Goodbye, AIG

[J]

Bloomberg

AIG Gets Up to $85 Billion Loan From Fed as U.S. Takes Control

By Craig Torres

Sept. 16 (Bloomberg) -- The Federal Reserve Board, with support of the U.S. Treasury, invoked emergency powers to lend up to $85 billion to American International Group Inc. to save the firm from collapse.

``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 Fed said on a day when it left the benchmark lending rate unchanged at 2 percent.

The purpose of the ``liquidity facility is to assist AIG in meeting its obligations as they come due,'' the Fed said in its statement. The facility has a 24-month term. Interest will accrue on the outstanding balance at the three-month Libor rate plus 8.5 percentage points.

``The loan is expected to be repaid from the proceeds of the sale of the firm's assets,'' the Fed said. ``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.''

The 3 month Libor rate is 6.44% right now, so that makes it a tad under 15% interest for the loan. I guess it's good news if you have an insurance policy or retirement plan under AIG, but if you're a shareholder, you are about to be forcibly sodomized.

[J]

I think I'm going blind from looking at charts all day, the 3 month Libor is 2.88%, not 6.44%, for a total of 11.38% interest on the loan.

[Chardok]

I think I'm going blind from looking at charts all day, the 3 month Libor is 2.88%, not 6.44%, for a total of 11.38% interest on the loan.

Laugh if you must, but it's better than the terms of WaMu's TPG infusion earlier this year. Though, in a sense the TPG move was a bit more savvy than a government bail-out in that Killinger wanted WaMu to stay independent so badly that it effectively took a 3-dollar-a-share stock and forces any buyers to take it at 3 buck's a share plus whatever the difference is between 3 and, like 11 dollars a share, plus a ridiculous premium and penalty.

Poison pill. Which is likely why he was ousted so handily - except that one of the principals of TPG and Killinger are longtime friends...dunno what to make of that.

I think, however, that Fishman is exactly what WaMu needs, though, given the actions taken since he's taken the helm - Not that he's doing anything radical, yet, but he's loosened the reigns significantly on the people who matter to such a degree that the company is finally taking action to shoot down bullshit negative press (which makes me think that Killinger was severely micromanaging - or that highers-up were scared of him)

Note that WaMu took the unprecedented step of releasing quarterly earnings 6 weeks early, and they addressed the Goldman downgrade with the corporate equivalent of a middle finger. (Unprecedented - unprecedented for WaMu.)


Sorry for the slight hijack - Hopefully the bailout is well-recieved. <insert picture of me laughing>

[Fingolfin_Noldor]

This makes... the third firm nationalized in a month.

Wonder how many else will either fail or get nationalized.

[Glocksman]

The AIG story is receiving a fair bit of coverage locally because a major local employer (American General Finance) is part of AIG.

Linky to story

In this Obama supporter's opinion, the first comment on the story summed it up perfectly:

How much more of this Republican "Peace and Prosperity" can we stand?

[fnord]

Why such a heavy spread over libor? "Bad AIG, you got caught, no biscuit!" ?

[Einhander Sn0m4n]

And America descends yet further into socialism of the worst sort.

[The Kernel]

I guess it's good news if you have an insurance policy or retirement plan under AIG, but if you're a shareholder, you are about to be forcibly sodomized.

Well put. Those of us with mutual or index funds (like me for example) that hold a stake in AIG are going to get fucked by this. Fortunately I'm not specifically invested in AIG outside of the Russell index spread (and even more fortunately I like the mid cap indexes like the Spartan Extended Market better anyway), but those who are heavily invested in AIG stock are going to get wiped out.

[The Kernel]

On a sidenote, it really makes you wonder how stable a lot of large cap stocks really are. Given all of the earnings deception you see even by large cap companies these days, it really shows that holding a portfolio of a handful of "safe" stocks in big companies is NOT an effective way of managing your risk.

I've been saying for years that the only smart investment strategy is index funds and ETFs. Building your own stock portfolio just doesn't hedge your risk enough against crap like this, and mutual funds are a total rip off (don't get me started on THAT).

[Ender]

Christ. How much longer before government bonds drop out from the strain of this?

[Ace Pace]

A more detailed article from the WSJ.

The U.S. government seized control of American International Group Inc. -- one of the world's biggest insurers -- in an $85 billion deal that signaled the intensity of its concerns about the danger a collapse could pose to the financial system.

The step marks a dramatic turnabout for the federal government, which had been strongly resisting overtures from AIG for an emergency loan or some intervention that would prevent the insurer from falling into bankruptcy. Just last weekend, the government essentially pulled the plug on Lehman Brothers Holdings Inc., allowing the big investment bank to go under instead of giving it financial support. This time, the government decided AIG truly was too big to fail.

The U.S. negotiators drove a hard bargain. Under terms hammered out Tuesday night, the Fed will lend up to $85 billion to AIG, and the U.S. government will effectively get a 79.9% equity stake in the insurer in the form of warrants called equity participation notes. The two-year loan will carry an interest rate of Libor plus 8.5 percentage points. (Libor, the London interbank offered rate, is a common short-term lending benchmark.)

The loan is secured by AIG's assets, including its profitable insurance businesses, giving the Fed some protection even if markets continue to sink. And if AIG rebounds, taxpayers could reap a big profit through the government's equity stake.

"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 Fed said in a statement.

It puts the government in control of a private insurer -- a historic development, particularly considering that AIG isn't directly regulated by the federal government. The Fed took the highly unusual step using legal authority granted in the Federal Reserve Act, which allows it to lend to nonbanks under "unusual and exigent" circumstances, something it invoked when Bear Stearns Cos. was rescued in March.

As part of the deal, Treasury Secretary Henry Paulson insisted that AIG's chief executive, Robert Willumstad, step aside. Mr. Paulson personally told Mr. Willumstad the news in a phone call on Tuesday, according to a person familiar with the call.

Mr. Willumstad will be succeeded by Edward Liddy, the former head of insurer Allstate Corp.

AIG's bailout caps a tumultuous 10 days that have remade the American financial system. In that time, the government has engineered rescues that insert it deep into the housing and insurance industries, while Wall Street has watched two of its last four big independent brokerage firms exit the scene.

The U.S. on Sept. 6 took over mortgage-lending giants Fannie Mae and Freddie Mac as they teetered near collapse. This Sunday, the U.S. refused to bail out Wall Street pillar Lehman Brothers, which filed for bankruptcy-court protection and is now being sold off in pieces. That same day, another struggling Wall Street titan, Merrill Lynch & Co., agreed to sell itself to Bank of America Corp.

The AIG deal followed a day of high drama in Washington. The Treasury's Mr. Paulson and Federal Reserve Chairman Ben Bernanke convened in the early evening an unexpected meeting of top congressional leaders. Late in the trading day Tuesday, anticipation that the government might assist the insurer helped propel the Dow Jones Industrial Average to a 1.3% gain.

In bailing out AIG, the Federal Reserve appeared to be motivated in part by worries that Wall Street's financial crisis could begin to spill over into seemingly safe investments held by small investors, such as money-market funds that invest in AIG debt.

Indeed, on Tuesday the $62 billion Primary Fund from the Reserve, a New York money-market firm, said it "broke the buck" -- that is, its net asset value fell below the $1-a-share level that funds like this must maintain. Breaking the buck is an extremely rare occurrence. The fund was pinched by investments in bonds issued by now collapsing Lehman Brothers.

Money-market funds are supposed to be among the safest investments available. No fund in the $3.6 trillion money-market industry has lost money since 1994, when Orange County, Calif., went bankrupt. A number of money-market funds own securities issued by AIG. The firm is also a big insurer of some money-market instruments.
Credit Downgrade

AIG's financial crisis intensified Monday night when its credit rating was downgraded, forcing it to post $14.5 billion in collateral. The insurer has far more than that in assets that it could sell, but it could not get the cash quickly enough to satisfy the collateral demands. That explains the interest in obtaining a bridge loan to carry it through. AIG's board approved the rescue Tuesday night.

AIG's board said in a statement that the deal would "protect all AIG policyholders, address rating agency concerns and give AIG the time necessary to conduct asset sales on an orderly basis."

The final decision to help AIG came Tuesday as the federal government concluded it would be "catastrophic" to allow the insurer to fail, according to a person familiar with the matter. Over the weekend, federal officials had tried to get the private sector to pony up some funds. But when that effort failed, Fed Chairman Bernanke, New York Fed President Timothy Geithner and Treasury Secretary Paulson concluded that federal assistance was needed to avert an AIG bankruptcy, which they feared could have disastrous repercussions.

Staff from the Federal Reserve and Treasury worked on the plan through Monday night. President George W. Bush was briefed on the rescue Tuesday afternoon during a meeting of the President's Working Group on Financial Markets.

That the government would prop up AIG financially offers a stark indication of the breadth of the insurer's role in the global economy. If it were to have trouble meeting its obligations, the potential domino effect could reach around the world.

For one thing, banks and mutual funds are major holders of AIG's debt and could take a hit if the insurer were to default. In addition, AIG was a major seller of "credit-default swaps," essentially insurance against default on assets tied to corporate debt and mortgage securities. Weakness at AIG could force financial institutions in the U.S., Europe and Asia that bought these swaps to take write-downs or losses.

AIG's millions of insurance policyholders appear to be considerably less at risk. That's because of how the company is structured and regulated. Its insurance policies are issued by separate subsidiaries of AIG, highly regulated units that have assets available to pay claims. In the U.S., those assets can't be shifted out of the subsidiaries without regulatory approval, and insurance is also regulated strictly abroad.

Tuesday afternoon, after the market closed, AIG put out a statement saying its basic insurance and retirement services businesses are "fully capable of meeting their obligations to policyholders." AIG said it was trying to "increase short-term liquidity in the parent company," but said that didn't "include any effort to reduce the capital of any of its subsidiaries or to tap into Asian operations for liquidity." Asia is one of AIG's largest markets.
Financial Pain

Where the company is feeling financial pain is at the corporate level, even while its insurance operations are healthy.

The urgency of federal aid came into stark relief Tuesday as other options fell off the table and pressures continued to build. On Tuesday, AIG's attempt to raise as much as $75 billion from private-sector banks failed. The banks advising the firm concluded it would be all but impossible to organize a loan of that size, making the government AIG's chief hope.

As a result of its credit downgrades, the insurer has to post $14.5 billion in collateral to bolster its credit rating. In the debt markets, AIG also has to post additional collateral to investment banks and others it trades with.

Adding to AIG's woes, investors continued to pummel the company's stock on Tuesday, pushing the share price down 21%, to $3.75. It was the third double-digit percentage decline in the past three trading days. AIG's shares are now down 94% for the year.

AIG's cash squeeze is driven in large part by losses in a unit separate from its traditional insurance businesses. That financial-products unit, which has been a part of AIG for years, sold the credit-default swap contracts designed to protect investors against default in an array of assets, including subprime mortgages.

But as the housing market has crumbled, the value of those contracts has dropped sharply, driving $18 billion in losses over the past three quarters and forcing AIG to put up billions of dollars in collateral. AIG raised $20 billion earlier this year. But the ongoing demands are straining the holding company's resources.

That strain contributed to the ratings downgrades on Monday. Those downgrades, in turn, ratcheted up the pressure on the company to come up with more cash, quickly.

Most insurance companies don't have financial-products units like these. But over nearly four decades, former CEO, Maurice R. "Hank" Greenberg built AIG into a firm that resembled no other. He transformed its insurance business, both by expanding abroad -- notably in China, where AIG has its roots -- and by buying up other firms.



Mr. Greenberg pushed into areas that have little to do with bread-and-butter businesses like selling life insurance or protecting companies against property losses. In 1990, for instance, he bought International Lease Finance Corp., which leases planes to airlines.

In 2005, Mr. Greenberg stepped down amid an accounting scandal. But Mr. Greenberg, who is fighting civil charges related to the scandal and has denied wrongdoing, didn't fade from the scene. He still heads a firm that is AIG's largest shareholder, and on Tuesday, he sent a letter to current CEO, Mr. Willumstad, saying he was "ready to offer any assistance that I can."
'I'll Do It'

Now, however, Mr. Willumstad himself will be leaving, after having been asked to step aside by the Treasury's Mr. Paulson. Mr. Willumstad, who recently took over as AIG's chief executive to try to turn around the firm, was surprised by the request. "If that's what you want, I'll do it," he said to Mr. Paulson, according to a person familiar with the call. AIG's board was unhappy with the decision but felt it had no choice but to go along, as the only other option was bankruptcy.

The fate of a corporate chief executive is normally the province of a board of directors. The decision by the Treasure Secretary to essentially oust Mr. Willumstad underscores further the magnitude of the government's intervention.

Mr. Willumstad's departure marks the end of a brief, tumultuous run. He joined AIG as a director in early 2006, after leaving the No. 2 post at Citigroup Inc., and became AIG's chairman later that year. In June, as AIG was reeling from record losses, the board forced out Mr. Willumstad's predecessor and gave him the top job. He had planned to unveil his own strategy for AIG on Sept. 25.

By tapping Mr. Liddy as AIG's next CEO, the government is turning to someone with deep experience in the insurance industry, having served as chief executive of Allstate from 1999 to 2006. He stepped down as chairman earlier this year. Allstate is a different type of insurer than AIG, focusing on selling car and home insurance to Americans, whereas AIG sells an array of insurance policies to individuals and businesses world-wide.

Mr. Liddy also has experience pulling apart empires, having helped dismantle Sears, Roebuck & Co. (from which Allstate was spun off) in the 1990s. Before joining Sears, Mr. Liddy worked under Donald Rumsfeld at drug maker G.D. Searle & Co. Mr. Liddy is on the board at Goldman Sachs Group, the investment bank that Mr. Paulson led before becoming Treasury Secretary.

As confidence in AIG declined recently, the amount of money it felt compelled to raise to calm its constituents continued to rise. Over the weekend, the figure was $40 billion. That climbed to $75 billion on Monday and, according to a person close to the company, rose further on Tuesday.
—Diya Gullapalli, Serena Ng, Damian Paletta and Ashby Jones contributed to this article.

[PeZook]

And America descends yet further into socialism of the worst sort.

What do you mean? It's far better than the abysmally stupid Mae and Mac bailout. This one's actually how the system is supposed to work: banks can take out loans from the Fed to prevent collapse, it's one of the main roles the Fed is supposed to work.

Of course, the sheer scale of the problem is mind-boggling here. As could be seen lately, where the government just let a bank fall flat on its face rather than trying to save it.

Of course, the people responsible for the situation will never quite see justice,but, ah...that's the world for ya.

[Edi]

And America descends yet further into socialism of the worst sort.

Quit kneejerking and actually back up this bullshit statement, Einy. As PeZook explained, there is nothing sinister in it. Take a look at how most European states work and what kind of regulatory framework is in place for financial institutions. Do we all labor under "socialism of the worst sort"?

[bobalot]

I think what irks a lot of people is that the people responsible with these disasters seem to be getting off with a free ride.

Behave unethically and irresponsibly? Hear you go have a few million dollars.

Fucked things up royally? Have a another few million and piss off.

What other profession (other than that of a politician) rewards you for being monumentally incompetent?

[Glocksman]

And America descends yet further into socialism of the worst sort.

Quit kneejerking and actually back up this bullshit statement, Einy. As PeZook explained, there is nothing sinister in it. Take a look at how most European states work and what kind of regulatory framework is in place for financial institutions. Do we all labor under "socialism of the worst sort"?

I'm not Einy, but my guess he's trying to say that the US has 'socialism of the worst sort' in that we 'privatize profits and socialize risk' when it comes to big business and yet have the 'fuck the poor' mentality of robber-baron capitalism.

[xerex]

I'm waiting for the GOP to come out against all this government meddling in the free market.

[Edi]

And America descends yet further into socialism of the worst sort.

Quit kneejerking and actually back up this bullshit statement, Einy. As PeZook explained, there is nothing sinister in it. Take a look at how most European states work and what kind of regulatory framework is in place for financial institutions. Do we all labor under "socialism of the worst sort"?

I'm not Einy, but my guess he's trying to say that the US has 'socialism of the worst sort' in that we 'privatize profits and socialize risk' when it comes to big business and yet have the 'fuck the poor' mentality of robber-baron capitalism.

Ah, that. He should have said so then. That distinction is not directly clear from the term socialism, which actually has legitimate uses and is not a synonym for communism.

[PeZook]

I'm not Einy, but my guess he's trying to say that the US has 'socialism of the worst sort' in that we 'privatize profits and socialize risk' when it comes to big business and yet have the 'fuck the poor' mentality of robber-baron capitalism.

That would make sense if the government bailed AIG out, instead of lending the money and selling off its assets to pay it back.

It pretty much works the way it's supposed to, except in a sane country the people who allowed the bank to go 85 billion dollars into debt would be thrown in fucking jail.

[Glocksman]

except in a sane country the people who allowed the bank to go 85 billion dollars into debt would be thrown in fucking jail.

There is that minor detail.
But don't you believe that the CEO and the rest of 'mahogany row' deserve their golden parachutes?
Are you trying to discourage innovation?
My God, don't you believe in rewarding risk taking?
Why do you hate America?

Note: I'm being sarcastic here, so don't flame me.

[Broomstick]

I know you were being sarcastic, but personally I'd like to see those executives living in a cardboard box on Lower Wacker Drive, using duct tape to hold their rotting shoes together and having to fight rats for what's in McDonald's dumpster in order to eat dinner.

[PeZook]

I know you were being sarcastic, but personally I'd like to see those executives living in a cardboard box on Lower Wacker Drive, using duct tape to hold their rotting shoes together and having to fight rats for what's in McDonald's dumpster in order to eat dinner.

I find the concept of the golden parachute...interesting.

From what I know, this phenomenon is purely a market issue: it happens because owners agree to write them into CEO's contracts. But, seriously...how come anybody agrees to that? There's no "CEO union" which could force people to include those clauses in contracts...

It's especially glaring in case of banks, of course, which aren't just companies: they're vital parts of the economic system (they suck, but they're the best we'll have for a long time...), which have potential to ruin entire national economies if used maliciously. Why CEOs in the US aren't held liable for (sometimes purposefully) mismanaging them, I have no idea. It can be done (many European countries have the right regulations, even if they are ineffective in many cases), so why not?

[Einhander Sn0m4n]

Quit kneejerking and actually back up this bullshit statement, Einy. As PeZook explained, there is nothing sinister in it. Take a look at how most European states work and what kind of regulatory framework is in place for financial institutions. Do we all labor under "socialism of the worst sort"?

I'm not Einy, but my guess he's trying to say that the US has 'socialism of the worst sort' in that we 'privatize profits and socialize risk' when it comes to big business and yet have the 'fuck the poor' mentality of robber-baron capitalism.

Ah, that. He should have said so then. That distinction is not directly clear from the term socialism, which actually has legitimate uses and is not a synonym for communism.

Ah, sorry Edi. I should have clarified that. No, I don't think European socialism is bad; in fact we could use a big dose of it here in America. This 'Fuck the Poor' Calvinism is what got us into this mess in the first place.

That would make sense if the government bailed AIG out, instead of lending the money and selling off its assets to pay it back.

Ah, well that's how it should work then. Punish the absolute fuck out of the damn bastards by gutting the company alive like a fish. That at least will ease the taxpayer's burden if the assets are worth anything.

It pretty much works the way it's supposed to, except in a sane country the people who allowed the bank to go 85 billion dollars into debt would be thrown in fucking jail.

Phil Gramm first, in my opinion.

[Broomstick]

I know you were being sarcastic, but personally I'd like to see those executives living in a cardboard box on Lower Wacker Drive, using duct tape to hold their rotting shoes together and having to fight rats for what's in McDonald's dumpster in order to eat dinner.

I find the concept of the golden parachute...interesting.

From what I know, this phenomenon is purely a market issue: it happens because owners agree to write them into CEO's contracts. But, seriously...how come anybody agrees to that? There's no "CEO union" which could force people to include those clauses in contracts...

It's especially glaring in case of banks, of course, which aren't just companies: they're vital parts of the economic system (they suck, but they're the best we'll have for a long time...), which have potential to ruin entire national economies if used maliciously. Why CEOs in the US aren't held liable for (sometimes purposefully) mismanaging them, I have no idea. It can be done (many European countries have the right regulations, even if they are ineffective in many cases), so why not?

Power, money, influence.

That's the reasons, right there. Even CEO's who are held legally liable for mismanagement may still be able to keep their "golden parachutes".

[PeZook]

That's the reasons, right there. Even CEO's who are held legally liable for mismanagement may still be able to keep their "golden parachutes".

I admit I don't know much about your legal system - is it because there are no proper laws in place, or that they just don't work on powerful people most of the time?

[J]

Christ. How much longer before government bonds drop out from the strain of this?

That's a good question, in a rational world the bonds market would blow up right after Freddie & Fannie were bailed out. It didn't happen. Conditions worsened and it was a little dicey for a day, but to quote Marvin the Martian, "where's the kaboom? There was supposed to be an Earth shattering kaboom"