More cheery news on the credit crunch front. Readers may recall that AIG entered into what was initially an $85 billion and was later increased by $38 billion with no further strings attached. The terms of the initial loan are pretty punitive, with the government loan having a two year term, a high coupon, and the government also received warrants for 80% of the firm.
AIG thus has a strong incentive to repay the loan as quickly as possible; indeed, it made a last-ditch effort to unload assets and secure other funding so as to avoid having to take the government’s terms.
AIG’s businesses are, on the whole, believed to be very solid. The insurer’s troubles result from writing a large number of credit default swaps.
However, the possible buyers who are nominally cash rich right now, private equity firms, are used to doing deals with lots of leverage. So with money scarce all around, they are making offers that are lowball even in this environment. However, strategic buyers, meaning other insurers, may step to the fore.
From Reuters (hat tip reader Steve):
Insurer American International Group Inc’s asset sales are taking longer than hoped as credit for deals is tough to come by and potential buyers wait for bargain prices and sometimes grapple with their own problems…
AIG plans to keep its U.S. property and casualty, foreign general insurance businesses, and an ownership interest in its foreign life operations, but sell the remainder….
But so far the company has announced just one deal: selling its stake in the London City Airport for an undisclosed price.
“No one has really stepped up to say: ‘Here’s X dollars of cash. Let’s get the deal done next week’,” said a financial services banker representing a potential buyer. “Everyone is just sort of lining up, saying: ‘Yes we are interested.’
“But it’s a chicken and egg situation, because if you wait long enough, a la Barclays-Lehman, you may be able to get this cheaper,” said the banker, who requested anonymity because of the sensitive nature of the sale process….
Chief Executive Edward Liddy said on October 3 that the company had several potential buyers interested in its assets, but declined to say how quickly he expects any deals to be signed.
“I want to balance speed with value,” Liddy said….
“They can’t really look to the banks to be ready lenders like they used to be,” said Robert Ellis, a senior vice president at financial research firm Celent.
Moreover, several insurance companies that could be interested in some of AIG’s businesses for strategic reasons are dealing with problems of their own.
On Thursday, Fitch Ratings revised the outlook for 12 insurance and reinsurance sectors globally to negative from stable, citing increasing pressure on balance sheets and investment portfolios.
Still, many of AIG’s assets could eventually lure bidders including billionaire investor Warren Buffett, who has said his Berkshire Hathaway Inc insurance and investment company would consider buying some units.
AIG said it received offers for Philippine American Life and General Insurance Co — that country’s biggest insurer — from around 10 local and foreign investors, including private equity.
Earlier this month Liddy said AIG was in advanced talks with one potential buyer for part of its U.S. personal lines unit.
Liddy has said he does not expect the divestitures to turn into a fire sale, but experts said AIG may have to sell some assets cheaper than they would fetch in normal times.
“Even at lower prices, it is difficult with the (credit) markets the way they are,” said William Bates, a mergers partner at law firm King & Spalding. “It’s a good thing they have two years to do it.”
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“”It’s a good thing they have two years to do it.”.
For them.
For the taxpayer, it depends on what is left out there for borrowing $125BILLION in our name. with an obligation to pay back $250BILLION with interest.
The bankers are in complete control of the existence and amount of the money supply, and the value of these, and any, holdings will decrease in relation to the lack of capital out there to buy things.
Hoarding.
It’s what we do in times of financial crisis.
Oh, yeah. It’s the bottom.
You should have heard Kudlow. To him, it’s inconceivable that the market would go down again.
You know, because outlook is so great.
He also has McCain and Obama tied in a poll.
Warning: we have had various anonymous readers point to sites that offer market timing advice.
Even though we are have a point of view about the general outlook, we do not give investment advice, beyond tried and true formulas, like “the vast majority of people who try market timing lose” and “diversification is important.”
We do not tolerate spam in comments. It’s one thing for readers to debate the outlook (that is welcome and useful for all, yours truly included), it is quite another for people to use the comment section to run ads for their site.
Yves, who is “we”?
Off-Topic:
Japan’s open, Tokyo crude oil -4.56 to $66.06 or -6.5% before lunch
anon, 9:31:
I believe Yves is referring to the ‘royal’ we. In which case I would as a reader like to differentiate myself by proposing “the hold few positions and watch them closely” alternative. If you were being facetious anon, then I will second joe in saying that we have not even reached a bottom for the month, let alone _the_ bottom.
The collapse of the synthetic market is not a bad thing. It was horribly overvalued. The impassionate market is finally working after eight years.
I am afraid it must take a greater beating before the Greenspan ( Ayn Rand) excesses and mind-set are wrung out. Hopefully, this will occur before the turd leaves office.
As an aside: It is interesting too hear McCain carry on about education. Az ranks 49th. Doh!
“AIG thus has a strong incentive to repay the loan as quickly as possible; indeed, it made a last-ditch effort to unload assets and secure other funding so as to avoid having to take the government’s terms.”
Don’t we, as taxpayers, want them to take a long time and pay us all that interest?
Don the libertarian Democrat
Don,
Yes, you are correct. I saw an estimate (I think from Felix Salmon) that the interest on the original AIG loan would be over 2% of corporate tax receipts. And with profits pretty certain to fall, the interest payments will probably be even more significant relative to corporate tax payments.
As to the use of “we”, it can be interpreted in various ways:
1. I do have fellow contributors, most of whom has not posted in a while, but Ed Wright works on a regular basis to provide site support. So it can be the collective “we”.
2. Relative to out-of-line comments, it is the royal we. Barry Ritholtz in his comment policy describes his blog as his fiefdom and adds “Fear my wrath, mortals.” We prefer to look a tad more democratic, but have no doubt that in the end, only one person here has voting rights.
3. It can be the schizophrenic “we”.
4. It can also be the “we never got over Goldman imprinting that said never to use ‘I’, that ‘we’ is always preferable.”
I have seen it argued that having AIG pay libor+850 is neither as good for the taxpayer nor as punitive to AIG as it appears; since the taxpayer also owns 80% of AIG, that money simply goes from the left hand to the right hand of the government. Comments?
from the internet, so it must be true:
Take the executives of American International Group (AIG) for example. Just days after the US federal government pledged $85 billion of taxpayers’ money to bail out the insurance behemoth, around 10 senior executives took 100 of their top salespeople to a Southern Californian beach resort for a week of wining and dining.
The company spent near half a million dollars on rooms ($200,000), meals ($150,000), spas ($23,000) and golf ($7,000) for its top performers. After lawmakers and the media got wind of the mass facial, a spokesman for AIG attempted to clarify: “It was not an executive retreat. It was a meeting to reward and incent independent sales agents.”
OK, so the show must go on, even during a bailout. After all, it was the billions that execs had gambled on stinking, rotten, maggot-infested mortgage loans that nearly bankrupted the company, not its traditional insurance contracts, which are in tip-top shape thank you very much.
But still, splashing out $440,000 for a week of pampering just doesn’t sound right when global markets are tumbling faster than a giraffe on Ketamine walking a tight rope over Manhattan.
AIG Still Paying For Luxury Suite at MSG
While Tulupman would not confirm how much AIG is paying for the MSG suite, a year-long contract for a "Club Suite" ranges from $225,000 to $500,000. Although AIG is stuck with paying for the suite, Tulupman said it will no longer be used by the company.
http://abcnews.go.com/Blotter/WallStreet/story?id=6052261&page=1
Undercover UK Tabloid Crashes AIG’s Latest Boondoggle: $86K Bird Hunt At Fancy English Manor!
…AIG officials declined to say which AIG executives attended the trip, which reports have said racked up an $86,000 tab. News of the hunting trip surfaced just days after AIG received an additional $37.8 billion loan from the Federal Reserve, on top of a previous $85 billion emergency loan granted last month.
In interviews with undercover reporters, the AIG honchos said they were aware that the markets were crashing back in New York – but were more interested in bagging birds.
“The recession will go on until about 2011 – but the shooting was great today and we are relaxing fine,” AIG honcho Sebastian Preil was quoted as saying.
Preil wasn’t the least bit embarrassed that AIG, which got its first $85 billion bailout from the feds last month, needed taxpayer money to stay in business. The hunting trip came the week AIG got a second loan of $37.5 billion.
“We should be on an even keel in two years,” he reportedly said.
In a letter released Friday, House Financial Services Committee chairman Barney Frank told Treasury Secretary Henry Paulson and Federal Reserve chairman Ben Bernanke the executives responsible for the gathering should “personally reimburse the government,” and requested increased oversight of the company.
Cuomo said in his letter the expenditures violated the state’s debtor-creditor law and demanded an accounting of AIG’s executive compensation and benefits since January 2007. He said the government’s financial rescue of AIG made the expenditures “even more irresponsible.”
– American International Group Inc., following criticism by New York Attorney General Andrew Cuomo, won't honor a $10 million severance agreement with outgoing Chief Financial Officer Steven Bensinger, Cuomo said.
Canceling Conferences
“We're reviewing everything and making an effort to identify activities that aren't critical and reviewing executive compensation,'' said AIG spokesman Nicholas Ashooh, declining to comment further on Bensinger.
The company will be canceling more than 160 conferences and events, some exceeding more than $750,000 per event, which Cuomo's statement will result in a savings of more than $8 million.
The company also will institute new expense management controls, Cuomo said, to prevent any other unwarranted expenditures.
David Herzog, 48, who was AIG's comptroller for three years, was promoted to replace Bensinger, the company announced today.
The company has been castigated by officials since it hosted a $440,000 conference at a California resort last month after agreeing to the federal bailout to avoid bankruptcy.
Cuomo, in a letter yesterday to AIG's board of directors, demanded the company stop “extravagant'' expenditures and recover millions of dollars in unreasonable payments, or face legal action.
`Golden Parachute'
Cuomo cited a $5 million bonus and $15 million “golden parachute'' AIG awarded its chief executive officer in March. Sullivan was AIG's CEO at the time.
The attorney general also noted in his letter that an unnamed top-ranking executive, “who was largely responsible for AIG's collapse'' and was fired in February, was allowed to keep $34 million in bonuses. Cuomo said the executive also apparently continued to receive a $1 million a month from the company until recently.
http://www.bloomberg.com/apps/news?pid=20601087&sid=azCc9UmFkByE&refer=home
The stories of looting by AIG incumbents just shows that half-measures at nationalization are half-assed. Replace the board. Impose austerity. Break the failed wreck up and stop pretending that the private sector value-added is something more than a bunch of MBA jerks playing at being landed nobility.
Anon of 10:34 — This is correct only if there is residual value for the equity holders. To the extent that there is no residual value and the government is merely gaining priority against AIG’s unsecured creditors with the mounting accrual of interest, the government will be in a net gain position.
“Warning: we have had various anonymous readers point to sites that offer market timing advice”
Yves: Thanks for the warning – I just thought that guy who thinks this is the bottom is metally deranged.
The readers of this blog are fluent in the language that brought this mess on. As an urban-affairs journalist, I did my best to achieve a first-grade level of fluency. But now, like Andrei Codrescu, I get my best news from poets — especially those who chronicled this meltdown’s 20th-century prototype.
Priceless documentation of who's being bailed out from
Lahde Quits Hedge Funds, Thanks `Idiots' for Success (Update1)
By Katherine Burton
Oct. 17 (Bloomberg) — Andrew Lahde, the hedge-fund manager who quit after posting an 870 percent gain last year, …in which he said he had come to hate the hedge-fund business. “The low-hanging fruit, i.e. idiots whose parents paid for prep school, Yale and then the Harvard MBA, was there for the taking. These people who were (often) truly not worthy of the education they received (or supposedly received) rose to the top of companies such as AIG, Bear Stearns and Lehman Brothers and all levels of our government.
“All of this behavior supporting the Aristocracy, only ended up making it easier for me to find people stupid enough to take the other sides of my trades. God Bless America.''
http://www.bloomberg.com/apps/news?pid=20601087&sid=aVUE96d.HKyw&refer=home