Felix Salmon

The IMF worries about international banks

Felix Salmon
Oct 6, 2010 21:34 UTC

photo.jpgThe IMF held its first-ever blogger meet-up on Friday, with PR honcho Caroline Atkinson, first deputy managing director John Lipsky, and various other Fund types sitting rather formally around a big table at IMF headquarters in Washington. “The discussion here is on the record, because I’ve been told that bloggers don’t do on-background,” said Atkinson — which made for an interesting contrast with how they do things at Treasury.

Everybody was kind of feeling their way at this first meeting, so it’s too early to draw much in the way of conclusions; I did get the impression that Fund staffers would like to engage the blogosphere in theory, but don’t actually spend as much time reading blogs as their Treasury counterparts do. That makes sense: the blogosphere has lot more in the way of policy prescriptions aimed at Treasury, or even the World Bank, than it has wonky discussions about the Fund’s areas of expertise.

I went in to the meeting with the idea that the Fund is on something of a downward trajectory these days. Its high point was surely the 2009 G20 meetings in London, which ended with a much beefed-up role for the IMF, and a lot more money too. But since then, the occasional Germany-mandated foray into Greek fiscal policy notwithstanding, the IMF seems to have played less of a role, especially in terms of crisis resolution and prevention, than I and many others expected it would.

I left the meeting a bit more impressed at what the Fund has managed to achieve in the past 18 months: it’s not hogging the financial-press headlines, but it is doing quiet, necessary work, especially in non-G3 nations where its expertise and money can be put to best use.

Matt Yglesias said the most interesting thing along these lines — that maybe the IMF didn’t want to get caught up in the headlines, and could actually be more effective if the eyes of the world were pointed elsewhere, at institutions like the G20. Just like Basel, it’s often easier to get things done when what you’re doing isn’t particularly politicized.

It’s also asking some important questions. I spoke to Lipsky a bit about cross-border resolution, and the way in which neither Basel III nor any other international agreement seems to have made it any likelier that a failed international bank might get resolved in a non-messy manner. Much of the worst damage from the Lehman collapse came as a result of the forced liquidation of its London operations — something the panicked meeting at the New York Fed over the previous weekend had barely stopped to consider. And Lipsky pointed out in a speech in July that even European bank failures have run into significant problems associated with duelling national authorities.

In the case of Fortis, [resolution] was complicated by national interests coming to the fore even between jurisdictions whose financial regulators have a long tradition of co-operation and whose legal frameworks are considerably harmonized. As a result, the Fortis group was resolved along national lines in a protracted process.

“Basel III is microprudential”, said Lipsky, and there’s very much still a need for big-picture cooperation between countries when international financial institutions get into trouble. That said, he was at pains to say that he didn’t want the job: “we’re not supervisors, we’re not regulators, and we do not aspire to be either. We can provide perspective to the standard setters. This will be an agreement among sovereigns.”

I’m not going to hold my breath. Here’s what Lipsky said in his speech:

A basic problem with many national regimes is that the authorities often are effectively precluded from cooperating in an international resolution exercise. For example, in liquidating the local branch of a foreign bank, some countries require their authorities to ring-fence the local assets of the branch for the benefit of local creditors and, in this manner, effectively prevent participation in a broader international process. Under our approach, national legislation would be amended to remove these obstacles. Moreover, it would call for national authorities to cooperate with other countries in the framework, but only when they believed such cooperation to be consistent with the interests of creditors and supportive of financial stability. A jurisdiction will be willing to defer to another only if it is clear that local creditors will be treated equitably and will receive at least what they would have received had the entity been liquidated on a strictly national basis.

In order for Lipsky’s proposed framework to work, then, two highly improbable things need to happen. First, the U.S., along with lots of other countries, would need to change its national legislation so that it can cede control of bank-resolution processes to other countries’ regulators. I wouldn’t like to be the legislator proposing that.

And secondly, if an international institution failed, the regulators of the good bits would have to decide that they’d be better off throwing those good bits into the international pot, rather than holding onto them themselves. Think of AIG, for instance: it had one huge black hole in London, and another big black hole in its U.S. securities-lending operation. It was highly profitable in Asia. Why would Asian regulators, if they had the power to keep the Asian operations for themselves in a resolution, give up that power and accept whatever fate befell the counterparties of the parent company more generally?

As Lipsky says, these questions are tough — so tough, indeed, that I doubt anybody’s going to seriously address them. Financial institutions will always spill across borders, and when cross-border institutions fail, it’s always going be messy. Lipsky’s warnings might make policymakers think about such issues, but I doubt that they’ll prompt them to actually do anything substantive about them.


You’re right about that. At one point I believe she was set to be the Obama administration’s undersecretary for international affairs. She knows her onions. And to the IMF’s credit, they appoint very smart and knowledgeable people to their PR honcho position. It’s definitely a senior job.

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For-profit colleges’ increasingly desperate tactics

Felix Salmon
Oct 6, 2010 16:57 UTC

Back in June, it was very puzzling why Tom Matzzie, the former Washington director of MoveOn.org, would be waging a campaign against Steve Eisman and other people who are exposing the abuses of the for-profit college industry. Now Mike Elk has uncovered what many of us suspected at the time:

Matzzie is vice president of the lobbying firm LawMedia Group. LawMedia represents the Student Access, Student Choice Coalition, which is funded by several for-profit schools. Matzzie also runs an organization called Accountable America, which he says accepted funding from John Sperling, the Chairman of the Apollo Group, which owns the University of Phoenix. Matzzie did not disclose these conflicts of interest when he denounced Eisman for testifying against for-profit schools’ predatory loans.

But already the for-profit school industry is moving on to other tactics. Like lawsuits:

Keiser University, a regional for-profit college, has filed suit against Florida State College at Jacksonville President Steven Wallace and one of his top administrators, saying they tried to sully the school’s image by colluding with detractors of for-profit colleges.

I’ve uploaded a copy of the lawsuit here, and embedded it below. It charges that FSCJ worked with Eisman to wage a media campaign against Keiser, which seems to me to be a pretty good idea, actually. If for-profit colleges can wage aggressive marketing campaigns, there’s no reason why state colleges shouldn’t do so as well, revealing the truth about what exactly you’re likely to end up with if you take out substantial loans to attend a for-profit institution. (Enormous drop-out rates mean that millions of students end up with nothing but burdensome debt, which can’t even be discharged in bankruptcy, and no degree to show for it; the ones who do get a degree often find it worthless in the real world.)

I can’t imagine that Keiser will prevail in court, although they’ll surely cost FSCJ lots of money in legal fees defending this. Yes, there does seem to have been an orchestrated campaign against Keiser — and I’ll take Keiser’s word for it that the campaign worked. But I don’t see anything illegal here. FSCJ is allowed to make claims about Keiser, and vice versa. If this case comes to trial, I look forward to lots of reporters covering FSCJ’s defense — which will surely be that the statements in question are true, rather than false.

It’s not clear which specific statements Keiser is taking issue with, or where those statements appeared. Instead, the suit just gives us this kind of thing:

Defendants’ false statements included, among other things, that proprietary schools like Keiser “ripped off” students by providing “worthless degrees,” and that such schools engaged in “subpriming students.”

With any luck, the publicity resulting from this case, if it does go to trial, will be even tougher on Keiser than the publicity it’s objecting to in the suit. This lawsuit is a high-risk and pretty desperate tactic, I think, on the part of Keiser. So expect more such suits, if and when the harsh light of negative publicity continues to damage the for-profit education industry. They’re a sign that blood is being drawn, even if the Department of Education is dragging its feet on reform.

20101004 Complaint Against FSCJ FINAL


Small oil spill? Are you English per chance??

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Whither the bank tax?

Felix Salmon
Oct 6, 2010 14:31 UTC

Remember the Financial Crisis Responsibility Fee? It seemed like a great idea at the time, raising money for Treasury while at the same time acting as something of a too-big-to-fail tax which would help give banks a disincentive to grow too big or to move away from a stable deposit-based funding base.

But the stated purpose of the bank tax was to repay TARP — and now it seems that the TARP shortfall is going to be less than $30 billion. So it’s both politically and rhetorically hard to get it passed right now. Jim Pethokoukis reports that “it wasn’t included in the summer’s financial reform bill for fear of scaring away Republican support,” but says that it might yet be resuscitated as a way of making up the government’s losses on Fannie and Freddie.

For the time being, however — and for the foreseeable future through the rest of Obama’s first term in office — the bank tax seems to be dead, even as similar taxes in Europe have never been more popular. It’s yet another sign of how European and American attitudes towards the banking sector are diverging: while the Americans took a hard line in the regulatory negotiations in Basel, they’re much less keen on bank-specific taxes. The Europeans tend to move the other way, towards laxer regulation and higher taxes. In a world where financial services are borderless and globalized, that divergence is little more than a recipe for regulatory arbitrage.


And regulatory arbitrage was exactly of the financial crisis with European banking free to leverage investing in US and US institutions like AIG doing what they did with European counterparts…

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Felix Salmon
Oct 6, 2010 04:45 UTC

Spaghetti tacos expert Robert Thompson has been interviewed by 78 different NYT reporters — NYTpicker

Fancy paying an extra $80/mo to your mortgage servicer? It’s OK if you don’t, they just thought they’d bill you anyway — Credit Slips

Treasury’s TARP retrospective (98-page PDF) — Financialstability.gov

Howie Kurtz to Daily Beast: “I am trying to be an online entrepreneur and that can be difficult in a big company” — TBD

Mexico readies century bond paying around 6% — Reuters

Reinhart & Rogoff giveaway — PUP

Explaining the AIG exit

Felix Salmon
Oct 5, 2010 19:40 UTC

Andrew Ross Sorkin’s column today is entirely based on what he learned talking to Jim Millstein, the chief restructuring officer at Treasury, who seems to be very happy to talk now that he’s officially announced Treasury’s plan to exit its investment in AIG. I spoke to him for 70 minutes this afternoon, and now have a much clearer idea of how Treasury is thinking, how its math works, and why there’s a disconnect between Treasury and critics like Kid Dynamite.

Millstein made a number of interrelated points.

First, the really big picture here is being missed. There’s now an end in sight to a huge and enormously complex corporate restructuring, of an entity — AIG — which was too big to fail, too big to manage, and which had an enormous black hole at its heart known as AIG Financial Products. Today, AIG is set to emerge as a viable entity roughly half its former size, small enough to fail, with the black hole gone. That’s not only a substantial achievement; it’s also a good proof of concept when it comes to the FDIC’s new resolution authority.

This involved a big strategic change of direction at AIG and Treasury. 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. That company looks as though it’s going to be worth something north of $60 billion, given its inherent profitability and general stock-market valuations of insurers.

But there’s an enormous difference between an insurance company you’re trying to liquidate, on the one hand, and an insurance company which you want to survive as a going concern, on the other: it’s not just a difference of taking various assets off the auction block. Rather, it all comes down to credit ratings: in order to be viable as a going concern, any insurance company needs a solid investment-grade credit rating.

If AIG was just selling off its assets or putting its insurance operations into run-off mode, then its credit rating wouldn’t matter so much — although the higher AIG’s credit rating, the easier it becomes to unwind AIGFP’s derivatives positions without facing enormous margin calls. But Treasury looked at the bids that AIG was receiving for its assets, and determined that they were being lowballed by the likes of MetLife, since potential buyers smelled a fire sale. As a result, Treasury needed to credibly be able to say that it didn’t have to sell off all AIG’s assets.

In order to do that, Treasury needed to take a large chunk of AIG’s debt and convert it into some kind of equity. That’s why Treasury ended up owning tens of billions of dollars in preferred stock: the ratings agencies don’t consider preferred stock to be debt, and so they disregard it when assigning their ratings.

Now a lot of the arithmetic being done by the likes of Sorkin and KD is based on that preferred stock essentially being debt. After all, that’s how AIG itself shows it on their website. But it’s a very peculiar kind of debt: in fact, to a first approximation, it really is that nerdy joke, the zero-coupon perpetual bond. There’s a dividend associated with the preferred stock, but AIG is under no obligation to pay it, and it’s non-cumulative: if AIG doesn’t pay the dividend then it doesn’t remain on AIG’s books as any kind of obligation. And there’s no maturity date, either. So the obligation that AIG has to Treasury is essentially zero: it has to pay back $0 per year, in perpetuity.

The only real value to the preferred stock is that unless and until AIG starts paying the coupon, it can’t make any dividend payments on its common stock. So the preferred stock is not entirely without value. But no one in their right mind would actually pay money for it.

So when Treasury swaps its preferred stock for common stock, it’s swapping something with essentially zero secondary-market value for something much more liquid and marketable.

Of course, Treasury brought this on itself, back in February 2009, when it swapped cumulative preferred stock paying a 10 percent coupon for new non-cumulative preferred stock. Without that move, there would never have been any equity value in AIG at all — AIG would have been a loss-making entity in perpetuity. But of course Treasury owns most of the equity in AIG, so it essentially made the decision to swap debt in an insolvent AIG for equity in a solvent AIG. And the reasoning was that the liquidation value of an insolvent AIG was much lower than the market value of a solvent AIG which could operate as a going concern.

At some point, Treasury was always going to insist on converting its new zero-coupon perpetual bonds into something a bit more useful, like secured debt or unsecured debt or cumulative preferred stock or common stock. They were always a halfway house, a way of getting here from there. And in the end, Treasury decided that the easiest and most profitable thing to do would be to just convert them all into common stock.

I’m not sure I would have made the same decision. AIG is making about $8 billion a year at this point, which is more than enough to support a bit more in the way of debt without making too much of a dent in its credit rating. If Treasury had converted say $20 billion of its current preferred stock into new preferred stock paying a 5% coupon, that would pay Treasury $1 billion a year in perpetuity, and could probably be sold at or near par. Instead, that $1 billion a year is being valued on a p/e basis in the stock market, at between $8 billion and $12 billion. That’s less than the $20 billion (ish) it would be worth if it looked more like debt.

But Treasury wants to exit its investment, and selling $20 billion of perpetual AIG preferred stock would be decidedly non-trivial. Selling AIG stock is a lot easier. So Treasury decided to simply convert everything to common stock, in an attempt to get out of the insurance business as quickly as possible.

Looked at this way, it’s silly to assign hard dollar values to the Series E and Series F preferred stock and then complain when they’re being swapped for equity worth less than that sum. Instead, the only number which matters is the total amount of money which Treasury ends up getting from selling off bits of AIG and, ultimately, AIG itself. And there’s a secondary consideration, too: Treasury wants to do that sell-off as quickly as possible.

Treasury’s exit strategy certainly maximizes the speed of the sell-off. And Millstein makes a credible case that at the end of the day, Treasury is going to get out of AIG more money than it put in — some $13 billion or so in profit. That sum is not nearly commensurate with the risk that Treasury took when it bailed out the insurer. But really, Treasury had no choice: when it was bailed out, AIG had a whopping $2.4 trillion in derivatives contracts, which would have caused major systemic consequences if they had been unwound in a Lehman-style forced liquidation. We would all be much poorer, today, if AIG had not been bailed out. Any profit on the bailout is just gravy.

So it’s easy to get caught up in the weeds here. But rather than getting caught up with the relative valuations of Series C and Series F, the big picture is relatively simple: Treasury put about $47.5 billion into AIG, and the Fed added a bunch more. The Fed is soon going to get paid off in full, with interest. And Treasury is going to end up with an equity stake in AIG worth something north of $60 billion; it’s optimistic that it’ll be able to sell that stake in the market, much like it’s selling off its Citigroup stake right now. That equity stake is a matter of choice; Treasury could have structured things many other ways, and probably could have ended up with something less liquid but more valuable if it had wanted to do so.

Millstein is a fan of common equity, and is looking forward to the day when he can start selling off the government’s AIG stake in the secondary market. Then we’ll be done with AIG, we won’t have big losses to show for it, and we will have dealt with the AIGFP black hole in the interim. It’s a pretty impressive achievement, all told. And the technical dynamics of exactly what the government is doing with its current slightly peculiar preferred stock are ultimately something of a distraction.

(A couple of footnotes, which don’t fit into the broader narrative: right now, AIG has the right to borrow $22 billion more from Treasury, in the form of that Series F perpetual zero-coupon preferred stock, at any time. Under this exit plan, AIG has to use that whole credit line to pay off the Fed, and then needs to repay it with various asset sales, including the sale of the assets it’s getting from the Fed. So the plan puts Treasury at less risk that suddenly it will have no choice but to send lots of money to a hungry AIG. And, AIG won’t only be an insurance company: for the time being, it still owns an aircraft leasing company called ILFC. But it has said that ILFC is non-core, and it will be happy to sell it at the right price.)

Update: It seems that Kid Dynamite had a similar conversation.


Excellent article, very easy to follow. Informative and balanced.

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Report report report, Potash edition

Felix Salmon
Oct 5, 2010 14:00 UTC

If you want to hone your financial-media reading skills — if you want to be an active, critical reader of the financial press — then here’s an exercise for you: find an important study of some kind which has been reported in many different places. Read the study, and then read the different stories reporting on it. Then, ask yourself about the degree to which the reports accurately sum up the contents of the study. The result is what I like to call a report report report, and it’s a great way of keeping readers alert.

There’s a great example right now: the Canadian conference board’s report on the effects of a takeover of Potash Corp. It’s been widely covered, and a look at that coverage is if anything even more illuminating than the report itself.

The first thing that jumps out at you is that no one actually bothers to link to the report. (Very honorable exception: The Canadian Press.) The NYT does provide a link where it talks about “the Conference Board of Canada”, but hilariously the link leads to a page of NYT stories about the Conference Board of the US. It’s not that the link is exactly hard to find: it’s splashed across the top of the board’s home page. But for some reason the place where readers can find the report on the internet is not considered important information by anybody covering it.

But how’s the journalism itself? I think the Canadians have acquitted themselves best on this front. The Canadian Press report, out of Regina, does I think the best job of summarizing the study, as well as being the only place with a link to the study itself. Here’s how it begins:

A successful takeover of Saskatoon-based PotashCorp could slash the province’s revenues by at least $2 billion over the next decade while having little or no net effect on employment, according to a report commissioned by the province.

Rob Gillies of the AP in Toronto also produces a good straight-down-the-line summary:

BHP Billiton’s potential hostile takeover of Potash Corp. would have few negative effects on the province of Saskatchewan but could reduce the government’s revenues by at least $2 billion over the next 10 years, a Saskatchewan government-commissioned report released Monday said.

But the minute that you start looking at the foreign press, things start getting messy. The WSJ throws three reporters at the story, and manages to produce a lede which is simply wrong:

BHP Billiton Ltd.’s bid for Potash Corp. of Saskatchewan Inc. could be beneficial to the province, especially in the long term, while a potential offer for the fertilizer giant from a state-owned Chinese company would pose a bigger threat to the local economy, according to a report commissioned by the provincial government.

Well, the “bigger threat” bit is right — but the thing about bigger threats is that they tend to be compared to smaller threats. While the WSJ makes it sound like the BHP bid isn’t a threat at all, and in fact “could be beneficial to the province, especially in the long term”.

I have no idea where the WSJ finds that conclusion in the report: I certainly can’t find it. The word “beneficial” appears nowhere in the report, which explicitly comes with an end point of 2020, ten years away. Over the course of those ten years, the report finds that a takeover by BHP would reduce tax revenues by $2 billion; beyond those ten years, it can’t really say. It’s possible that BHP investment in something called the Jansen Lake project will pay off for the government in terms of new economic activity — but that won’t happen until 2026 at the earliest. That’s very long term. And there’s nothing at all in the report, that I can see, that stresses any long-term benefits of a BHP takeover over a non-takeover option. All of these bars point downwards:


I don’t know about you, but my reading of this chart says that tax revenues will decline over the short, medium, and long term if BHP buys Potash Corp. (That’s the blue bars.) And they could decline even further if BHP becomes desperate for revenue and starts running Potash at full production. (That’s the red bars.) BHP promises it wouldn’t do that, but as the Globe and Mail points out, promises from big foreign miners are often broken.

Yet somehow the WSJ concludes, in the words of its picture caption, that “a report found that BHP’s bid for the company could be beneficial for Saskatchewan”. Very odd. Yes, there are silver linings — a BHP takeover would prevent an even worse Chinese takeover, for instance, and being open to foreign takeover bids “would ensure that Saskatchewan’s turn in the spotlight encourages the sustained investment in the province that is vital to Saskatchewan’s long-term economic prosperity”. But there’s little if anything which says that the takeover itself would help the province.

I think that the problem here is that the financial press is looking at this as a deal story, and from that perspective the report makes a deal slightly more likely than it was before the report was released. Ergo, the report must be positive!

The Reuters story makes this connection very explicit, saying that the report favors a BHP deal over a Chinese deal, and highlighting the effect of the report’s release on the Potash share price. Meanwhile, Marketwatch comes up with the dreadful headline “BHP’s bid for Potash has ‘few negatives’: study”. That headline clearly implies that it’s quoting the report on the “few negatives” front, but that phrase never appears in the report, and I have no idea where it came from.

It’s instructive to compare these finance-based stories with the much more downbeat NYT story, which leads with the potential revenue losses for Saskatchewan, and which I think does a better job of conveying the report’s substance.

Of course, very few people have the time or inclination to read the original study, let alone all the stories reporting on it. But once you start reading these things critically, red flags start appearing. The WSJ lede about the study’s upbeat conclusions, for instance, conspicuously fails to be backed up by any quotes from the report or even any paraphrase of what the long-term benefits of a takeover might be. That’s a giveaway, really. Journalists hate leaving opinions unsupported, and when you see an opinion unsupported like that, it’s often a sign that it’s unsupportable.

Which raises the question of what it’s doing in the paper at all. But that’s a bigger story, which has something to do, I think, with the constant pressure on journalists to “add value” in the form of analysis and conclusions. Sometimes, you won’t be surprised to hear, they’re not very good at that.


This is a hostile bid… as far as I know no substanstial portion of shareholders have or will tender to this lowball offer. BHP has had it’s eye on Potash Corp since the silly season of 2008 when potash price were stratospheric and Kloppers is trying desperately to make a big deal after he got embarassed in the Rio Tinto fiasco.

Furthermore, I don’t really think that the CDN govt will allow the bid to go through even if it had support – they killed a big takeover of an aerospace firm earlier this year.

And lastly… what a shock that the WSJ is doing shite reporting – good ol Rupert out selling sensational headlines. Woe is me WSJ, outshone by the G&M and CDN AP.

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Felix Salmon
Oct 5, 2010 06:14 UTC

On the evolution of Las Vegas-Los Angeles U-Haul rates — MR

Why are people happy to pay more for the e-book than for the hardback? You ever try reading a 1,008-page hardback? — NYT

The Speed Camera Lottery — YouTube

Phone-hacking scandal: Andy Coulson ‘listened to intercepted messages’ — Guardian

Official Fourteen Point Manifesto on Natural Wine — Dressner


The speed camera lottery seemed like a good idea for a moment, except that it would encourage extra driving. Why take the bus when you might win the slow driving lotto? This problem could be avoided by making it a bus ticket lottery (supported by downtown parking rates or something), but I have a feeling that Volkswagen wouldn’t have been such a fan of that idea.

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Sorkin’s AIG math

Felix Salmon
Oct 5, 2010 06:11 UTC

Andrew Ross Sorkin talks to Treasury’s Jim Millstein and makes a valiant attempt to explain the AIG deal, explaining step by step how the company’s debt to the government is going to be repaid. But I’m afraid I still don’t understand it. Especially not this bit:

Now the tally is down to $71 billion.

At this point, A.I.G is going to pay down the Fed’s remaining $20 billion stake in two special-purpose vehicles, which hold the rest of Alico and A.I.A, he explained. In doing so, and this is where things get a little tricky, A.I.G. will be using money from the Treasury Department’s credit facility. In some ways, the government is moving money from one hand to another.

If all of that works — and if you’re still with me — A.I.G. will be left owing us, the taxpayers, about $49 billion.

No, Andrew, I’m not with you. If Treasury is lending the money to buy out the Fed’s $20 billion stake, then the total debt either goes up or stays the same. I don’t see how it goes down — and I certainly don’t see how it goes down by more than $20 billion. The official AIG press release helps a bit, though. If I’ve got this right — and it certainly isn’t presented in a transparent manner — then the plan is essentially that AIG will borrow money from Treasury to buy its SPVs back from the Fed, and will then sell the contents of those SPVs to repay Treasury.

So OK, let’s grant that. But the next bit really doesn’t add up.

Now, you’re probably asking, how can A.I.G., or what’s left of it, which is currently worth $26 billion, become a $49 billion company?

As part of the restructuring, Treasury is going to exchange its preferred shares for common shares, expanding the total number of shares of the company and diluting the current investor base. Treasury will own 1.6 billion shares, or 92 percent of the company. At A.I.G.’s share price on Monday, the government’s stake would be worth about $62 billion, a $13 billion profit. That’s if, of course, shareholders do not send shares tumbling because of the dilution.

Mr. Millstein is betting that investors will be bullish on the stock once they understand the government’s plan to exit its investment over time.

It seems to me that before the exchange, the government will have $49 billion in debt, as well as an 80% stake in a company valued at $26 billion. So call it $49 billion in debt and $21 billion in equity, for a total of $70 billion.

After the exchange, Treasury will own nothing but equity — and that equity is forecast to be worth only $62 billion. You can call that a $13 billion profit if you like. But you can equally well think of it as an $8 billion loss.

So maybe Mr Millstein is right to bet that investors will be bullish on the stock once they understand the government’s plan to exit its investment. Because a large part of that plan seems to involve swapping a $70 billion stake in AIG, most of which is made up of senior, interest-bearing securities, for a $62 billion stake which is junior and pays no interest at all.

Think about it this way: before the exchange, the government and private shareholders between them will have securities valued at $75 billion — $49 billion in debt and $26 billion in equity. The government will own some $70 billion of that $75 billion, or 93%.

After the exchange, the government and private shareholders between them will have securities valued at $67 billion: somehow, the exchange will have erased $8 billion of value. And the government will own only $62 billion of that $67 billion.

The whole idea behind this column is that AIG has value after paying off its debts to the government at 100 cents on the dollar. But that doesn’t seem to be what’s going to happen. Instead, Treasury seems to be paying itself $41 billion in equity for $49 billion in debt, valuing those debts at less than 84 cents on the dollar.

Which would help to explain why AIG’s current shareholders might be rather bullish: it looks as though Treasury is happy to forgive a good $8 billion of the debt they owe taxpayers.

I can see why Treasury might want to do that, in its rush to exit AIG as quickly as possible, just so long as it can extract at least as much money as it put in along the way.

But Treasury placed a significant interest rate on its loans to AIG for a reason. If AIG is incapable of paying those loans back in full, with interest, then the value of the non-government stake in AIG should be zero. Instead, it’s $5 billion. And that’s the bit which, to me, doesn’t add up.


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!

Posted by KidDynamite | Report as abusive

Inside Job

Felix Salmon
Oct 5, 2010 05:09 UTC

One of my dreams in life has long been to have the opportunity to sit down opposite Larry Summers or Bob Rubin, with video cameras rolling, and ask one of the key players in the financial crisis some tough on-the-record questions about the degree to which he’s responsible for it. This is the kind of interview which can only be done on video, which captures evasions and non-answers and general oily shiftiness in a way that no print journalist ever could.

That’s no longer a dream of mine. Instead, I have a new dream: that Charles Ferguson conduct exactly that interview.

Ferguson is the director of Inside Job, the new documentary about the financial crisis which is a must-see for pretty much everybody. I didn’t have very high hopes for the film: I generally consider that video journalism has acquitted itself very badly over the course of the crisis and I blamed the medium rather than the messengers, many of whom are very smart and well-informed.

It turns out, however, that in expert hands, the medium, at least when it’s under the control of Ferguson, can do a spectacularly good job of presenting what happened and why — better than any newspaper series or magazine article or book or radio show.

What Ferguson has achieved here is an extremely impressive balancing act: while his explanations are clear-eyed and accurate, he’s never content to simply tell us what happened. He also takes pains to constantly remind us that people did this and that nearly all of them are still relaxing in plutocratic comfort even as millions of workers in America and around the world have seen their lives destroyed by the effects of the crisis.

Some of those people he manages to coax in front of the camera. The smart ones — including Summers, Rubin, and Greenspan — all said no, while a handful of academics, including Ric Mishkin and Glenn Hubbard, will forever regret saying yes. They’re hardly the biggest villains of the crisis and they’re not presented that way, but they are great examples of the way in which the financial elite is so used to the please-oh-wise-man-tell-us-what-you-think school of journalism that it’s genuinely shocked when it encounters anything else. (You won’t soon forget the scene where Hubbard, not even bothering to conceal his anger, spits at Ferguson, saying “you have three more minutes. Give it your best shot”; you will barely believe how Marty Feldstein happily says he has “no regrets” about his position on the board of AIG in the run-up to its collapse.)

A great Pixar movie manages to do two things at once: it entertains and delights the kids, while also giving their parents a fresh view of life with a remarkably adult perspective. Inside Job is similar, in a way: if you don’t really understand what happened during the financial crisis, it will explain that to you very clearly. If you do know what happened during the financial crisis, however, it will do something else: it will rekindle the anger and dudgeon that you might well have lost over the past three years of being buried in the financial weeds. Ferguson doesn’t do that Taibbi-style, by calling people names: he’s more effective than that and this film will surely galvanize the anti-Wall Street wings of both the Democratic and the Republican parties.

No financial journalist could have made this film: we were all far too close to the people and events depicted in it, which turn out to have really needed an outsider’s perspective. This is surely the first and last piece of financial journalism that Ferguson will ever make and it’s much more effective for it.

Still, I can’t help but hope that somehow this generation will somehow produce a Ferguson/Summers series of interviews to rival Frost/Nixon. Nixon only appeared, of course, because he was paid by Frost; Summers hardly needs the money, so Ferguson won’t be able to get him that way. But Ferguson has known Summers for many years, and maybe Summers’s legendary appetite for intellectual debate might persuade him to say yes after he leaves the government. Go on, Larry. I dare you.


“We should re-open all these cases and…”
I whole-heartedly agree, but…”we” can’t because “they” call the shots. And, like the last 10 min of the movie demonstrated with Barack’s choices for his key economic posts, no matter whom “we” elect, we soon find out that we elected one of “them”.

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