle of “Look Forward, Not Backward” was first applied to torture, rendition, war crimes and these sorts of things that falls under the umbrella of Civil Liberties. You know, the kind of stuff that concern mainly those pesky pinko-commies called the “professional Left” and their compadres in sedition, a.k.a. the ACLU and CCR. All sorts of unsavory neighbors that Serious People (and God knows how Serious the investors’ class is) avoid like the plague.
Yet…the principle shall be transferred and deemed applicable to financial criminality too. After all, why would higher-ups within the govermin expose themselves to potential embarrassment by having to explain their deeds? Why rock the boat by revealing how rotten, inefficient and hopelessly tilted toward corporations the legal system has become when it is time to deal with financial misbehavior? Imagine that: Such admissions could lead to protests so virulent that it could force (GASP!!!) legislative attempts at remediation, hereby irritating and angering the political donors’ class. Who, among those who truly matter, need that shit anyway? Isn’t it much better to keep on injecting a slow but steady stream of mildly sedating PR bullshit unto the social fabric?
J’ai dit!
The government does seem to be willing to “look back” with regards to the economy. They keep trying to re-create the 2006 economy overlooking the fact that it was pretty much just a bomb waiting to go off.
Or I suppose it can all be called “pretend and extend”, still little more than to say we’re all back in 2006 and everything is green shoots.
In defense of AMTRAK, it actually provides a service useful to our country. True, it doesn’t seem to turn a profit, but we never ask the freeways or the airports to make money either, and these are both very heavily subsidized.
I have never seen AIG do anything useful.
After I posted, I got to thinking: Since the government will own AIG forever anyway, why not just make it the vehicle for a national insurance company where people can buy life, health, and property insurance at reasonable rates?
AIG’s capitalization is certainly sufficient for that, and the health insurance companies are jacking their rates to compensate for new health insurance requirements that they should have been doing all along, so perhaps this is the time.
Ha! Wouldn’t that be ironic if AIG became the public option?
Of course, it’d never happen; not enough money for the corporations in it.
Just why is it that several efforts to sell one or more subsidiaries have failed. Was the bid simply too low; or were the assets overpriced? I suspect the later.
Converting preferred shares to common shares is, indeed, lunacy. It also is a big tell as to the competence of this administration. The incompetence of the prior administration was well established before the bailout of AIG. Moreover, the bailout of AIG was more a bailout of some 16 or so primary dealer banks than the salvation of AIG.
It is my opinion that the predicate for the bailout lies in a massive tort wherein AIGFP entered into contracts that were grossly underpriced and which it could never manage to honor. Moreover, the accounting missrepresentations go back in time prior to the removal of Hank Greenberg. I find it astounding that there has been no criminal prosecution.
You would need to make Geithner and Summers disappear first.
But I truly love how Machiavellian your idea is: a financial bailout morphed into the health care public option.
{evil grin}
Surely it is not clear that the Obama team is simply no other choice.
If “Peace With Honor” was the ruse to get out (the legacy of which was Pol Pot and The Killing Fields) the other applicable Vietnam analogy comes from the work of the late David Halberstram’s, “The Best and Brightest”. The so called best and brighest that got us into the quagmire.
Ridiculous existing shareholders retain any value after all this.
“Peace w/ Honor” ! — I couldn’t help but hear that phrase every time that Palin & Beck used the hazy “honor” meme in their not-so big rally.
“But the government bought the AIG malarkey that it could not afford the interest rate it had agreed to.” Nice to know the same bright people that were duped by that malarkey are the ones to whom we turn to resolve our economic mess to say nothing of our health care. I don’t think they lacked the intelligence as this was just part of the scam to extract money from the common citizen and put it in the pockets of their buddies. The only lacking of intelligence is in the common citizens who continue let this happen. Fool me once, shame on you. Fool me twice, shame on me. Fool me for the hundredth time, well, that happened yesterday.
people like me, who don’t know anything about the “science” of economics, react to stories like this in a certain way. we read what people write and wait for them to get to a formulation (as is found in this post) in which the writer describes what is happening in shorthand, and it’s always the same way. “your taxdollars are being given to a bunch of lying fuckups who don’t want to admit what they were doing was losing at poker, and not some terribly essential public service. the administration, like the last one, is happy to continue this process.” that’s my dividing line these days. do you understand this? if so, i listen with respect to what you have to say. if not, i scroll on by. i may be ignorant of much theory related to money, but i am not ignorant of the fact that “follow the money” is all the economics i really need right now.
I can’t help wondering, what with all the “sops to AIG” you cite, and all the OTHER sops to various corporate thieves from the Obama administration, how many of the Bushies they actually have gotten rid of since the administration has changed hands. You’d almost think that the federal civil service–at least, in the upper reaches where policy is formulated and/or effected–that there’s a permanent sub-Cabinent-level government of corporate borgs, planted for the sole purpose of streamlining the flow of public money into private purses.
I don’t know which is more sickening to contemplate: that the Obama administration is that incompetent, or that they’re that much in thrall to the corporate thugs that continue to loot our purses with absolute impunity. Incredible.
As always, it is about the looting. The government effectively owns and controls AIG. The only reason it is allowing AIG to act as it does is to facilitate further looting. That was why Goldman’s Edward Liddy was first put in charge of it. It is why a psychopath like Benmosche then was chosen to run it.
Great piece Yves! I wrote up an “expansion”, Who Could Forget AIG? The U.S. Treasury Sure Wants To and expanding on some of the total bail out funds outstanding by AIG, as well as speculation on these latest “moves” by Geithner. You are heavily quoted of course. Notice how bail out details are falling off of the public awareness radar?
Obviously now, if we were to audit the Fed they would have to come up with their own 105 (or what ever that Lehman thing was).
A little mentioned aspect of this fiasco makes me want to puke – that the U.S. Treasury did not control the company. Were you or I to own 75% of a company, you could bet your bippy you or I would be in the boardroom and the CEO would do as we directed – or leave. Instead, we get this:
And as we have chronicled at length, the government has tolerated the intransigence of the new CEO, Robert Benmosche, who has refused to execute the government program of sale of divisions until the financing is repaid, arguing that AIG is worth more intact. To him and the board members that back him, that is clearly the case.
I will never understand this. It is simply incomprehensible – at least it is incomprehensible if one assumes that Mr. Obama wishes to serve the public interest. If not, he should be impeached because that is what he swore to do.
Savers, Seniors plus the sons and daughters of us all are paying for the sins of fire industry, wall street, fed, congress and banks
Reward the prudent with more taxes and the seniors with no yield unless you play with fire….
These kind of stories and then witnessing the protests in Europe makes me wonder where the citizens thoughts are here? How do you move past the parties and into the minds of consumers? A country that became that lighted a path just 200 years ago for democracy, freedom and a govt. for the people is now being drowned out by media, technology, and ourselves.
Media, Govt. and Fire turning us into consumers cleverly turned us away from being citizens
Consumers
Quick question. If Treasury increases its stake beyond 80%, doesn’t it need to explicitly recognize AIG debt as US debt?