Oh, just one more thing.....

My first day in my upper division Managerial Finance class included the statement "The goal of management is to "maximize shareholder equity".

Below are some comments regarding the shareholder equity along with the explanation as to why the FED lifted it's skirt and bailed out AIG. Enjoy the reading........HA HA HA!!!!!

Given that AIG had a market cap of 10B today, how is paying 85B for 80% a good deal? Oh, and let's not forget that they were offered a private buyout and turned it down. And 80% of their insurance business is outside the US. If the biggest investment banks didn't want to put money into this zombie, why on earth should the Fed?

If it really were such a sweet deal, a private loan would have been arranged relatively easily- that one could not be arranged strongly suggests that the loan is a losing proposition.


What truly puzzles me is how the creditors take a haircut without a bankruptcy declaration. If the creditors don't take a haircut, then this is just another bailout of bondholders. And, where in line does the Fed stand in the creditor queue?

It's because there is something profoundly, fundamentally wrong with how we operate in this country. Economy: We're doing it wrong. Maybe, the weird amalgam of capitalist rhetoric, government intervention, constant bullshit from politicians and pundits, stagnation for most people, bankruptcy for too many, incredible and growing wealth for a very few, maybe we need to get off that treadmill. And maybe these bailouts are both a symptom of the problem and an opportunity to rethink how we do things.

Scrapping together 85b on short order, in the current environment, may well be beyond the grasp of most any institution but the Fed at the moment.


As for the worth of AIG, my understanding is that the reason they need the bridge loan is that they're not going to be able to liquidate their (from what I understand substantial) assets soon enough to cover the increased capital requirements necessitated by the downgrading of their credit rating.

AIG agreed to accept $85 billion in government financing in exchange for warrants representing 79.9% of shares. The $85b isn’t payment for the shares - rather, it’s a loan, which accrues interest at Libor + 850 basis points (currently totaling over 11%).

So the good news is, AIG will definitely survive, and they have plenty of assets to sell to repay the loans. The bad news is that current shareholders will be substantially diluted.

From the FED:

The Federal Reserve Board on Tuesday, with the full support of the Treasury Department, authorized the Federal Reserve Bank of New York to lend up to $85 billion to the American International Group (AIG) under Section 13(3) of the Federal Reserve Act. The secured loan has terms and conditions designed to protect the interests of the U.S. government and taxpayers.
The Board determined that, in current circumstances, a disorderly failure of AIG could add to already significant levels of financial market fragility and lead to substantially higher borrowing costs, reduced household wealth and materially weaker economic performance.
The purpose of this liquidity facility is to assist AIG in meeting its obligations as they come due. This loan will facilitate a process under which AIG will sell certain of its businesses in an orderly manner, with the least possible disruption to the overall economy.
The AIG facility has a 24-month term. Interest will accrue on the outstanding balance at a rate of three-month Libor plus 850 basis points. AIG will be permitted to draw up to $85 billion under the facility.
The interests of taxpayers are protected by key terms of the loan. The loan is collateralized by all the assets of AIG, and of its primary non-regulated subsidiaries. These assets include the stock of substantially all of the regulated subsidiaries. The loan is expected to be repaid from the proceeds of the sale of the firm's assets. The U.S. government will receive a 79.9% equity interest in AIG and has the right to (veto the payment of dividends to common and preferred shareholders. )

Ahhhh... the beauty of the American taxpayers taking large one where the sun doesn't shine.