Blog on the Run: Reloaded

Tuesday, September 14, 2010 8:42 pm

Free enterprise for thee, government bailout for me

Filed under: I want my money back.,We're so screwed — Lex @ 8:42 pm

AIG screws the taxpayers yet again:

AIG originally agreed took a deal from the Fed that was on the same terms as a private sector funding that failed to raise enough dough: 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, and management was confident it could do so.

Now this was a dandy solution to a bad situation. And no, I’m not being ironic. The remedy was suitably punitive. No executive would want to get in a AIG type mess and be required to dismantle his company. The interest rate was high, thus keeping pressure on AIG to move expeditiously as well as providing taxpayers with a decent return. And from a systemic risk standpoint, breaking up AIG was a plus, since it would cut a TBTF entity down to size.

But AIG was able to slip the leash. Its cheery assurances that it could divest divisions proved hollow. It came back to Uncle Sam and managed to get both more money and a reduction in interest rate. In deal land, this is called a free concession and is a sign of chumpdom (the Treasury press releases tried to imply that the government got more, but when you already have a senior lien on all the assets, there’s nothing more to get, save maybe throwing out the board, which would have been a good gesture). The argument was that the interest payments would damage AIG, but all that suggested was that the interest payments be deferred, not reduced. Oh, and in case you weren’t paying attention, the financial deal was retraded not once, but three times.

Your diligent Administration also installed three trustees to oversee AIG, and since they were all professional board members, they were the last people you’d expect to rock the boat by asking Elizabeth Warren style tough questions. They were thus easily rolled when new CEO Robert Benmoshe took the reins and retraded the deal yet again, with the imperial announcement that AIG would not seek to repay the loans via divestiture. This was an act of unbelievable intransigence; no private sector majority owner would tolerate such backtalk from a hired hand.

Yet not an official word was said in opposition, since the Administration bought or hid behind the canard that Benmoshe would be hard to replace. And given that AIG has a lot of cross-company exposures (divisions lending to each other) one wonders whether dismembering the company might yield more accounting improprieties, which would mean the divisions were worth even less than thought, which would reveal that the taxpayer loans were unlikely to be repaid in full.

This is all going on with the acquiescence of the “anti-business” Obama administration.

Funny, isn’t it, how creative and accommodating the Treasury can be when dealing with large distressed firms, and its skill seems to evaporate when contending with underwater homeowners.

Now, the fact that AIG is attempting this and the government is letting it get away with it is bad enough. Worse still is why AIG is doing this: It apparently is not financially healthy enough to meet the terms to which it originally, and pretty enthusiastically, agreed. That being the case, any reasonable person would be justified in asking whether AIG is, in fact, solvent and concluding that the odds are excellent that it is not. And you know what that means: more bailouts on the horizon.

If I were a politician and I couldn’t get elected running against crap like this, I’d take up needlepoint or something.

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