Americans: Add AIG To Your Investment Portfolio!
filed in financial services, politics and markets on Sep.17, 2008
As one of ~300 million Americans, we each now own about 0.000000002663333% of AIG.
I think the Fed did the right thing here by requiring some financial benefit in return for such a huge loan. Not only do taxpayers get a 79.9% equity stake in AIG, but we also are collecting some hefty interest on the deal, to the tune of LIBOR plus 8.5 percent.
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September 17th, 2008 on 7:43 am
LIBOR + 8.5 is not bad. What’s the reason behind the stock dilution, though? If AIG is more or less solvent with a cash crunch, we the taxpayers seem to have driven a very hard bargain.
September 17th, 2008 on 8:04 am
If the Feds had just given AIG a loan without getting anything in return, it really would have been a bailout, which would have enraged lots of people.
Essentially, the Fed simply acted as the source of the capital that AIG needed to raise because no other financial institution had the liquidity (or desire) to come up with such a huge amount of money in such a short amount of time. With sovereign wealth funds and private equity unable to do the deal, the Fed was the only way AIG could raise the money needed.
Those other parties will now likely be the ones to bid on the individual assets that AIG is going to put up for sale in order to pay back the loan, since they can handle smaller amounts more easily.
September 17th, 2008 on 8:25 am
It may be a good rate, but wouldn’t you rather choose for yourself other than having your money forcibly taken away, then used to prop up a company that should be paying for its mistakes?
What happens the next time when a bigger co takes bigger risks assuming the gov will pull it out.
And the obvious comparisons the socialism scare me to death.
September 17th, 2008 on 8:53 am
Chad, given the collapse of AIG, do you still contend that Citigroup is impervious to bankruptcy?
September 17th, 2008 on 10:09 am
Roark-
By taking an 80% stake in AIG, the Fed diluted current shareholderes by a factor of 5 times. That would likely be the argument why this didn’t bail anybody at AIG out, but rather it protected policyholders and counterparties.
Anonymous-
No firm is impervious to bankruptcy. That said, comparing Citigroup to LEH, BSC, and AIG is apples vs oranges. Citi has a deposit base to fund its business. None of the firms that have gone bankrupt (or needed emergency actions to avoid it) have had a bank’s deposit business model. You can’t paint them with the same brush.
There is a reason the big commercial banks (BAC, JPM, C)aren’t the ones on the brink of going under, but rather the ones who are being asked to be part of the solution. You simply cannot compare an investment bank, an insurance company, and a commercial bank and say they are the same animal.
September 17th, 2008 on 6:45 pm
Isn’t insurance business very similar in nature to commercial banking?
Insurance gets regular payments against probability.
A commercial bank holds your money, but also needs to pay you yield so it lends your money to a 3rd party agin hoping against probability [that things could go wrong].
Or is it that commercial banks rely on money in checking accounts?
How are they different?
September 18th, 2008 on 5:28 am
Insurers like AIG are not like commercial banks. They are even regulated by different entities.
AIG is on the hook for all of the mortgage backed security and credit default related losses that are being realized by the investment banks because they insured these things against default.
The ratings agencies had them at AAA in part because of the insurance, but subprime loans aren’t going to default at AAA rates. As a result, AIG doesn’t have enough cash to cover potential liabilities (and thus had their own credit ratings downgraded). Because they don’t have any customer deposits like commercial banks do, they can’t fund their business on their own and need to sell assets to raise the money since nobody would lend to them.
Commercial banks not only have customers’ savings, checking, and CD deposits to fund their business with, but they also lend money to each other. It’s a completely different model. Commercial bank loss rates on loans to credit-worthy borrowers are still running at extremely low levels, as they do historically (losses rates of 1%-2%). They are losing money from subprime (and capital raises are replenishing that capital), but core banking is still making money for commercial banks even today.