Part of the deal requires that existing management be fired, according to CNBC. They'll be replaced by the Turnaround Team of Chuck Prince, Stan O'Neal, and Jimmy Cayne, who are all currently living together and can thus use the carpool lane.Here's a brain buster for you, that I'm mostly asking of the AIG inner sanctum members joining us this evening but anyone can feel free to answer-- when they were sitting around making the decision to say "thanks but we're good" to PE, who did they think was going to come along with a more desirable alternative to the shit that's gone down tonight? Really, who or what gave them the confidence to say "we're holding out for something better," besides a severe blow to the head?
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Are they actually being serious? I have no idea who any of those people are, but...how could anyone in the position to take over a multi-billion dollar company have roommates?
I mentioned this in another thread, but all this talk of hind-sight regulation and no mention of CDSes? Was it really necessary to let everyone write as many of these things out of thin air as they want without limitation, regulation, oversight, or even transparency? Weren't CDSes the main culprit, if not in triggering the crises, but at least amplifying them?
What do these three have in common? They all got fired/resigned. They can't get some VP at Goldman or Citi to do this?
That's the most offensive thing about the AIG bailout. It's one thing for the government to act as lender of last resort to fend off a systemic failure. It's quite another for a company to turn down a private, free market solution because they hope to get a better deal at taxpayer expense.
Why, isn't profit maximization the be-all end-all of any corporation, as currently defined?
That's the most offensive thing about the AIG bailout. It's one thing for the government to act as lender of last resort to fend off a systemic failure. It's quite another for a company to turn down a private, free market solution because they hope to get a better deal at taxpayer expense.
Did they actually end up getting a better deal? Does anyone know anything about the PE offer(s)?
Little Boots--
Perhaps social justice and adherence to John Rawls ought to be the sine qua non of every corporation. Not any sort of responsibility to, you know, shareholders, like my parents, or your parents, or me, or you, or the union working stiff in Ohio whose pension owns stocks, or even your beloved California public sector employees.
Naaaah... John Rawls. Yeah.
Stan O'Neal. Wow. After all he did for Merrill, he's taking time to bless AIG. Meanwhile, I am seeing very little outrage that so much of the financial markets is being nationalized. When Truman nationalized the steel industry, at least half the country was aghast, and it didn't stick. Today, all I'm seeing is concern about the Saturday's games and a lot of giggles over the Palin name aggregator.
None of these firms should have been purchased/loaned to, FF included. Their assets should have been sold off to the highest bidders, and the painful but inevitable market adjustments should have been allowed. This is the best long-term solution. Instead, we are getting Hoover-Roosevelt redux, with attendant government-big business partnerships against everyone else and policies designed to stop markets from finding their clearing price levels. If I wanted a Depression, instead of a short and painful correction, I'd pretty much do what Bernanke, Paulson, and Bush have been doing.
Adam, they're not being serious. Those 3 are the former CEOs of Merrill Lynch, Bear Stearns and Citigroup. (Chuck Prince, the former Citigroup CEO/chairman retired last year because of lousy performance.)
'Scuse me. Just contemplating my beloved California public sector employees. And John Rawls.
Seriously, you guys have given up on any serious look at this economy, haven't you?
Bwahahahahaha!!!!
MM - If you think you have headaches w/ the commenters over here, check out free for all over at DB.
btw, fellas: The bit above about Stan O'Neal, et al, is snark.
btw2: If any of you can actually remember why Stan was canned, you'll understand me when I say that instead of firing him, Merrill should've erected a statue in his honor -- he would've had the shareholders out about 80 points ago.
"Why, isn't profit maximization the be-all end-all of any corporation, as currently defined?"
This is a leftist tell. Since, to a leftist, wealth is simply had, rather than something first created, the prerequisites of wealth creation escape them.
The capitalist answer is that the be-all end-all of any corporation is the solvency of the firm, as that solvency is the only path to corporate profit. Short-term gain at the expense of the firm's solvency is not "profit."
No, darling, that was an obvious answer to an obvious question. Why should corporations give a shit about randroid philosophy, any more than any other alleged public good?
So many people with no sense of humor here.
Fact: Existing management will be fired.
Joke: The 3 amigos are going to take over.
Fact: AIG turned down investments from private equity, because they felt these would require them to surrender too much control.
Fact: This was, in retrospect, a pretty stupid call.
"Why should corporations give a shit about randroid philosophy, any more than any other alleged public good?"
Cause and effect.
Dumbya Bush's last public act as president should be performing a ritual act of seppuku on national television. Afterwards his useless carcass should be tossed somewhere on the National Mall for crows to pick at.
Well I don't know any living inner sanctum members, but I bet the late CV Starr and KK Tse would be spinning at extremely high RPMs.
They understood risk (a lot!) but never succumbed to avarice.
Cause: need for money.
Effect: money from government.
Yay! Stockholders happy for now. And executives. Which is all that matters.
Little Boots, stockholders are fucked and executives are getting fired, so I think you need to re-evaluate.
Could be a nice little return for the Fed if things work out. L+850 is a hell of a spread when your cost of capital is 2%, and if the equity recovers when AIG has liquidity and safe credit ratings, the Fed could do one hell of a huge secondary offering of its 80% stake.
Never thought I'd see the day the Fed started a prop desk. Focused on distressed assets of course. All this talk of regulating hedge funds, if you can't beat em, join em.
A linguistic question: is this a bailout? Is it a takeover?
What about Bear Sterns. Was it bailed out? It crashed and was sold for a song. Its creditors were saved, however. (Letting the stock jump back to 10 after the initial deal at 2 does complicate that one).
Jesus H. Christ, and I really thought I'd get to see some honest-to-God global panic over this, not some piddly 500-point drop. The Fed and Secretary Paulson are driving me batty with these bailouts. Can't a guy just watch the world burn for one mother------- minute without the government stepping in and saying, "Not right now, maybe later"? Is that so much to ask?
Marx! Where's your spectre, buddy? MAAAAARX!!!
Stockholders happy for now. And executives. Which is all that matters.
Yeah, I'm sure the investors are thrilled. They've lost 95% of the value of their stock over the last year and now the feds will be waltzing off with 80% of their remaining assets.
Nothing says "happy" like starting the year with a million dollars and ending the year with ten grand.
At what point do we start worrying that our credit cards won't work, or that people stop accepting government specie? It seems increasingly likely that I was wrong about the Palin choice -- maybe the most vital kind of expertise we're going to need this year really is knowing how to field-dress a moose.
brooksfoe is always good for the cogent comment, even better when humor is included !
However, in this case I have to push back.
Unless you've joined the Rapture crowd (or End of Days or your post-apocolytic scenario of choice) and believe that Alaska is the end destination for those of us who remain, I'd say field dressing rabbits, squirrels and maybe whitetail deer is more appropriate for more of the country.
Wasn't it here that folks posted their recipes for squirrel stew some months back? Who knew !
Cheers,
What little became public about the private sector offer to resue AIG looked tough but realistic. Turning it down looked as risky as Dick Fuld at Lehman's turning down the Koreans.
In the marine salvage world, I gather that there is a suspicion that modern very effective emergency life saving for distressed crews has made ship's captains more reluctant to accept assistance on the terms offered by the salvage tug. Are we seeing something paralell in finance?
Megan's posting, even when speechless, is superbly eloquent.
"What little became public about the private sector offer to resue AIG looked tough but realistic. Turning it down looked as risky as Dick Fuld at Lehman's turning down the Koreans."
One positive effect of letting Lehman go Chapter 11 and of the Fed's confiscatory terms on its loan to AIG is that the next time a company is in a similar situation, its executives will be more inclined to take a private sector offer, even if the terms seem onerous.
Interesting question asked of NY Insurance Superintendent Eric Dinallo this morning on CNBC: Would AIG have gotten to this point had Elliot Spitzer not forced out Hank Greenberg? Of course, Dinallo declined to speculate.
I'm not a financial whiz by any stretch, but I'm confused as to how the Fed is even allowed to put up $85 billion for AIG. Isn't the Fed allowed only to deal with banks? Isn't AIG the domain of the Treasury Dept. rather than the Fed? Also: I understand that the Fed is acquiring Warrants in exchange for the loan. Are Warrants actually equity, or are they more like call options?
I guess what I'm asking is this: does the Fed now own 80% of AIG, or do they simply have the ability to own AIG if they exercise their Warrants?
Here's former Fed vice chairman Alan Blinder comparing the current financial situation to Japan in the '90s -- a decade of stagnant growth. Is this an accurate comparison?
http://www.youtube.com/watch?v=uzg0e5IY3V4&eurl=http://www.dailyprincetonian.com/
I see a lot of stupid on liner commentary on this from people who ought to have something smarter to say. Rather than throw away lines like "welcome to our new socialist paradise" and such tripe I would really like to know what the consiquences would have been had AIG been allowed to fail. Second, what is the long term plan here. Is the Fed going to just run the beast or are they going to get it back on feet and sell?
My instince is always to let bad businesses fail and the market work. That instinct is complicated however by my concern for people who have annunities and pensions that are dependent on the market. I think this is one of the unintended consiquences of an ownership society. We very much have an ownership society. Most people depend upon the market for their retirement either through a 401K or a pension fund. Back in the days before that was true, it was very easy to let the market crash and the big investors go belly up. It really didn't directly effect that many people. Now, if you do that you run the risk of pension funds and the retirements of millions of people being wiped out. Given that fact, how can we be surprised that the government is so quick to intervene? The ownership society is sold as a way to get people to support the free market and go against government intrusion in the market. I suspect the opposite will prove to be true. As more and more people become dependent on the market, the political pressure to ensure that no one loses in the market will become greater and greater.
CEO Wiilumstad and his group of merry men ran AIG into the ground. They deserve cement parachutes. The should be charged with 85 billion counts of Aggrevated Larceny and placed in prison with their lawyers until they finish reading all 85 billion counts at which time they may have their trial. Read Hank Greenberg's letter.
I see a lot of stupid on liner commentary on this from people who ought to have something smarter to say. Rather than throw away lines like "welcome to our new socialist paradise" and such tripe I would really like to know what the consiquences would have been had AIG been allowed to fail. Second, what is the long term plan here. Is the Fed going to just run the beast or are they going to get it back on feet and sell?
My instince is always to let bad businesses fail and the market work. That instinct is complicated however by my concern for people who have annunities and pensions that are dependent on the market. I think this is one of the unintended consiquences of an ownership society. We very much have an ownership society. Most people depend upon the market for their retirement either through a 401K or a pension fund. Back in the days before that was true, it was very easy to let the market crash and the big investors go belly up. It really didn't directly effect that many people. Now, if you do that you run the risk of pension funds and the retirements of millions of people being wiped out. Given that fact, how can we be surprised that the government is so quick to intervene? The ownership society is sold as a way to get people to support the free market and go against government intrusion in the market. I suspect the opposite will prove to be true. As more and more people become dependent on the market, the political pressure to ensure that no one loses in the market will become greater and greater.
Dave in Hackensack
I hope you are right that all this will impel those at risk to take the Merrill Lynch route in good time rather than the Lehman or AIG routes. For that,
it is important that the execs at Lehman and AIG come out really hurting personnally, and far worse than the Merrill Lynch execs.
"I'm not a financial whiz by any stretch, but I'm confused as to how the Fed is even allowed to put up $85 billion for AIG."
Monty, see Mish's post on this, "AIG Bailout: Fed Loophole 13.3".
"I guess what I'm asking is this: does the Fed now own 80% of AIG, or do they simply have the ability to own AIG if they exercise their Warrants?"
There's not a whole lot of difference materially.
There's not a whole lot of difference materially.
I guess my question is this: what's in it for Uncle Sam? If the intent is to allow AIG to wind down their business in an orderly fashion, won't the warrants that the Fed holds become worthless, thus wiping out their $85 billion investment? On the other hand, if the intent is to prop up AIG, how can the Fed avoid conflict-of-interest problems when setting monetary policy, given than they are now (functionally) a large player in the very market they're playing in? When can the Feds exercise their warrants in such a way as to recoup the investment without incurring allegations of improper enrichment (assuming that AIG's stock price recovers)?
The ownership society is sold as a way to get people to support the free market and go against government intrusion in the market. I suspect the opposite will prove to be true. As more and more people become dependent on the market, the political pressure to ensure that no one loses in the market will become greater and greater. - John
And the prize for the most reality-based comment goes to John.
It seems increasingly likely that I was wrong about the Palin choice -- maybe the most vital kind of expertise we're going to need this year really is knowing how to field-dress a moose.
As usual, this is only funny because there is an element of truth to it. I suspect that government & political 'expertise' is vastly over-rated.
As more and more people become dependent on the market, the political pressure to ensure that no one loses in the market will become greater and greater.
Exhibit A: Social Security
"I guess my question is this: what's in it for Uncle Sam? If the intent is to allow AIG to wind down their business in an orderly fashion, won't the warrants that the Fed holds become worthless, thus wiping out their $85 billion investment? On the other hand, if the intent is to prop up AIG, how can the Fed avoid conflict-of-interest problems when setting monetary policy, given than they are now (functionally) a large player in the very market they're playing in?"
Monty,
There's a lot of potential upside in it for Uncle Sam. First, the Fed is going to be getting paid a hefty interest rate on the money it lends out -- 8.5% above LIBOR. Second, AIG has a lot of profitable lines of business and a lot of valuable assets. If it survives as a business (as seems likely) the share price will appreciate significantly from its current penny-stock levels. At some point in the next several years, the Fed should be able to exercise its warrants and make a tidy capital gain on the deal.
Regarding potential conflicts of interest with setting monetary policy, I think this is why the interest rate on the lending facility was indexed to LIBOR (the London interbank offering rate), since the Fed doesn't control that rate.
I'm not sure what you mean by "allegations of improper enrichment".
I'm not sure what you mean by "allegations of improper enrichment".
I'm probably not phrasing it correctly. What I mean is: is the government allowed to make a profit on this kind of deal, given the mission of the Fed? And wouldn't the Fed have a huge incentive to do some insider trading, given the position they now have with AIG? It's a conflict-of-interest thing -- if the Fed happens to take some action or make some policy that ends up bringing money into their own coffers via the AIG warrants, how can the Fed prove that their own enrichment was a side-effect of a purely disinterested decision?
"What I mean is: is the government allowed to make a profit on this kind of deal, given the mission of the Fed?"
Sure, why not? Why shouldn't the Fed have some upside potential to compensate it for the risk its taking on as a lender of last resort? This sort of government equity stake isn't unprecedented.
"And wouldn't the Fed have a huge incentive to do some insider trading, given the position they now have with AIG?"
Do you have an example of the sort of "insider trading" you are worried the Fed might engage in? I can't think of one offhand, but I'm not too worried about impropriety from the Fed here. First, Fed officials aren't going to be running the company (although they'll probably hire or approve new management). Second, Fed officials won't stand to benefit personally from any gains -- these are civil servants, not investment bankers working for a big year-end bonus. Third, who wants to go to jail? It's true that the Fed will have access to inside information about AIG, but Fed officials already have access to inside information on many Wall Street firms as a result of their oversight of these firms. I would assume similar controls are in place with AIG.