Stop bitching. AIG is not a bailout.

CaptK's picture
Rank: Neanderthal | 2,413

Have you complainers even read the terms of the loan? (yes, loan)

Basically, the Fed agreed to loan AIG up to $85 billion at LIBOR + 850bps. (!) That's about 11% interest. And in exchange, AIG gave the Fed 80% of the company - for keeps. AIG common and preferred get nothing, bonds get pennies on the dollar.

AIG has about $1 trillion in assets. As I understand it, the Fed just received claim to about $800 billion of (albeit illiquid) assets in exchange for LOANING AIG $85 billion. Not to mention that because AIG remains a going concern, the stock will likely appreciate over time as we come out of this mess.

In summary, this is no bailout. No taxpayer money has gone out the door. The loan is secured by the assets of AIG, and the creditor (the Fed) now controls the company, and has authority to cancel any dividends and force asset sales to repay the loan. This is about as safe a loan as I can imagine. If anything, the Fed/Treasury will make a profit on this one.

I don't see this as a bailout of anyone but the American people and economy. Not only was this necessary to prevent some MAJOR carnage due to unwinding of AIG's deeply intertwined derivatives, it probably will turn out to be a gain for the Fed/Treasury.

Stop bitching.

Comments (22)

Sep 17, 2008

For your reference, the text of the announcement from the Fed's website:

The Federal Reserve Board on Tuesday, with the full support of the Treasury Department, authorized the Federal Reserve Bank of New York to lend up to $85 billion to the American International Group (AIG) under section 13(3) of the Federal Reserve Act. The secured loan has terms and conditions designed to protect the interests of the U.S. government and taxpayers.

The Board determined that, in current circumstances, a disorderly failure of AIG could add to already significant levels of financial market fragility and lead to substantially higher borrowing costs, reduced household wealth, and materially weaker economic performance.

The purpose of this liquidity facility is to assist AIG in meeting its obligations as they come due. This loan will facilitate a process under which AIG will sell certain of its businesses in an orderly manner, with the least possible disruption to the overall economy.

The AIG facility has a 24-month term. Interest will accrue on the outstanding balance at a rate of three-month LIBOR plus 850 basis points. AIG will be permitted to draw up to $85 billion under the facility.

The interests of taxpayers are protected by key terms of the loan. The loan is collateralized by all the assets of AIG, and of its primary non-regulated subsidiaries. These assets include the stock of substantially all of the regulated subsidiaries. The loan is expected to be repaid from the proceeds of the sale of the firm's assets. The U.S. government will receive a 79.9 percent equity interest in AIG and has the right to veto the payment of dividends to common and preferred shareholders.

  • Capt K
Sep 17, 2008

Correct, sir. What the Fed has done with the PDCF, Bear, and now AIG has nothing to do with money creation and/or velocity. Time to consult our econ textbooks, perhaps. :)

Sep 17, 2008
Dave baby:

Correct, sir. What the Fed has done with the PDCF, Bear, and now AIG has nothing to do with money creation and/or velocity. Time to consult our econ textbooks, perhaps. :)

Bear Stearns was a different situation. The Fed agreed to absorb any losses on Bear's portfolio in excess of the first $1 billion, which JPM was on the hook for.

PDCF is also different. The Fed is swapping assets that could very well decline in value for liquid cash, thus leaving the Fed with a bunch of crappy collateral on it's balance sheet.

Both of these can be thought of as using taxpayer money to lubricate the financial system. My argument is that the AIG loan is not of the same breed - I don't see any risk the Fed doesn't get all it's money back, and then some.

  • Capt K
Sep 17, 2008

"The loan is expected to be repaid from the proceeds of the sale of the firm's assets." Does this mean that AIG will sell off some of its subsidiary holdings, ILFC etc? What assets are we talking about?

If the loan is collateralized by AIG's assets, what happens if those assets are written down/off?

Where are the shareholders in all of this, beyond probably not getting dividends during the 24-month period?

PS. Idiot CNN and even WSJ is calling the Fed's move a bailout. The confusion is understandable. Still, while AIG's collapse is not as imminent, it should make us all generally uncomfortable that the Fed/Treasury now ostensibly own the firm, considering the still uncertain fate of the company and its assets.

Sep 17, 2008
venturecapitalista:

Does this mean that AIG will sell off some of its subsidiary holdings, ILFC etc? What assets are we talking about?

If the loan is collateralized by AIG's assets, what happens if those assets are written down/off?

Where are the shareholders in all of this, beyond probably not getting dividends during the 24-month period?

Yes, AIG will sell assets soon at the direction of the Fed as a provision of the loan. Not sure which assets yet.

The $85 billion loan is collateralized by $1 trillion in assets. It would take an awful lot of writedowns to jeopardize their ability to repay...

Shareholders are basically fucked. They just got diluted to 1/5th of their prior ownership, and can expect no dividends for a long time.

  • Capt K
Sep 17, 2008

I've been out since early this afternoon and just saw this flash across my TV. Thanks for clearing stuff up - this is the kind of thing we need more of in this forum.

Sep 17, 2008

this was absolutely a bail-out. go re-read Dave baby's post. And then understand it.

rolls eyes

Sep 17, 2008

can you explain further? i'm not sure i understand...

Sep 17, 2008

No more BITCH ASS NESS ha

Sep 17, 2008

who think this WASN'T a bailout and that it WON'T create inflation:


In fact, the government doesn't have the $85 billion needed to bailout insurance giant American International Group.

The treasury department announced this morning it would auction new debt to raise funds for the Federal Reserve's rescue plan for AIG.

That's according to CBS. Here is the link:

http://www.cbsnews.com/stories/2008/09/17/notebook...
The "too big to fail" argument is wearing pretty thin.

Sep 17, 2008
Edmundo Braverman:

In fact, the government doesn't have the $85 billion needed to bailout insurance giant American International Group. The treasury department announced this morning it would auction new debt to raise funds for the Federal Reserve's rescue plan for AIG.

Edmundo, as far as I can tell, you're the koolaid drinker around here. Nearly every single one of your posts is alarmist and reeks of the conspiracy theories that run rampant on the internet.

So you say the government must raise new capital to fund the $85bn credit line to AIG (which may not all be drawn at once by the way). Well last I checked (5 minutes ago), the government borrows money at about 3%, depending on term. Their loan to AIG is at about 11%. Fairly favorable spread for the Fed don't you think?

Yes, the new treasuries issued may create a bit of inflation. But have you considered the damage that would have been done by the alternative, a disorderly implosion of AIG?

  • Capt K
Sep 17, 2008

I guess an "orderly" implosion of AIG (like the one manufactured last night) is preferable to a disorderly implosion. Classic.

I've got a kooky idea...how about we let the free market decide who makes it and who doesn't??? I guess what used to constitute capitalist dogma now qualifies one as a conspiracy theorist.

You must be buried pretty deep in this mess to be cheering this loudly for such a despicable abuse of power.

Are you sure it's "Captain" K and not "Special" K?

Sep 17, 2008

Captain K,
Sorry dude, that was out of line. It's clear we disagree on the fundamental issue, but I should have left it at that.
Eddie

Sep 17, 2008

I'm not going to get into this with you as it's clearly over your head. Yes, AIG continuing with orderly asset sales as a going concern without triggering CDS is far better than AIG filing for bankruptcy.

  • Capt K
Sep 17, 2008

It doesn't matter what's "better" - clearly AIG not failing is better... that doesn't substantiate your initial point that this was not a bailout. I refer you again to Dave baby's post. I have a feeling that you studied Finance or something at a vocational school since you don't really seem to understand economics. It's all about the M1 baby.

Sep 17, 2008
b2:

It doesn't matter what's "better" - clearly AIG not failing is better... that doesn't substantiate your initial point that this was not a bailout. I refer you again to Dave baby's post. I have a feeling that you studied Finance or something at a vocational school since you don't really seem to understand economics. It's all about the M1 baby.

b2, weren't you the jackass asking if ML was the next great bank? Why don't you stop stealing jokes from leveraged sell-out and start polishing your MD's knob to get 2nd-tier bonus.

Sep 17, 2008

...AIG is massively negative net worth and the govt will never get back that 85bn in my opinion. The govt bought their 1 trillion of assets as well as their massive liabilities. Since you condescend to the board and ask if we've read the loan, do you know anything about AIG's liabilities? No you dont or else you wouldnt be flapping your electronic gums on this subject. In fact nobody, not even the most diligent analysts, really have a handle on what the losses will be for AIG. Amongst other assorted crap, AIG has gauranteed $400bn worth of dodgy assets on the balance sheets of European banks. That wise transaction alone could cost the US govt much of that 85 bil. I confidently predict that not only does the lowly taxpayer never see a dime of that 85bil but that further capital injections will be needed in the future as the full losses are realized. Dont get me wrong, it is possible that the treasury makes big money on the deal if losses turn out to be modest and the assets stop losing value in the next couple of years, but i dont pay my taxes so Paulson can pick attractive private equity targets and speculate on my behalf.

Sep 17, 2008

Just FYI - that's not a LSO joke - it's very well known on the Street... at least at my firm, which hires mostly Harvard and Stanford kids. LSO steals all his jokes from his banking roommates, but, as you've never worked in banking in your life, I wouldn't have expected you to know this.

Sep 18, 2008
b2:

Just FYI - that's not a LSO joke - it's very well known on the Street... at least at my firm, which hires mostly Harvard and Stanford kids. LSO steals all his jokes from his banking roommates, but, as you've never worked in banking in your life, I wouldn't have expected you to know this.

So you ARE the jackass who thought ML was going to be the next great firm?

And I would love to know which bank "mostly hires Harvard and Stanford kids". Good bullshit. And please don't just answer this question and ignore the part of how much of a jackass you are.

Sep 18, 2008

I respectfully disagree with Bondarb. $85bb for .799 pc AIG is a steal. This mess is the fault of the FPG; AIG will remian strong with respect to its core competencies. By '10 we should start to see AIG on the path to becoming what it once was. People walked from this deal because of the lack of time and the reality that this amount of capital couldn't be marshaled. AIG will turn out alright.

Sep 18, 2008
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