Comments on: Sorkin’s AIG math http://blogs.reuters.com/felix-salmon/2010/10/05/sorkins-aig-math/ A slice of lime in the soda Sun, 26 Oct 2014 19:05:02 +0000 hourly 1 http://wordpress.org/?v=4.2.5 By: KidDynamite http://blogs.reuters.com/felix-salmon/2010/10/05/sorkins-aig-math/comment-page-1/#comment-19074 Tue, 05 Oct 2010 14:01:50 +0000 http://blogs.reuters.com/felix-salmon/?p=5649#comment-19074 Rlehmann – that stake in AIA/ALICO prefs still needs to be sold. the Sorkin article just eliminates it. yes – Treasury is buying the AIA/ALICO SPVs from the Fed, essentially – that is very much NOT the same as AIG paying back the value of those investments!

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By: RLehmann http://blogs.reuters.com/felix-salmon/2010/10/05/sorkins-aig-math/comment-page-1/#comment-19070 Tue, 05 Oct 2010 13:15:10 +0000 http://blogs.reuters.com/felix-salmon/?p=5649#comment-19070 Treasury is lending AIG the money to buy (most) of the preferred stake in the AIA and ALICO SPVs. But AIG is then contributing that stake back to Treasury. The stake itself is an asset, not a liability.

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By: fresnodan http://blogs.reuters.com/felix-salmon/2010/10/05/sorkins-aig-math/comment-page-1/#comment-19068 Tue, 05 Oct 2010 12:29:47 +0000 http://blogs.reuters.com/felix-salmon/?p=5649#comment-19068 Think about it this way:
When people are trying to f*ck you, they don’t say, ‘we are really trying to f*ck you out of your money.’
They say, ‘this is really good management by our government, who in cahoots with the bright people at AIG, have made a sow’s ear into a gold bar.’

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By: right http://blogs.reuters.com/felix-salmon/2010/10/05/sorkins-aig-math/comment-page-1/#comment-19066 Tue, 05 Oct 2010 11:30:52 +0000 http://blogs.reuters.com/felix-salmon/?p=5649#comment-19066 I don’t know the details of the structuring of AIG’s bailout, but based on what you’ve described here’s a guess of what’s going on: T

he $49B in debt that Treasury holds creates a substantial tax shield that Treasury may just be assuming no private lender will re-create in the near-to-medium term. I don’t know what the interest rate is on that debt, but let’s assume it’s 10%, which creates interest expense of $4.9B each year, which at a 35% marginal tax rate lowers the tax bill by $1.7B annually. At a 10% discount rate, this works out to $17B in AIG “value” lost, but the value is entirely in avoiding corporate tax payments, which from Treasury’s point of view is of course not value at all — they’d be happy to take a “paper hit” of $8B if AIG’s tax bill goes up $17B.

The difference between $17B and $8B could easily be an assumption of normalizing AIG’s capital structure for private financing (or different discount rates, tax rates, etc.)

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