Comments on: A second look at the AIG deal

By: KidDynamite

KidDynamite — Sat, 02 Oct 2010 02:11:17 +0000

Alea – I get your point – you’re saying that if we used a $39 conversion price instead of a $45 conversion price, the net “loss” to the gov’t is not $6-odd Billion.. it’s more like $450MM… right? (assuming the post-conversion market cap is the same as today’s price implies: $69B – you can back into post-conversion share prices (lower), Gov’t ownership % (higher), and Gov’t owner value (higher) – but only higher by $450MM)

By: KidDynamite

KidDynamite — Sat, 02 Oct 2010 01:24:44 +0000

Alea, if you build yourself a spreadsheet which assumes that the market will assign post-conversion AIG a $69.7B market cap (which is what it has assigned it), you’ll find, not surprisingly of course, that the government does better in every case with a lower conversion price. precisely because we own only 80% of the equity, and not 100%.

By: alea

alea — Fri, 01 Oct 2010 23:03:58 +0000

KID:
I understand your point, what you seem to miss is that it makes no sense to maximize the conversion ratio on the preferreds (E and F) when you own de facto 80% of the equity, unless you want to shoot yourself in the foot, since the higher the conversion ratio the less valuable the equity.

By: KidDynamite

KidDynamite — Fri, 01 Oct 2010 21:28:25 +0000

Alea,

my blog post is not about the PnL sheet for the Treasury’s investments. I’m surprised you’re finding that detail hard to understand. Felix even summed the points up nicely with three bullet points at the top of this post.

Treasury got the series C pref warrants as a result of the extraordinary bailout they gave AIG. Those warrants are currently worth $21.9B. Great. That’s a good thing.

It doesn’t excuse the fact that Treasury exchanged some assets (preferred stock) worth $49B for some assets further down the cap structure with a lower value ($42.5B). That’s money that should be flowing to taxpayers/Treasury, which will instead accrue to AIG and its non-gov’t shareholders.

The “in the money” debate is another one entirely, and one with many uncertainties still to be seen. But the Congressional Oversight Panel estimated at the end of june that the AIG hole would be $36B deep…

http://cop.senate.gov/reports/library/re port-061010-cop.cfm

so let’s not start high fiving yet.

By: alea

alea — Fri, 01 Oct 2010 21:09:46 +0000

It is irrelevant that they were done at the wrong price. Net net treasury is in the money. Why exactly do you think you should count only the losses and not the profit. Fact: Treasury got free warrants now worth $21.9 bln.

By: KidDynamite

KidDynamite — Fri, 01 Oct 2010 19:59:54 +0000

Alea –

We have warrants. we got them as a condition for the other loans. so what? Would it be ok for us to sell them for $1B? They have value.

I’m talking about the series E/F conversions – they were done at the wrong price. Do you disagree with that?

I said in my piece that the series C was the least of the problems (probably not a problem at all – we did a deal – the deal was for 80% of the common – that’s what we got for the series C – I’m cool with that!)

By: alea

alea — Fri, 01 Oct 2010 19:54:01 +0000

I put a comment at the Kid’s blog. Basically he is ignoring that some preferred ( the c perpetual) were not paid for but received as a condition to get loans i.e AIG was obligated to give up 80% of the company to be rescued.
the value of these c preferred is booked by AIG at $23 bln vs 0 cost to treasury i.e the sale of these preferreds is pure profit ($21.9 bln at current prices).

By: klhoughton

klhoughton — Fri, 01 Oct 2010 19:21:31 +0000

If the Preferred (which is senior to common) isn’t worth as much as AIG says, what does that say for the stock into wich they’re swapping?

(I can’t be the only one who LOL’d when all the headlines–from the FT on down–declared that going from 85% to >90% was “an exit strategy,” can I?)

The free warrants put a de facto cap on the return from the bailout–and since the original bailout structure was designed to give the taxpayers who are footing the bill equity appreciation in the recovered, repentant (stop laughing, Felix!) company, giving a large chunk of those rights to current shareholders really is a great example of privatizing the gains.