Wednesday, March 18, 2009

The whole AIG mess (stock)

I can't stand this whole "outrage" over AIG's (as well as other financial institutions') bonuses. To me, it's an example of wanting to have your cake and eat it too. As I've mentioned before, I'm a fan of nationalization for some of these institutions at this stage. But the government didn't want that. They didn't want to run these companies. They wanted to keep them afloat so that "the financial system doesn't crumble" while allowing business as usual. Well, this is business as usual. This is how they've always done things and I don't think the government is allowed to complain when they created this situation. I'm not saying that what AIG is doing is right, but that the government is also at fault. Strangely enough, I think the most sensible thing I've heard about this came out of Barney Frank's mouth yesterday when he said that the government needs to view themselves as owners and act accordingly. I agree with this. The government/taxpayers may not be full owners of AIG, but they own enough to try to put some new people on the board who represent their interests. They have to get all Icahn on this stuff.

I think a possible solution for situations like this is to set up a joint venture with a private equity firm. I understand that there probably are a lot of difficulties regarding feasibility and implementation, but this would solve a few problems. A joint venture takeover of AIG would allow new private money to flow in (with the government backstopping losses like earlier bank deals), allow an outside company to reorganize AIG so that the government doesn't have to do it, and let them pay a realistic premium to existing shareholders so that there's no panic about everyone's equity going to 0 on the occurrence of nationalization.

As far as "the financial system crumble" that would happen had they not bailed out AIG, a friend of mine thinks that AIG was bailed out because they had so much exposure to Goldman Sachs. I mean, if you look at the actual numbers, a good amount of the bailout money has gone to paying off bank counterparties with Goldman receiving a decent chunk of that money. He also thinks that they would have saved Lehman if Lehman had more Goldman exposure as well. Remember, one of the key guys making those decisions was Hank Paulson, an ex-GS CEO.

As far as how AIG got into this mess to begin with, here's an interesting story about how AIG's London office may have been where it all started and where all those CDS's were written without control over how much is lost if a loss occurs.

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