AIG Roundup

Jesse Walker | September 17, 2008

A lawyer friend IMs "I would be fascinated to know on what authority the Fed is claiming the right to do this." It's probable that they don't actually have the legal right to do anything like this. Their authority is this: who's going to stop them? No one wants to take on responsibility for this mess themselves.

Eric Posner:

True, the Fed statute says that loans can be issued with conditions....But the Fed statute does not say that the Fed can purchase businesses, and it seems reasonable to interpret the statute to forbid the Fed to purchase businesses. So here's the question, is the AIG deal a purchase or a loan? I suspect the deal is a loan in form but a purchase in substance. Unfortunately, the details are not available, but the press accounts suggest that the Fed is receiving AIG equity (more precisely, the option to obtain equity) as collateral for the loan but that it's going to exercise the option more or less automatically. Here's an analogy. Suppose that I lend you $100 and we agree that all of the equity in your business will be collateral for the loan. The contract provides, however, that you must pay me interest of a gazillion dollars, due one second after closing, and that if you fail, that counts as a default, whereupon the collateral is mine. The parties use the loan form but substantively a sale occurs. A court would almost certainly interpret the transaction as a sale, not a loan, if tax or other legal consequences turned on the distinction. If the AIG loan is like this, then it's illegal. So: why aren't our rule-of-law friends yowling?

Lady Liberty:

I wonder if this was the September revamp talked about in July

Michael Hiltzik:

In each case, industry and government officials have justified the bailout as cheaper in the long run than doing nothing. But critics contend that bailouts often encourage bad behavior by relieving underperforming industries of the consequences of their ineptitude.

In addition, sometimes the government can end up as an investor in companies that are the target of regulatory action, creating a conflict of interest. The government's potential ownership of AIG could put policymakers at cross-purposes with their own efforts to regulate a variety of financial transactions in which the company participates.

John Scalzi:

Are we socialists yet? No, no. Relax. We couldn't possibly be socialists. Socialists only nationalize successful businesses.

And from a Hit & Run comment thread downstream, here's a bleak thought from John Kluge:

The ownership society is sold as a way to get people to embrace the market and oppose government control of the market. I think the opposite is going to prove true. As more and more people are dependent on the market doing well, the political pressure to ensure that no one loses in the market will be greater and greater.

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jmd|9.17.08 @ 11:29AM|#

shady financial dealings by the fed? different, of course, from the shady financial dealings by private lenders/traders that created this mess in the first place.

|9.17.08 @ 11:30AM|#

JUNKIE ECONOMY.

C'mon folks pick up on this, it's a perfect metaphor.

squarooticus|9.17.08 @ 11:34AM|#

Can we at least all agree that a recession---even using the government's suspect numbers---is a foregone conclusion? AFAICT, the remaining outstanding item is whether we're headed for the Great Depression II (deflation from not bailing out the financial system) or the Crack-up Boom (hyperinflation from a bailout).

My money is still on the Crack-up Boom. I think Bernanke is sufficiently afraid of deflation that he truly will drop money from helicopters before permitting a second Great Depression.

|9.17.08 @ 11:37AM|#

Can we not get a Reason shout-out for Constitution Day? My campus is full of commies and we still all got pocket Constitutions and pie. Apple pie. The Constitution's pie.

JMR|9.17.08 @ 11:39AM|#

Shout outs to commies with pocket constitutions they probably never crack. "Conservatives" (neocons) are desperately trying to paint this socialism as "maybe a good thing, since it might make money like Chrysler??!?" They're consistent. Consistently truth-impaired, but consistent.

Elemenope|9.17.08 @ 11:40AM|#

Are we socialists yet? No, no. Relax. We couldn't possibly be socialists. Socialists only nationalize successful businesses.

It's no fair at all when the winner is in the article.

|9.17.08 @ 11:40AM|#

You mean the federal holiday previously known as "Citizenship Day", NutraSweet? Maybe "Servant of the State Day"?

|9.17.08 @ 11:41AM|#

Details are few and far between; I don't have the patience to root around for them, anyway.

If this is a "nationalization" of AIG, who will be running it? Some faceless assistant undersecretary of the Treasury? Or Barney Frank?

Smoke, Mirrors|9.17.08 @ 11:42AM|#

squarooticus,

Government can't really bail out the financial system. They can steal money from one part of it to prop up another, but simply can't contribute anything to the financial system except provide a semi-deterministic underlying framework enforcing the rule of law.

The best they can ever do is reduce the amount of damage that they do to the financial system. It will thrive or suffer on its own merits. Government bailouts are smoke and mirrors, at best.

|9.17.08 @ 11:43AM|#

Can we at least wait until General Motors actually files for bankruptcy before we buy it?

robc|9.17.08 @ 11:47AM|#

JMR,

Never forget that neocons are Trotskyites, so socialism comes easy to them.

squarooticus|9.17.08 @ 11:48AM|#

Smoke, Mirrors:

They can create the illusion of a bailout of the capital markets by destroying the currency. See the Weimar Republic for an example of this.

So, while you are technically correct that they can't simulate the same conditions as a well-oiled Ponzi capital market based on fractional reserve banking, they can preserve the illusion long enough for the bankers to get out with their wealth mostly intact while the rest of us struggle to buy $50 loaves of bread.

Dagny T.|9.17.08 @ 11:53AM|#

Apple pie. The Constitution's pie.

*drool* The sweet, sweet pie of freedom.

/end channeling Homer

Wait, are those pies sugar-free??

|9.17.08 @ 11:56AM|#

You mean the federal holiday previously known as "Citizenship Day", NutraSweet? Maybe "Servant of the State Day"?

Look. I got pie. I'm very easy to appease. At least they actually mention the constitution for once around here, rather than just wiping their ass on it.

The government's potential ownership of AIG could put policymakers at cross-purposes with their own efforts to regulate a variety of financial transactions in which the company participates.

That could never happen; a government(backed) financial institution lobbying the Congress for favorable regulatory treatment?

Jerry|9.17.08 @ 11:58AM|#

The real shit that is going to hit the fan is when babyboomers start retiring within these coming 5 years. The subprime crisis will only look bleak in comparison.

|9.17.08 @ 11:58AM|#

Wait, are those pies sugar-free??

No, they weren't. My sissy pancreas can just STFU.

And I got to have a discussion about how the Constitution doesn't grant us rights, but rather enumerates what right the government shouldn't be able to take away with my student workers.

|9.17.08 @ 11:59AM|#

Look. I got pie. I'm very easy to appease

Struggling...struggling...pie...another kind...must not...

|9.17.08 @ 12:01PM|#

Wait, are those pies sugar-free??

No, they weren't. My sissy pancreas can just STFU.

Why don't you make one with Splenda, NutraSweet? Or do you already at home?

|9.17.08 @ 12:02PM|#

Epi,

If you're a sausage fan, it's all right to tell us.

If we can still accept Weigal after yesterday's shocking revelations, you should be fine.

"Are we socialists yet? No, no. Relax. We couldn't possibly be socialists. Socialists only nationalize successful businesses." Thanks, I needed that......

|9.17.08 @ 12:06PM|#

Nah, I rather have a little bit of a good bad thing, than a whole lot of a bad good thing.

And the Gideon's were on campus to day, handing out New Testaments. "If it ain't the King James, it ain't the Bible!"

Mike|9.17.08 @ 12:09PM|#

The ownership society is sold as a way to get people to embrace the market and oppose government control of the market. I think the opposite is going to prove true. As more and more people are dependent on the market doing well, the political pressure to ensure that no one loses in the market will be greater and greater.

Which is, basically, one of the points made in "What's the Matter With Kansas". Love him or hate him, that point seems true.

kablammo|9.17.08 @ 12:10PM|#

As I understand it, this is a 2 year credit facility at LIBOR+8.5, with the fed taking a controlling stake in AIG to protect their interests, including the right to veto all dividends and direct the sale of certain assets of AIG to ensure the fed gets paid back. If (and again, this is just my understanding of the deal at the current time) AIG pays back everything w/in the two year commitment, the fed steps back out of AIGs business and walks away with no part of AIG other than a pound of flesh consisting of the interest on the loan.

|9.17.08 @ 12:12PM|#

If you're a sausage fan, it's all right to tell us.

I've never heard of "sausage pie", but if you have had it, that's...disturbing.

You better have known what I actually meant or I will ridicule you.

|9.17.08 @ 12:13PM|#

I agree. That's H. L. Mencken funny.

Dagny T.|9.17.08 @ 12:13PM|#

No, they weren't. My sissy pancreas can just STFU.

Ah. The competitive, spite-based eating. Eat through the pain! (Just getting in the spirit for the upcoming Canadian Thanksgiving.)

And the Gideon's were on campus to day, handing out New Testaments.

Pie, the Constitution, AND a Bible? This is a "Dear Diary" day, isn't it, SugarFree?

Warty|9.17.08 @ 12:18PM|#

Did someone say sausage pie????? OMG OMG OMG I have to make it now now now now now now now now

Elemenope|9.17.08 @ 12:18PM|#

And the Gideons were on campus to day, handing out New Testaments.

I like the Gideons. They are always polite, and all they do is give you a book.

Some other groups could take a hint: this is *good* witnessing.

|9.17.08 @ 12:20PM|#

Dagny T.,

Wednesday's suck. All my students have classes after 10:30 and I'm alone against a cavalcade of idiots.

Thanks for making fun of my attempts to make a human connection is this cold world of pixels and clacking keys.

|9.17.08 @ 12:22PM|#

Ele,

They didn't offer one to my work wife on her way in. I pointed out it was probably her slutty skirt...

Yes, the Gideons are very benign and polite. Much better than the Jesus-shouters who scream the entire Bible over a loudspeaker for the first two weeks of every semester. (No, I'm not kidding or exaggerating.)

|9.17.08 @ 12:24PM|#

Did someone say sausage pie????? OMG OMG OMG I have to make it now now now now now now now now

Warty, this is even better; it has rapini (broccoli rabe) in it.

hotsuace|9.17.08 @ 12:29PM|#

But this is what I wonder: If the deal is so good and the Fed actually expects to be repaid (principal plus LIBOR+8.5), why didn't a private interest step in to realize the profit opportunity? All this talk about an orderly liquidation is hogwash. What's so special about the government that only it can liquidate a business to maximize its value?

|9.17.08 @ 12:32PM|#

Both sound awesome, but the first one is easier for me. KY has almost no rabe.

:-(

Dagny T.|9.17.08 @ 12:33PM|#

Thanks for making fun of my attempts to make a human connection is this cold world of pixels and clacking keys.

Aw, I'm sorry. No more mockery. Let the hurting stop and the healing begin.

Much better than the Jesus-shouters who scream the entire Bible over a loudspeaker for the first two weeks of every semester.

There was an abortion shout-off every semester on my campus, but nothing so cerebral as reading the entire Bible. That shows impressive dedication.

Djyrn|9.17.08 @ 12:35PM|#

"The real shit that is going to hit the fan is when babyboomers start retiring within these coming 5 years. The subprime crisis will only look bleak in comparison."

Using squaruticus' options, I'd say they're the ones getting bailed out.

It remains to be seen if they'll be able to retire. That'll be the next big bail out.

|9.17.08 @ 12:42PM|#

Both sound awesome, but the first one is easier for me. KY has almost no rabe

Why? We have tons of it in CT. It's not like it grows here.

There was an abortion shout-off every semester on my campus, but nothing so cerebral as reading the entire Bible

You with this, NutraSweet with Gideons and pie; Johns Hopkins had none of this shit. Maybe that's why it was so boring.

Paul|9.17.08 @ 12:48PM|#

Two words: boo ya.

I grimmaced yesterday as Daniel Schorr on NPR mentioned that with all these financial institution failures that capitalism wasn't "working". I was screaming, red faced into my radio that capitalism is working just fine by removing the dead wood, but the government keeps stepping in and fucking it all up.

FYI: My retirement fund is with AIG.

The good news: If I were to lose everything, I won't lose that much.

My future: Wal-Mart greeter.

Warty|9.17.08 @ 12:49PM|#

Fuck man, I wish my school had had bible-ranting crazies. All I got was crushing amounts of differential equations, rain every Friday, borderline alcoholism, and depression. Oh, and no pussy.

Any high schoolers reading this: do not go to a nerd school.

Dagny T.|9.17.08 @ 12:49PM|#

Johns Hopkins had none of this shit. Maybe that's why it was so boring.

Well, I can't speak for SF's school, but Johns Hopkins probably makes UW look like Special Ed. Poor you, surrounded by all the "boring" geniuses. ;-)

robc|9.17.08 @ 12:58PM|#

SugarFree,

What campus are you on that is "full of commies"? Transy?

Fuck man, I wish my school had had bible-ranting crazies. All I got was crushing amounts of differential equations, rain every Friday, borderline alcoholism, and depression. Oh, and no pussy.

My nerd school had all that AND the bible-ranting crazies (and as a evangelical, I have a higher threshold to reach there).

|9.17.08 @ 1:01PM|#

Any high schoolers reading this: do not go to a nerd school.

Or if you do, go to one with a non-nerd school (preferably with a medical center) nearby. Though in this age of cornicopious internet pr0n, there's less reason to concern oneself with such things.

|9.17.08 @ 1:03PM|#

Well, I can't speak for SF's school, but Johns Hopkins probably makes UW look like Special Ed. Poor you, surrounded by all the "boring" geniuses. ;-)

What can I say? Maybe I'm just jaded.

|9.17.08 @ 1:05PM|#

robc,

No, the other one. It's not that bad really, but I think a couple of them might have fainted after reading the 2nd Ad.

robc|9.17.08 @ 1:13PM|#

SugarFree,

I dont know what "the other one" is. Im ignoring the giant in the room, but I cant imagine anyone saying it is full of commies or any of them fainting after reading the 2A - they might drop their rifles.

|9.17.08 @ 1:22PM|#

No, I'm talking about UK. Even with the frat and sorority density, the liberal arts core is nambly-pambly college socialist.

Fun fact: We just got a new VP for Diversity. UK bought her a $350,000 dollar house as a "signing bonus."

robc|9.17.08 @ 1:24PM|#

SugarFree,

Dont something like 70% of UK students schedule afternoon classes only in fall semester so they can go deer hunting in the mornings? Or is that just my relatives?

robc|9.17.08 @ 1:27PM|#

Also, about 90% of my interactions with UK students/alumni are at Commonwealth Stadium on saturdays, so MMMV.

My sister and most of my cousins are UK alum and the radical "left-winger" in the family is a moderately conservative democrat.

|9.17.08 @ 1:37PM|#

robc,

Just your relatives, I'm afraid. Plenty of heavy-lefties and an active womyn's studies program.

The fans are usually not even students. Why would they waste tickets on smelly old students?

Russ 2000|9.17.08 @ 1:51PM|#

Eventually we'll have big inflation, but Bernanke is trying to avoid joe sixpack's accounts (and paychecks) being subject to 60-day freezes like the '30's. Those account freezes turned the market crash into the Great Depression. It's possible that all of Bernanke's horses and all of Paulson's men won't be able to avoid a freeze-up, but if they do nothing there absolutely would be a freeze-up and that affects joe sixpack more than it affects Forsythe P. Twentyfourpack.

kablammo|9.17.08 @ 2:01PM|#

"why didn't a private interest step in to realize the profit opportunity? "

Paulson tried to get JPM and Citi to do just that - he wanted them to pony up a $70-75bn fund to backstop other (smaller) players. But they've got their own problems right now; remember JPM just took on Bear. My guess is that BAC was on that list too, but they're still trying to digest Countrywide and now Merrill. I heard the former chairman of AIG (Greenberg?), who holds about 11% of the stock, was also considering some sort of action by himself merely to protect his investment, but this is a problem of liquidity and confidence. That said, I think Paulson levied the LIBOR+8.5 to send a strong signal to the remaining players that there would be a steep cost to calling on the fed and lessen the problem of creating a moral hazzard.

"All this talk about an orderly liquidation is hogwash. What's so special about the government that only it can liquidate a business to maximize its value?"

The key here is the time to liquidate, not ability to do so. Assuming a stable market, if your home has a FMV of $500k, you may be able to get $500k for it if you have a few weeks or months to sell it. If you have 3 days to sell your home, you're going to have to take a steep haircut to get a buyer interested and to come to the closing table with a check that fast. Now imagine you have three days to sell your home or you'll owe not only the original $500k, but also an additional $100k to another party.

With AIG, if they take the time they need to liquidate assets at FMV, they could likely get a better price, but in the process that extra time is going to cost them in the form of rating downgrades and collateral calls. It was said a one mark downgrade would have triggered $18bn of collateral calls on their CDS holdings. If the collateral calls couldn't be met, there could have been a further downgrade, more collateral calls, etc.

I'm not entirely happy with the way this is being worked out, but I think Paulson is doing what he thinks best to protect the taxpayer and the people on main street, and not those on Wall street. (If not, why did he give Lehman the flying finger over the weekend?) Make no mistake, if AIG were allowed to fail, it could set off a wave a small bank failures, overwhelm FDICs reserves, and bring lending to individuals and small businesses to a grinding halt. All that said, I was kinda hoping for a complete failure of AIG - but I'm a corporate lawyer so I'd just be making more money off this while the rest of America feels the pain.

robc|9.17.08 @ 2:11PM|#

The fans are usually not even students. Why would they waste tickets on smelly old students?

There is a decent student section. Many of the fans I used to sit around were alumni. Then again, the guy in front of me owned coal mines, so he may not have been the typical alumni. :)

Warty|9.17.08 @ 2:12PM|#

robc, I blame you for Tim Couch.

robc|9.17.08 @ 3:08PM|#

I dont know what kind of blame I should be taking for Tim Couch, unless you are a Brown's fan, in which case, all I can say is, get a frickin o line for him (you know, using your time machine and all).

vinny gates|9.17.08 @ 4:19PM|#

SugarFree, I got a Constitution today as well, but no Bible. I mean, half of Louisville is without electricity and the fire chief is telling everyone not to use candles for light, but at least I got some cake!

I miss the screaming evangelicals, but we do get the "Abortion = Holocaust" guys once a year!

Rhywun|9.17.08 @ 4:20PM|#

Make no mistake, if AIG were allowed to fail, it could set off a wave a small bank failures, overwhelm FDICs reserves, and bring lending to individuals and small businesses to a grinding halt.

I.e. capitalism. Gotta take the bad with the good.

kbolino|9.17.08 @ 4:48PM|#

Megan McArdle:
"A lawyer friend IMs 'I would be fascinated to know on what authority the Fed is claiming the right to do this.' It's probable that they don't actually have the legal right to do anything like this. Their authority is this: who's going to stop them? No one wants to take on responsibility for this mess themselves."

Governing principle of the Fed: Catch-22.

mike|9.17.08 @ 5:04PM|#

And what of the Fed and Paulson forcing Lehman under last weekend? The big question had been 'why didn't they use the discount window facility'. Answer: They didn't have to. Their commericial paper was rolling over every day and all counterparts were still trading with them. Then on Saturday, Fed drags them in and says sell yourself this weekend or you are done, no discount window for you'. Thus ends any hope of doing commercial paper or trading.

So it was not the market that killed Lehman last week, it was Hank Paulson and the Fed. Interesting that the CEO of Goldman said publicly 'less competition is better for us' and Hank is .. gee.. an ex-ceo of Goldmans.

Invisible Finger|9.17.08 @ 6:33PM|#

That said, I think Paulson levied the LIBOR+8.5

I think it was bernanke that levied it. Anyway, it was nice to see the Fed be consistent - they forced a high rate on AIG and DIDN'T do the opposite by lowering the discount rate.

I think Bernanke finally has a handle on the problems, before he seemed to be Greenspan II and made hasty decisions. I still think Paulson is primarily looking out for his next job.

GG|9.18.08 @ 11:38AM|#

And what of the Fed and Paulson forcing Lehman under last weekend? The big question had been 'why didn't they use the discount window facility'. Answer: They didn't have to.

J.P. Morgan advanced $138 billion to Lehman

The advances were secured by collateral, according to J.P. Morgan. It didn't say where the $138 billion came from, or whether it had access to a Federal Reserve window. A J.P. Morgan spokeswoman did not immediately return calls. A Lehman official declined comment.

"Presumably, the funds to repay the loan at the end of each day come largely from the Federal Reserve's Primary Dealer Credit Facility," said Louis Crandall, an economist at Wrightson ICAP.

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