Can someone PLEASE explain to me how the Federal Reserve bought an 80% stake in AIG?

Kin


Welcome to the secret world of the federal reserve, where they can do whatever.....


Quote from The Kin:

Release Date: September 16, 2008

For release at 9:00 p.m. EDT

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 percent equity interest in AIG and has the right to veto the payment of dividends to common and preferred shareholders.



It's nice to see the Fed has taxpaters interests as a primary concern... I also spotted a mistake in the press release. They did not quote the section in the federal reserve act which gives them the authority for the U.S. Government to receive a 79.9% equity interest in a private company.
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Kin, why do you say the government is buying an 80% stake? The way I read, it's a loan with assets as collateral to be paid back during a period of 2 years at an interest rate. Where's the purchase?

AIG will have time to sell off what it needs to without the market preying on it. The locusts will just have to move off to another company. There are plenty left.
 
Quote from Ivanovich:

Kin, why do you say the government is buying an 80% stake? The way I read, it's a loan with assets as collateral to be paid back during a period of 2 years at an interest rate. Where's the purchase?

AIG will have time to sell off what it needs to without the market preying on it. The locusts will just have to move off to another company. There are plenty left.
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Well you are right it is not a sale of stock to the government but rather AIG is giving the government a 80% equity stake as collateral on the loan. As long as AIG can pay off the loan and meets interest paymetns the government does not have take full ownership of the collateral. It is a pledge of assets to a bank as collateral for a loan.

But still quite unprecedented and if AIG goes under or fails to generate funds to pay off the loans, the government pretty much owns a worthless piece of shit and writes down the losses that taxpayers pay for. Shitty deal for the government and us despite the benefits of avoiding systemic market collapse.

We should pretty much look at it as a government hand out of billions that AIG will default on.

Who really thinks the govt will ge repaid on this facility? AIG will simply go under and the loans will be lost stupidity.
 
Quote from Ivanovich:

Kin, why do you say the government is buying an 80% stake? The way I read, it's a loan with assets as collateral to be paid back during a period of 2 years at an interest rate. Where's the purchase?

AIG will have time to sell off what it needs to without the market preying on it. The locusts will just have to move off to another company. There are plenty left.
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I honestly don't read it that way. The loan is collateralized by all the assets of AIG and its subsidiaries. For the privilege of getting this loan, the U.S. government is getting a 79.9% interest. Other reports are saying the government has taken over AIG. That would not be true unless they had the equity interest. But who knows.
 
Quote from optioncoach:

Well you are right it is not a sale of stock to the government but rather AIG is giving the government a 80% equity stake as collateral on the loan. As long as AIG can pay off the loan and meets interest paymetns the government does not have take full ownership of the collateral. It is a pledge of assets to a bank as collateral for a loan.

But still quite unprecedented and if AIG goes under or fails to generate funds to pay off the loans, the government pretty much owns a worthless piece of shit and writes down the losses that taxpayers pay for. Shitty deal for the government and us despite the benefits of avoiding systemic market collapse.

We should pretty much look at it as a government hand out of billions that AIG will default on.

Who really thinks the govt will ge repaid on this facility? AIG will simply go under and the loans will be lost stupidity.
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Doesn't AIG have something like 1 Trillion in assets? Wouldn't the government just take some of that if it were to fail? I doubt Paulson agreed to this loan without understanding what plan AIG had for selling parts of the business.
 
Quote from Ivanovich:

Doesn't AIG have something like 1 Trillion in assets? Wouldn't the government just take some of that if it were to fail? I doubt Paulson agreed to this loan without understanding what plan AIG had for selling parts of the business.
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My understanding this was a lend and collateralize first and worry about ability to pay after otherwise AIG would be in serious trouble. Happened so fast like the MER and BAC deal cannot imagine all the details were ironed out so cleanly as a non-pressured deal like this could take weeks to perform due diligence.

1 Trillion in assets? What about almost 1 Trillion in liabilities with untold losses reducing that gap further. Check out AIG's currnet ratio, they have negative working capital which means they are working on fumes and technically bankrupt.

This is a hail mary IMHO. Pray AIG can stave off the vultures and salvage some value to save the markets or simply delay the inevitable. My prediction is that AIG is going to be picked apart no matter what and is history before Thanksgiving.
 
Ivan, here is a very rare gem from the Yahoo message boards

AIG gets a $85 billion dollars in cash and signs a promissory note and secured by substantially all of the company's assets via a Security Agreement. The warrants are not tied to repayment, rather they are intended to entice the lender to lend by giving them a chance to participate in the upside.

If AIG defaults, the govrnment forecloses on the company's assets through the security agreement. Does not exercise the warrant, because the company is bankrupt and they are taking all the assets any way.

If AIG lives on, the debt is repaid and the security agreement terminates according to its terms, the government exercises the warrant to become 80% owner of a no stable entity.
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If any of these bankrupt companies had net assets, they wouldn't be bankrupt.

80% stake here, sub triple A (no recourse) loans there. Its all bullshit.

This thing is going to end up worse than Japan.

People living in a storage box because the bank foreclosed on their cookie-cutter Mansion...

Whats the solution...carry each bankrupt corp a few days, let counterparties net trades like Lehman, then let them file.

Forget it. This stuff is lasting too long and is super stag-flationary.
 
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