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3/20/2009 2:16:56 PM

i swear we've been talking about AIG in another, lengthy thread already.....

3/20/2009 2:22:19 PM

It's been 6 months already?

Holy shit.

3/20/2009 2:29:50 PM

how do you make a payment to yourself?

3/20/2009 4:31:58 PM

Not sure, but I'd assume it's mainly employee salaries, bonuses, leases, and other sort of routine maintenance expenses that most companies pay in order to continue their existence.

Though some of those probably fall under "Other", as well.

[Edited on March 20, 2009 at 5:39 PM. Reason : .]

3/20/2009 5:37:59 PM

if it was a payment to an employee, that would still be striking it off the AIG balance sheet.

3/20/2009 10:29:19 PM

Ah, I didn't even notice that little arrow on the bottom leading over to a strip of blue that doesn't appear to actually go anywhere...

Investment for the future, perhaps?
I'd want to say they're saving "just in case" something bad happens (emergency preparedness... or whatever a corporate bureaucrat would choose to call it), but that idea's dead right off the bat given how bad a something has already happened, and how they're currently digging deep into emergency money that isn't even theirs.

3/20/2009 11:11:36 PM

USA

Propping up bankrupt businesses with monopoly money

Change we can all believe in

#1

3/20/2009 11:16:42 PM

bank run or keep the world going...hummmmmmmmmmmm

3/20/2009 11:46:57 PM

Quote :

"Investment for the future, perhaps? I'd want to say they're saving "just in case" something bad happens"

ah, this seems most likely, as it does wrap back around on itself (+2.5 more going to nowhere). The only confusing thing about that is; if it's still there for the future, why would it not be accounted for in the "money left"?

3/22/2009 4:19:40 PM

I really don't understand why AIG is still even an entity.

Ok, we take their toxic assets and put them on the federal balance sheet so other financial companies don't write them off.

But

Why is AIG as a company being kept afloat? Whatever happened to the concept of a graceful failure?

3/22/2009 6:50:33 PM

^ Four words

"Too big to fail"

The moment we bought into that bullshit, letting these companies fail gracefully or otherwise was no longer an option.

[Edited on March 22, 2009 at 7:44 PM. Reason : dsf]

3/22/2009 7:43:39 PM

the too big to fail excuse is not working. they just wind up postponing the inevitable if a company is no longer viable. Look at GM and Chrysler. they are calling for a lot more money and it's only been a few weeks.

3/22/2009 7:51:24 PM

GM and Chrysler != AIG

A straight-up AIG collapse or bankruptcy would have a ripple effect that would bring down countless other companies and countries.

I'm not saying what they're doing now is good or right, but the calls for "just let them die" is just as ill-informed as "give them as much money as they want"

3/22/2009 8:00:15 PM

I'm not saying they are the same thing. What I'm saying is pumping money into failing companies just allows them to stay afloat till they blow through the money and the taxpayers are left holding the bill.

3/22/2009 8:20:01 PM

well, that may be so, but that doesn't have anything to do with the "too big to fail" issue. AIG is too big to fail in the fashion of a normal Chapter 11 or 7. So, we shouldn't be pumping money into them endlessly like we seem to be doing now, but just letting them die-off is not an option.

3/22/2009 8:41:30 PM

Quote :

"USA Propping up bankrupt businesses with monopoly money Change we can all believe in #1"

remind me who started this bailout?

3/22/2009 9:37:03 PM

Quote :

"well, that may be so, but that doesn't have anything to do with the "too big to fail" issue. AIG is too big to fail in the fashion of a normal Chapter 11 or 7. So, we shouldn't be pumping money into them endlessly like we seem to be doing now, but just letting them die-off is not an option."

So what is an option then? Honest question because its my understanding that the process of bankruptcy is exactly what everyone is really screaming for, we just don't want to call it that.

Quote :

"remind me who started this bailout?"

Quote :

"change [cheynj] Show IPA verb, changed, chang·ing, noun –verb (used with object) 1. to make the form, nature, content, future course, etc., of (something) different from what it is or from what it would be if left alone: to change one's name; to change one's opinion; to change the course of history. 9. to become different: Overnight the nation's mood changed. 10. to become altered or modified: Colors change if they are exposed to the sun. –noun 19. a transformation or modification; alteration: They noticed the change in his facial expression. 20. a variation or deviation: a change in the daily routine. 21. the substitution of one thing for another: We finally made the change to an oil-burning furnace. 22. variety or novelty: Let's try a new restaurant for a change. 25. the supplanting of one thing by another. 26. anything that is or may be substituted for another. "

So if Bush started it, and Obama is continuing it, where is the "change we can believe in"?

3/22/2009 10:08:14 PM

U.S. Steel
Farm Subsidies
The entire building railroads thing in the 1800s

3/22/2009 10:11:42 PM

Quote :

"So if Bush started it, and Obama is continuing it, where is the "change we can believe in"?"

hey, i'm just saying, be fair now. i guess i forgot that we're all awesome libertarians here who are outsiders who speak truth to power. my bad.

[Edited on March 22, 2009 at 10:22 PM. Reason : .]

3/22/2009 10:21:24 PM

Quote :

" "just let them die" "

We should let AIG die. Being run by the gov't, it's pretty much already dead. Let its assets be sold off to successful businessmen who can put them to better use.

Pull the feeding tube and let this comatose company pass over. Go to the light, AIG!

3/22/2009 11:57:28 PM

We should have (and still should) nationalize the company. The fact that it's still listed on any exchange is a joke and insulting that traders are hovering around this piece of junk.

No 'investor' in this company should be allowed to expect any payout - ever, it failed, you put your chips in the wrong place. If you accept that then you can (rightly so) value this company in the negative numbers and thus it should not be a problem for any kind of 'imminent domain'.

The entire reason that companies found it to be a good idea to take 40:1 leverage is because investors never have to face negative value. Companies can fall to zero, no further. That encourages risk taking beyond what is responsible because the scenario where they go too far under was never of relevance to the company leaders. If investors could have been held liable for the trillions of negative equity that banks tally up then the problem would have never happened. The fact that companies form their own legal entity and can thus limit damages is nothing more than a loophole of capitalism in the way that we have set it up.

All the economists who know what they're talking about have been saying this.

Nationalize.
Take you medicine.
Rebuild.

3/23/2009 1:40:32 AM

^ Not at all. While I support restoring liability to shareholders, it is not necessary to prevent these eventualities. Afterall, had lenders looked upon AIG's books and seen that it was leveraged so, then they would have refused to lend further. However, bond holders in large companies have had an implicit government guarantee since at least 1998 when LTCM was bailed out (wiped out equity holders and guaranteed bond holders). If the government had not done that, effectively promising never to bail out bond holders even when they turned out to be government retirement funds, then bond holders would never have allowed any corporation to leverage 30 times over, thus reducing the problem.

The problem we have is that no one at the table has any incentive to not leverage 30 times over. The equity holders are already losing everything when it goes south, so all leveraging more does is increase the upside without any downside. Meanwhile, the bond holders have an implicit government guarantee which only gets stronger the more they lend. In fact, bond holders only ever worry that they have not lent enough to sustain "too big to fail" standards.

[Edited on March 23, 2009 at 12:13 PM. Reason : california]

3/23/2009 12:11:44 PM

Quote :

"The problem we have is that no one at the table has any incentive to not leverage 30 times over. The equity holders are already losing everything when it goes south, so all leveraging more does is increase the upside without any downside."

Right, that's what i was trying to say.

Quote :

"Meanwhile, the bond holders have an implicit government guarantee which only gets stronger the more they lend. In fact, bond holders only ever worry that they have not lent enough to sustain "too big to fail" standards."

Well, if you did want to blame this all on any one market player in particular, I think it would most definitely be AIG's bond holders and lenders. Granted, I understand that that includes municipalities and everyone on the big flow-chart, but they are the people who were supposed to watch out for this. I know there was an implied thinking that the Fed would bail them out, but aside from being irresponsible on the part of the government, that shouldn't have been an absolute anyway.

The reason we're purported to back up the AIG bond holders, debt holders, etc. is because we are afraid that not doing so could bring the financial world to a screeching halt, and with it, society. I don't think that's what the people who bought their bonds and insurance had in mind. The reasons people could trust AIG are complicated, but they certainly looked like one of the most stable and reliable companies out there.

There are several ways that our system encourages too much risk taking and irresponsibility, and the fact that stocks limit liability is just one. But in reforming this, I don't think we should be throwing out bones to equity holders. There is no reason for the government to be generous, in fact, quite the opposite - an example has to be made and promises need to be made to not doing something similar in the future. That's why we need a hard-ass approach, which is how I see nationalization.

3/23/2009 1:16:50 PM

And in your nationalization, are the bondholders going to take a haircut? If not, then it is not a solution: the bond holders will wait for the government to pay them back, then go leverage some other company 30 times over with no reason to act otherwise. We have nationalization, we had it in 1998; it is nationalization through bailouts that caused these perverse incentives. The only action that fixes the problem is nationalization in the form of bankruptcy courts where bond holders are given the company and told to make the best of it, losing their shirts in the process and swearing never to do this again. Making stock holders liable for loses does not fix bond holders, it just protects them even more.

So, to clarify in once sentence, what are you going to do to bond holders in your nationalization that will make them swear never to do this again?

[Edited on March 23, 2009 at 1:43 PM. Reason : .,.]

3/23/2009 1:41:32 PM

No, I don't advocate nationalization in order to pay back 100% to the creditors (although I think this is the current 'plan'). If you say "let them fail", I don't disagree with you, I just think that the 'form' of failing needs to be the government coming in and taking over stuff. I don't claim to be an expert, or even understand the majority of the details, I just have a general sense of things... and get the blog feed.

http://baselinescenario.com/2009/03/20/let-aig-fail-lucian-bebchuk/

Quote :

"I think that the government could let AIG fail, if - and this is a big if - it can first identify which creditors and counterparties would be hurt, determine which of those cannot be allowed to fail (which should not be all of them), design a program to provide them enough capital directly, and announce everything on the same day. The net cost to the taxpayer cannot be higher than under the Too Big To Fail strategy, which implies a 100% guarantee for all counterparties and creditors (not to mention employees - bankruptcy would settle this whole question of whether the bonus contracts are legally binding once and for all)."

We 'bail them out' in order to prevent chaos. Now we need to let them down in a manner that makes use of government funds in a way that benefits the whole over vested interests as much as possible. That will be done by the government picking and choosing who is getting what after we declare the company itself to be no more.

I advocate:
- delisting from exchanges, and claiming whatever form of bankruptcy works
- the government dealing out the pieces... how this will be done i don't claim to know, but it's not 100% bond payback, it's not 0% either

3/23/2009 2:43:13 PM

well, what an interestingly complicated mechanism. That is not too different from a usual bankruptcy, except you are replacing the bankruptcy court judge with direct appointees by congress and the president on a per-instance basis, and placing government funds at the disposal of the process.

If the plan becomes law, of course, then I assure you next time around 100% of the bond creditors will qualify as counterparties which "cannot be allowed to fail". Remember, bonds can be bought and sold freely; once a company comes into trouble those most able to game whatever bankruptcy system exists will buy the bonds at a discount from those less capable.

It was not the end of the world when Leighman Brothers went into bankruptcy. Credit markets, which had assumed all such firms enjoyed implicit government guarantees, were shocked when LB was not bailed out and so froze up for a while. But it was not the end of the world, and certainly did not cause civilization to collapse. As such, now that wallstreet understood that bailouts were not automatic but purely based upon political influence, further reminders, such as an AIG collapse, would have been unlikely to have worse outcomes and potentially would have left us all in a better policy position afterwards by hopefully repudiating the previous bailouts and telling all investors to look to their own security in the future, not Washington.

3/23/2009 3:21:23 PM

The collapse of Lehman Brothers was a huge shock on global markets, and most economists agree that it was a mistake to let them fail.

AIG is about 5 times bigger than Lehman Brothers was, so it's a legitimate concern that AIG's failure could bring about a doomsday scenario in the financial markets.

3/23/2009 3:30:25 PM

Unless you believe the shock was that anyone could be allowed to fail, a shock which would not have been repeated with AIG, since someone else had already just been allowed to fail (LB) and so stake holders would have taken measures to protect themselves from a repeat with AIG, something they had not done to protect against a LB collapse, since the bailout of Bear Stearns put a floor under both LB and AIG. And I know lots of economists that believe the mistake was to sacrifice the gains paid so dearly for when LB was allowed to fail by proceeding to bail out everyone else, undoing the lesson without undoing the pain.

Afterall, the CEO of Goldman Sachs claimed recently that when LB was allowed to fail, his company arranged to protect itself from an AIG collapse, something they had not otherwise bothered to do. (will get the link up later).

[Edited on March 23, 2009 at 3:47 PM. Reason : .,.]

3/23/2009 3:43:27 PM

Bernanke himself says that he regrets letting LH fail.

A complete collapse of AIG is difficult to imagine, and I don't understand this enough to say for sure anyway. But I imagine that "bad" would be appropriate.

3/23/2009 4:28:09 PM

Yes, Bernanke which bailed out a bunch of people regrets not bailing out even more people. I agree with him completely. We have decided that taxpayers should bail out every large firm that fails. As such, it is unfair to not bail out LB bondholders, especially when we had just finished reminding them we would.

Now, if we could go back to 1998 and not bail out LTCM, then great, the normal rule of "no bailouts for anyone" could have been maintained, and we'd not be here. However, since we did bail out LTCM, it was unfair not to bail out Lehman Brothers, since they had reasonably relied upon us to enforce the "bailouts for everyone" rule.

3/23/2009 5:40:14 PM

^

I don't understand the connection you're making between AIG and LTCM; the latter was bailed out with private sector capital, the Fed just played Mother Goose and got everyone around the table. That's a far cry from directly using public money to save a company like AIG and the government taking warrants for its equity.

As to the rest of your "analysis," frankly it just consists of speculation about how bond markets move; it's not a basis for making policy one way or another. There was plenty of (informed) speculation on the same topic here: http://dailybail.com/home/no-need-to-bailout-seeking-alpha-discussion-of-bank-bondhold.html. They speculate in more or less the opposite direction, that Lehman cast sufficient doubt to prevent the re-leveraging you're describing (in the near-term at least). All told, it's just speculation; if you're so good at it, put your money where your mouth is, bet on the bond market, and tell us in a few years how it worked out for you.

[Edited on March 26, 2009 at 3:21 AM. Reason : foo]

3/26/2009 3:19:45 AM