Comments on: We Bought Ourselves an Insurance Company

By: Kaimi

Kaimi — Wed, 17 Sep 2008 23:00:40 +0000

Good question, Michael.

I heard it characterized on NPR as that the government now has effective veto power over asset sales that it doesn’t approve of. That sounds reasonable enough (though I don’t know how the details work in this case).

By: Michael Guttentag

Michael Guttentag — Wed, 17 Sep 2008 20:41:47 +0000

I’m curious, for teaching purposes among other reasons, how does corporate governance work when you have a lender with a warrant for 80% of the equity. Is Bernanke effectively the acting Chairman of the Board of AIG now? If so, how does the FED manage AIG?

And what about shareholder approval of the warrants: Are shareholder approvals already executed? Does AIG have to return the $85 billion if they don’t approve the warrants?

By: Kaimi

Kaimi — Wed, 17 Sep 2008 07:15:11 +0000

Dave asks, “What is a “loan” in return for a “79.9 percent equity stake”? Is it a stock purchase agreement? A secured line of credit – i.e., we own the company until such time as it pays off the debt, taking interest payments along the way? ”

According to the NYT:

“Under the plan, the Fed will make a two-year loan to A.I.G. of up to $85 billion and, in return, will receive warrants that can be converted into common stock giving the government nearly 80 percent ownership of the insurer, if the existing shareholders approve. All of the company’s assets are being pledged to secure the loan. Existing stockholders have already seen the value of their stock drop more than 90 percent in the last year. Now they will suffer even more, although they will not be totally wiped out. The Fed was advised by Morgan Stanley, and A.I.G. by the Blackstone Group.”

See http://www.nytimes.com/2008/09/17/business/17insure.html

By: Frank

Frank — Wed, 17 Sep 2008 07:03:37 +0000

Here’s some support for Nate’s skepticism on bailouts:

http://www.nytimes.com/2008/09/17/business/17leonhardt.html?hp=&pagewanted=print

“Barry Ritholtz — who runs an equity research firm in New York and writes The Big Picture, one of the best-read economics blogs — is going to publish a book soon making the case that the bailout [of Chrysler] actually helped cause the decline [of Detroit generally]. The book is called, “Bailout Nation.” In it, Mr. Ritholtz sketches out an intriguing alternative history of Chrysler and Detroit.

“If Chrysler had collapsed, he argues, vulture investors might have swooped in and reconstituted the company as a smaller automaker less tied to the failed strategies of Detroit’s Big Three and their unions. “If Chrysler goes belly up,” he says, “it also might have forced some deep introspection at Ford and G.M. and might have changed their attitude toward fuel efficiency and manufacturing quality.” Some of the bailout’s opponents — from free-market conservatives to Senator Gary Hart, then a rising Democrat — were making similar arguments three decades ago.”