The numbers and the measures become more and more extreme. For AIG to get permission from regulators to move $20 billion in capital from its subs to the holding company and have significant asset disposals teed up wasn’t sufficient to shore up the embattled insurer., The Fed has reportedly convened yet another emergency session to see if the usual suspects might be able to somehow aid the embattled insurer. The Wall Street Journal reports that the Fed has leaned on Goldman and JP Morgan for an emergency $70-$75 billion loan as well.
It is a bit of a mystery to me why a loan request would be made. The sword of Damocles hanging over AIG is a possible downgrade by rating agencies, who want the big insurer to come up with $30 to $40 billion more in capital. Even if Goldman and JP Morgan went along with the Fed’s request, it isn’t obvious how a large loan helps. Suibordinated debt might help, but rating agencies look more favorably upon common and preferred stock. A bridge loan against an asset sale? Again, not sure how this advances the creditworthiness.
I am normally not at a loss, but the logic has me perplexed. The only other role for the funds might be to help meet collateral posting requirements in the event of a downgrade, I cant’ imagine the two financial firms would be up for that risk in the absence of backdoor government support.
Anyone with some insight is welcome to comment.
Consistent with my “huh” reaction, the Financial Times has a report that makes more sense, although who knows where the truth lies, that the Fed is hosting emergency talks on AIG but has not asked Goldman and JP Morgan to provide loans, nor has it offered to provide indirect support.
From the Wall Street Journal:
In an effort to prop up giant insurer American International Group Inc., the Federal Reserve on Monday asked Goldman Sachs Group Inc. and J.P. Morgan Chase to help make $70-$75 billion in loans available to the company, according to people familiar with the situation.
The move came as officials on both the state and federal level scrambled Monday to help AIG find ways to come up with as much as $40 billion to help prevent a downgrade of its credit rating, an outcome that could ultimately prove fatal for the firm. It wasn’t immediately clear whether the banks would agree to the government’s request…..
From the Financial Times:
The New York Fed is hosting a fresh set of crisis talks to deal with the problems at AIG, the troubled insurer. JPMorgan Chase, representing AIG, and Goldman Sachs, representing potential principal investors, are in the building working to come up with some kind of funding facility for AIG.
The Fed has convened the parties and is facilitating their discussions. But it has not asked JPMorgan and Goldman to provide $70bn in funding for the company, and at this stage has not discussed itself lending indirectly to AIG via back-to-back transactions intermediated by the investment banks, one possible way of channeling liquidity to AIG.
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A minor quibble. It’s “Sword of Greenbergclese”.
somebody on cnbc blabbed that GS was AIG’s financial advisor (aka life coach)…so gs could just be lending its rolodex and a few hollow words of self-assurance (“you’re worth $10/share…no…$20!”).
The source of your perplexity, Yves, is that you anticipate logic where there is none. What we have here is stinking desperation and delusion. This 'potential loan' is not too different from the Moloch of the Super SIV Paulson tried to foist on the market. It is clear than Hank & Co. so dearly believe in the magic of the [shadow] banking system that to them no scheme, no matter how large or nonsensical, is too large to be 'funded' if put to the market with the US public authorities behind it. If JPM and GS are 'authorizied' to canvass the world for ~$70B in dough to throw on the building blaze in the gunpowder factory which is AIG, I doubt anyone thinks a tenth of that would actually be raised—but the idea is so spin the markets for a day or two until the raters can be bamboozled to back off 'for the good of the System,' or some such rot. This isn't a solution, it's a press release in search of the rube-ocracy.
Allowing AIG to gut its subsidiaries of capital is the move which boggles _my_ mind. I'm not exactly blaming Patterson and Dinallo, they are out of rabbits, hats, and magic bullets, but this move amounts to AIG not only eating its seed corn but cannibalizing its children. Ugley. I mean, evidently they are swapping 'collateral' down for that cash, i.e. ASBs and CDSs, which in this environment amounts to fraudulent conveyance. Anybody with the slightest exposure to those subsidiaries had better crawl under their thermal blanket and breath shallowly, 'cause no one should think the public authorities will make said exposees whole in a few months or weeks time. Man, this is a wild one.
. . . Watching this, I get the sense of a financial equivalent to Poland having fallen, Finland and Albania under invasion, Czechoslovakia long gone, China being wolfed down, and the fools in Britain and France who lost the Great War for themselves wandering around in Flanders looking for the foe and telling us they have things in hand just trust in them and their defences. The Big One ain't hit, yet.
Just hurry up and downgrade this pig (AIG) out of investment class. All this pussyfooting around is just annoying.
You are right, Yves. It makes no sense… unless the Fed decides to make another monster non-recourse loan. Forget coupon passes; non-recourse loans are the new printing press :D
Cheers, Matt
YES!!!
WaMu debt lowered to junk by S&P!
http://www.bloomberg.com/apps/news?pid=20601087&sid=awDjhtIfoz_Q
Ca-Ching!
This is vintage Paulson. Kick the can down the road. We have seen this act too many times. The Super SIV, Hope(less) Now, Re-regulation and more. Who at this point, does Goldman call for capital to loan ?
I totally agree with Richard Kline’s post.
It was totally irresponsible for New York to give AIG access to secured assets from their subsidiaries.
When AIG goes, and it will, the fallout will be a disaster.
All facts here are symptomatic of the EXTREMELY desperate straits of AIG.
The scope of the problem (in terms of the tens of billions required to temporarily repair the damage) keeps growing every 8 hours, as we learn more from inspecting their books about just how reckless they were without adult supervision.
Matt Dubuque
The theory is that finding secured lenders would demonstrate confidence in the valuation of the assets that AIG is putting up for sale. The reality is probably far worse. The question is how much un-rollable paper AIG has falling due in 30 – 60.
September 15, 2008
To update my blog comment of Sept. 9 2008:
Here’s the deal boys and girls:
1.The largest financial institution in the USA [add the whole financial system of the USA] is now being run by politicians.
2.There are no rules that apply to politicians.
3.There will be no rules, whatsoever, applied to the financial conduct of the former Fannie/Freddie [add the whole financial system of the USA] other than the “rules” of political expediency.
But wait! Dubya is meeting manana
with “all the kings horses and all of the kings men”. I wonder if he will see that all of those WMD that he thought were in Iraq were always right here at home in the Fed and the Treasury?
Earl L. Crockett
Santa Cruz, CA
“All facts here are symptomatic of the EXTREMELY desperate straits of AIG.”
Are they really that desperate? Why did they refused a participation offer from a private equity firm this week end then?
Because the upper crust would’ve lost control of their Empire, correct?
So, in order to preserve their almighty self-importance in the food chain of the elite, they go and beg to the Fed.
Well…nyet!
They screwed up, it’s time to pay the piper.
The big boys go, or AIG blow…it’s that simple.
So Richard, could we call it the ad hoc logic of an uncontrollability which can’t be admitted, or is that too moderate?
the following are some personal speculations, based on my interpretation of the events so far. but, as i see it, it's the most logical reading of the facts on the ground as we know them.
the bridge loan only makes sense if AIG is going to be broken up and wound down in an orderly fashion.
think of it as DIP financing. the underlying insurance subs are going to be auctioned off in order to raise cash for holdco. holdco needs cash in order to (a) pay off the obligations of AIGFP; and (b) post collateral as the book is wound down. (AIGFP is an obligation of the holding company, i believe).
the global banks actually will be receptive to putting in $75B because the alternative is much, much worse: the wholesale unwinding of the CDS market. AIG was a big writer of protection, and probably didn't do much hedging. (as an insurance company, they are a natural seller of protection, and likely don't run a matched book the way JPM, GS and the market makers do.) the entire WORLD is long AIG counterparty risk via AIGFP. that includes the feds, via the interest rate swaps FNM/FRE have taken out to fix the duration of their retained portfolios.
AIG clearly has massive needs at holdco (ie, AIGFP). i suspect something more is going on than the well-known CDO exposures. i wouldn't be surprised if AIGFP was a big writer of FNM/FRE CDS, and LEH CDS. those two trades alone might have been enough to blow a $20-40B hole in their balance sheet (let's not forget that AIG started cratering just after paulson nationalized the GSE's. presumably the brokers who bought protection to offset their customer liabilities know who is on the hook for the claims payment.)
so let's suppose FM/FN blew another hole in AIG's balance sheet. then LEH starts tottering (another potential liability). the rating agencies are aware of this, and put the screws to the company to raise equity quickly. the street sniffs blood and the thing starts to unwind.
so AIG goes into the weekend looking for a miracle. Flowers passed. TPG passed. Buffett passed. those guys took a look and said "no thanks". we're more than happy to acquire some of your subs, but we're not injecting money into holdco (ie, AIGFP).
AIG then decides that their only hope is to approach the feds and threaten the system. the feds say, no way, and tell JPM & GS (two large CDS brokers) to deal with it themselves.
so JPM & GS are underwriting the DIP loan for the holdco. sure, the capital may avert a ratings downgrade in the near-term, but the reality is that no bank is putting in money unless they get paid back pretty quickly. the only way that happens is if the loan is secured by subsidiaries that are already on the market.
in the meantime, the market gets 6-12 months to gradually work down its exposure to AIGFP, in the hopes of averting another catastrophic hit on the heels of LEH.
what a massive failure of leadership, prudent risk management and regulation. unbelievable.
Exactly what systemic dangers does AIG pose to the American financial system that the Fed has to get involved? That's only partially a rhetorical question, as I know very little about the insurance industry and even less about AIG, so I'm genuinely curious. But to my eye, AIG, as a private insurer, is only relevant to its policyholders. The only government interest is in any guarantees the government provides to policyholders to step in if an insurer is unable to payout a claim.
Really, this is getting ridiculous. First it was IBs, then it was GSEs, then S&Ls, now insurance companies? And (in all likelihood), car companies in the next month or so??? Is there any company in corporate America that is not too big to fail? Anyone willing to live by the invisible hand and die by it as well? Anyone? Anyone?
AIG and Fed defenders, I'm all ears!