Friday, February 27, 2009

Restructuring AIG – letting the mothership go

The rumoured AIG restructure should make the hardline – hit-em-where-it-hurts-and-get-rid-of-adverse-selection crowd happy.

The government is going to swap its debt in the parent company into an interest in each of the subsidiaries.

As a result it is subordinating all parent obligations to the Government’s claim.  

Once you do that you can let the AIG parent company go.  The parent company debt is trading above 50c in at least some maturities.

I once thought the AIG parent company debt was probably money good.  I suspect it is now probably zero.

Not too bad a thing either – because the AIG parent company is not systemically important.


Anonymous said...

More ad hoc non-process though.

John Hempton said...

If it is not systemically important you should let it fail.

It would not be ad-hoc if they said that.

They seem to be preparing to let AIG parent company fail.

Could be wrong - but that is my interpretation.

Possibly the least-ad-hoc idea of the whole crisis.


The CEO of AIG is paid in options only. He gets zero. Watch that be renegotiated.


Anonymous said...

JH wrote:
> If it is not systemically
> important you should let it fail.


> It would not be ad-hoc if they
> said that.

Yes. But I believe this has not been said, nor have the list of systematically important banks been provided. My gut feeling is that any management strategy which depends on *not* providing information is inherently flawed - something, somewhere, is very wrong.

Anonymous said...

Blank raises a good question. A Lehman which needs $5 billion to stay afloat (which they might raise from selling Neuberger Berman) is not systemically important.

A Lehman riddled with fraud which destroys $150 billion of creditor claims in its bankruptcy IS systemically important. It's important to know ahead of time which 150 year old primary dealers have destroyed 3x more value than Enron, so that you can then use taxpayer money to keep them going.

As for AIG I believe it has Goldman Sachs as a counterparty in a number of transactions. I don't know what else you have to do to be "systemically important" (besides defalcation on a grand scale as described in paragraphs above, a test which AIG also passed).

Until AIG cleans up all counterparty exposure to GS I can't understand how it can be allowed to fail.

Tim, do you have anything to say?

Anonymous said...

According to Reuters tonight (Saturday) it looks like Treasury and the Fed have reverted to form:

"The revised AIG agreement is expected to include an additional equity commitment of about $30 billion, more lenient terms on an existing preferred investment, and a lower interest rate on a $60 billion government credit line, the source said."

So once again it looks like the debt-holders are getting a reprieve courtesy of the American taxpayer.

The failure of Lehman was the most auspicious price discovery event of the last 20 years. At last, the air started to rush out of the debt-inflated asset balloon. Far from being a mistake, allowing Lehman to fail was a necessary condition for creating a future favorable investment climate for prudent savers. It also provided evidence that the FIRE economy based on ever increasing debt is unsustainable.

Treasury and the Fed are doing their utmost to reverse the manifest benefits of the only sensible (in)action they took in this "crisis". It would be better policy in the long run to incur public debt supporting a social safety net for displaced workers and the disadvantaged, back-stopping pension funds, and increasing social security benefits for persons near retirement than to forcibly transfer wealth from taxpayers to the holders of bad debt. The path we are taking is the one of maximum suffering for the most people.

James Carville was right about the bond market - to the sorrow of us all.

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