The legislators have a modestly legitimate beef with this “bailout”, but on the other hand, the seriousness of the situation demands the attention of actual adults with functioning brains and who can get something rather complex done under a tight deadline = days, hours. This automatically rules out Congress.
Let me restate what I’ve said on a few other threads: This is no “bailout”. This is an EXTREMELY harsh, near-mafia grade bridge loan to AIG. IMO, today’s DJ -450 market reaction was in response to AIG. There is NO PREDICTING whether this “bailout” can be pulled off, most simply because it’s not going to be easy for AIG to pay 11.3% interest in a 3-4% environment. Simple as that. IF they can not pull it off, then the abyss that the Fed wants to avoid by making this loan will recur. And it ain’t pretty, folks, it WILL be quite serious. Multiply today’s market action by 10. Yeah, 3000-5000 DJ points.
The terms of the so-called “bailout” are pretty vicious:
1: AIG pays 11.3% interest LIBOR + 8.5% on the loan for 2 years.
2: The Federal Reserve becomes 79.9% owner of AIG’s total business by inserting their magic “warrants” into the chain of ownership. This collateralizes the loan. AIG was as high as 70 last year, with 2.7 billion shs outstanding, and has been a $60 stock for about 5 years. Let’s call a nominal value 40, times 2.7 billion = $108 billion x .80 = about 86 billion, roughly the amount of the loan.
3: AIG has to trim itself down considerably. AIG is a massive, massive company and has lots of good businesses under its umbrella. It’s obviously going to have sell a good slug of them, and it has to sell for cash, not debt, because only cash will extinguish the loan from the Fed. This isn’t exactly the optimum environment to sell businesses, with credit so constricted.
4: As AIG sells good businesses, the toxic crap they took on their books becomes a bigger and bigger portion of their “book”, and the market for that stuff is much worse than it is for actual functioning businesses.
I am not advocating sympathy for AIG, they brought this on themselves and sold credit default insurance with wild abandon. But, this is no cakewalk they have going, there’s no certainty they’ll be able to pull it off.
The reason the market sold off so violently is this move by the Fed is ANYTHING BUT a bailout, it is more accrately paraphrased as “You got yourself in, you get yourself out. You want our help, it will cost you almost as much as your company is worth. If you can do it, maybe you get a company when you’re done. If not, tough. WE’RE OUT OF BAILOUT MONEY”
Totally disagree....
In fact, dont be surprised there are more financial bailouts (yes AIG is a BAILOUT)
The sad part, and little discussed, is that this is American taxpayers bailing out a mostly non-American company...so many of its assets are in foreign countries...esp COMMUNIST China
In fact, AIG, ironically, was started in China (pre-Commie China).
Not only it was bad to use US taxpayers $$ to bail out AIG...it was absolutely Nutty Globalist to have US Taxpayers bail out foreign interests.
Thanks for a thorough analysis.