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Strategies & Market Trends : The Residential Real Estate Crash Index -- Ignore unavailable to you. Want to Upgrade?

To: Live2Sail who wrote (179577)	2/28/2009 4:02:23 AM
From: stockman_scott	Read Replies (1) \| Respond to of 306849

Spreading Pain in A.I.G.’s Bailout _______________________________________________________________ By LAUREN SILVA LAUGHLIN and RICHARD BEALES Op-Ed The New York Times February 27, 2009 The government needs to get tough with the insurer American International Group. Even at the time of the first bailout in September, the company seemed like a black hole. Now, its hopes of selling some of its assets are fading and the government may be considering more aid. Taxpayers look like the biggest losers in what’s already a $150 billion bailout. Even if A.I.G. really is too big to fail, its other creditors, who have been shielded in part from losses by the government’s interventions to date, need to share the pain. The Federal Reserve apparently underestimated the problem at A.I.G.’s financial products group. In the days after Lehman Brothers went bankrupt, the government lent the insurer $85 billion. Then, it revamped the deal in October and November. In all, A.I.G. received $150 billion of government help: a $60 billion loan, $40 billion in exchange for a 79.9 percent equity stake and about $50 billion to capitalize two vehicles holding A.I.G.’s bad assets. A.I.G. promised to sell assets to pay off the $60 billion loan. That always seemed like an ambitious goal given the troubled state of the economy and financial markets. Many potential buyers are short of capital. And no buyer is going to offer top dollar for an asset when they know the seller is under pressure. A.I.G. has already sold assets for $2.2 billion — including its private bank, its life insurance business in Canada, the HSB Group, Unibanco and some other units. MetLife made a preliminary offer of $11.2 billion for the American Life Insurance Company, according to news reports — an asset that last fall might have fetched nearer to $20 billion. That $2.2 billion doesn’t move the needle much. And the sales of A.I.G.’s most valuable assets seem to be stalled or are, like its life insurance business in the United States, bringing in disappointing offers. If buyers just don’t have the cash, A.I.G. could hand businesses over to the government as a way of repaying its bailout. But government ownership of operating businesses isn’t a good idea, and fairly valuing them could be tricky. Interested buyers could perhaps buy some A.I.G. units for stock, but then the government could end up owning those interests, too. So much for the loan. The government’s equity investment also looks like a loser. A.I.G.’s troubles selling assets and the low offers are forcing it to put more businesses up for sale than it originally anticipated. That means there is likely to be even less left for shareholders. Stock market investors seem to agree that A.I.G. does not have enough assets to cover its private and government liabilities. The outstanding shares the government doesn’t own are worth only $1.5 billion or so. That means the government’s approximately 80 percent interest, for which it paid $40 billion, is now worth only about $6 billion. Even if A.I.G. does pay back the government’s $60 billion loan and the “bad bank” vehicles break even, the implication is that, at best, a quarter of taxpayers’ $150 billion won’t be coming back. Meanwhile, the insurer still had $92 billion of privately held debt on its balance sheet as of the end of September. If the government were to inject more funds into it as preferred or common stock, taxpayers would be behind those lenders in the long line for A.I.G.’s assets. All that suggests that giving the company more cash or guarantees would be throwing good money after bad. Of course, A.I.G.’s well-known and widespread role as an insurer may convince the government that it shouldn’t be allowed to go under. But for taxpayers’ sake, remaining shareholders and other creditors need to shoulder part of the cost. Creditors and trading partners have, after all, had nearly six months since the original bailout to reduce or hedge their exposure. If there’s a way to cauterize A.I.G.’s wounds, the pain of doing so should be shared. LAUREN SILVA LAUGHLIN and RICHARD BEALES For more independent financial commentary and analysis, visit www.breakingviews.com. Copyright 2009 The New York Times Company