Bad but not that bad

AIGAIG’s shares rose 15 percent when investors learned that the insurer would post a loss in the first quarter but it would not be as large as the hit it took in the last three months of 2008.

Adding to the “good” news: the loss would not trigger yet another tweak to the rescue package that has propped up AIG as it sorts through its affairs.

Of course, AIG’s mountain of red ink reached new heights in the fourth quarter, as it posted $61.7 billion in losses, the largest in U.S. corporate history.  The government owns a nearly 80 percent stake in AIG. And AIG owes taxpayers some $85 billion in TARP funds and loans.

Maybe AIG’s fourth quarter loss set a new standard, sort of a reverse watermark on how low things can sink. And maybe now the bottom will have to fall out yet again for people to get shocked.

Still, one must wonder what investors are thinking. It will be bad but not that bad, so buy AIG? 

General Growth’s collapse

mallThe modern shopping mall is the cathedral of consumer prosperity, so news that U.S. shopping mall owner General Growth Properties sought bankruptcy protection, capping a months-long effort to cope with a $27 billion debt load, is something of a seminal event in the global economic crisis.

The story of the second-largest U.S. mall owner reflects the larger trend in today’s credit-stifled economy: companies that loaded up on debt in better times and have been struggling to refinance so they can cover their payments. Many have succumbed to Chapter 11 after frequent negotiations with lenders, and many more are expected to.

It’s even worse for shopping malls. Commercial-property values have sunk, and the U.S. retail market is hurting. Many analysts say General Growth could survive a lengthy bankruptcy without resorting to a liquidation, but would have to sell off some properties. That could consolidate power in the mall industry if major players like Simon Property Group, Westfield Group and Taubman Centers could cherry-pick some of the assets.

The Value of Experience

BRITAIN/(Corrected – Bank of America did not purchase Countrywide early this decade)

Now that the nation’s top public servant is wielding The Donald-like powers over chief executives of bailed-out companies, expectations are high that more heads will roll, and Bank of America CEO Kenneth Lewis is looking like the next contestant on a new economic prime-time drama: The Executive.

Rick Wagoner, ousted as General Motors CEO, had spent more than three decades in the company and had been in the driver’s seat for most of the last one. He also presided over the era of the energy-unfriendly Sport Utility Vehicle and is criticized for sticking with trucks far longer than he should have.

At AIG; an offer they can’t refuse

USA-AIG/PROTESTThe Wall Street Journal appears to have gotten hold of a rather disturbing AIG memo implying an unseemly threat that angry Americans will undoubtedly feel fits the crime. Unless those who had the audacity to accept bonuses start returning the money, names of bonus recipients will be handed out to the angry mob by New York’s attorney general. On the other hand, if enough people join the giveback, the names won’t be released.

In Washington, the Senate is looking increasingly less likely to vote any time soon on a measure to tax the offending bonuses out of existence. Public ire over the bonuses helped send a similar measure zipping through the House quicker than Treasury Secretary Timothy Geithner can say “too big to fail.”

The AIG memo could be seen as more evidence that the case against the bonuses is flimsy at best. Not that authorities have no right to make this kind of threat – but isn’t it kind of seedy that they think they have to?

An act of God?


(UPDATE’S third paragraph to clarify the irony in Weinstein’s Ethics Czar reference).

Force Majeure is standard language in finance contracts, specifically debt paperwork. If you are building a pipeline across the San Andreas fault line and the earth moves, the risk that the hand of god has made it impossible for you to pay your debts is kind of a default valve absolving you from having to honor your contract. Is that what is happening with AIG? Those who argue contracts can (and, more alarmingly, should) be easily broken often cite Force Majeure as an example. But one might be hard pressed to find an example of a more man-made catastrophe than the seemingly crazy, but once pretty much standard contracts at AIG’s Financial Products divisions.

Later this morning, AIG’s CEO Edward Lilly is scheduled to strap into the Capitol Hill hotseat, where he is likely to face several fire hoses of vitriol over his decision to pay bonuses. He might also face a few thorny ones about settling bad bets with counterparty banks. Though the hand of God may not have been behind AIG’s demise, Liddy will certainly need divine intervention to ensure that he can conduct anything like business as usual at the not-quite-bankrupt but mostly government-owned insurer. Such an outcome would hardly be considered righteous by the angry mob.

The pizza guy will miss AIG-FP’s business

98401205_3In Wilton, Connecticut, a bucolic town an hour’s drive from Manhattan, there is nowhere for AIG’s derivatives whiz kids to run, but neither is there a need to hide.

Even as questions of who is benefiting from AIG’s billions of bailout dollars stir resentment on Wall Street, people in Wilton — where AIG Financial Products, the unit that built highly complex trading instruments that eventually gutted the insurer, is based — aren’t throwing any brickbats.

People who live in the area said they have very little interaction with the dozens of businesses based in Connecticut’s dollar-dripping “Gold Coast,” dotted with golf courses and 10,000 square-foot homes.

The Trouble with Bailouts part deux

USA/Yes, Senator Charles Grassley suggests that bonus-wielding AIG execs resign or drive swords into their guts. But cooler heads may yet prevail in the drama playing out in the American outrage arena. The Wall Street Journal argues that politicians are focusing on the bonuses because the tougher question about why contractual obligations to banks should be paid is far trickier and more costly than the somewhat spurious argument that AIG needs to retain top talent.

According to the Journal, counterparties – well, at least Goldman Sachs – were hedged against losses from credit default swaps written by AIG. So if AIG had gone bankrupt, voiding these contracts, the damage to the global banking system may not have been as catastrophic as had been feared.

Why these counterparties should be getting tens of billions of dollars in bailouts if they were hedged anyway is a question that needs to be answered. Investors who bought AIG-written CDS as investments rather than insurance, whether they be French banks or freewheeling U.S. hedge funds, would hardly be surprised to have lost their money in this environment. Might they have been even more puzzled to be paid off?

The Trouble with Bailouts

MARKETS-JAPAN-STOCKSSo AIG is honoring its contracts using bailout money. Pundits, sputtering with rage that the corporate world engaged in contractual bonuses, are basically rehashing the argument about whether AIG should have been allowed to go bankrupt. After all, the government decided that allowing AIG to pay its bills was better for the world than letting it break or renegotiate its contracts.

French bank Societe Generale has gone public defending the fact that it got $11.9 billion in bailout funds from AIG. France’s third-biggest bank by market value said it had acted within its rights to call on AIG for cash. This speaks directly to the rationale for the bailout — if AIG had been allowed to fail, a global systemic collapse in payments would have followed.

Keep in mind, too, that if it had resisted paying the contractual bonuses, AIG likely would have been dragged into court, spent millions on legal fees, and then been forced to pay up anyway. However ludicrous the concept of a contractually guaranteed bonus may be, they were legally binding contracts.

Senate’s roast of AIG regulators

AIGNow that the government has yet again propped up the embattled insurer, Congress is hauling regulators over hot coals as they try to figure out what happened. Here are some highlights from testimony today:  

Senate Banking Committee Chairman Christopher Dodd:
“That we find ourselves in this situation at all, is in my mind, and in the minds of many of my constituents, quite frankly, sickening. …

“The lack of transparency and accountability in this process has been rather stunning. Throughout the entire fourth quarter last year, it was frankly never clear, who owned AIG, or who was in charge.” 

ILFC bidders may get TARP relief

AIGPotential buyers of a large AIG business could be the latest to get some “relief” under the $700 billion Troubled Asset Relief Program (TARP).

In approving a revised AIG rescue package, the government has also agreed to give potential bidders of the insurer’s assets at least a bit of what some of them have been clamouring for – access to capital.

AIG has received significant interest from buyers for its aircraft leasing unit, International Lease Finance Corp, Chief Restructuring Officer Paula Reynolds said.