The Broken Promise Of AIG
Jim Millstein has certainly not been shy when it comes to talking to journalists about the Treasury's new AIG exit strategy.
Yesterday, Andrew Ross Sorkin's column was entirely based on conversations with Millstein about the exit strategy. Now Felix Salmon has apparently interviewed Millstein for over an hour about the plans.
Millstein seems to be a pretty persuasive guy. Both Sorkin and Salmon come away convinced that his exit plan, which involves having the government exchange its non-cumulative preferred shares for common stock, makes sense. Salmon, for instance, offers an excellent explanation to questions raised by Kid Dynamite about why the US Treasury would trade senior, preferred shares for common (hint: the preferred shares don't have a guaranteed dividend so might never spin out any cash.)
One thing that has been overlooked is how the government's exit plan represents a broken promise. Felix explains:
When Treasury installed Ed Liddy as AIG CEO in the immediate aftermath of the bailout, says Millstein, the idea was very much to sell off everything — essentially, to liquidate AIG entirely.
But that’s no longer the vision: instead, the idea is now to keep AIG going as a good-sized US insurance company, with a very strong property and casualty franchise and a solid life insurance franchise to boot.
When the Federal Reserve first bailed out AIG in September of 2008, the bailout was in the form of an $85 billion loan with an interest rate of 8.5% over LIBOR. That punitive rate was an intentionally unsustainable rate for the company. Fed officials were telling reporters on background that although there was no explicit requirement that AIG be liquidated, this was likely the only way AIG could repay the loan.
Two months later, the government used the funds appropriated to buy troubled mortgaged assets from financial companies to recapitalize AIG with a $40 billion injection. At the time many of us realized that the deal was changing. We'd crossed from trying to shore up markets to rescuing a failed company, although this was never explicitly explained by government officials.
Keep this in mind whenever someone tells you the TARP worked. Sure it worked, just not as advertised and not for the people who paid for it.
It worked for AIG, keeping it alive despite the market verdict that it should die.
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