Wednesday, September 17, 2008 :::
I'm hearing politicians and other talking heads complain about the AIG bailout, about the cost to taxpayers, about the public interest being made subservient to private interest. When I first heard that the Fed was making an $85 billion loan to AIG, this is approximately how I felt, but when I saw the details, I became much more positive on it. Go ahead and look at this, and why I said, "I'm not sure 'bailout' captures the flavor of this nearly as well as 'non-bankruptcy bankruptcy'."
There is some chance that the Fed will lose its money here. It is much more likely to make money on this, quite possibly a lot of it. A small amount would have been worthless; a large loan, under terms like these, could be profitable, but no private entity could have put together this kind of deal overnight. So now: who's been bailed out here? It may be that the shareholders will only be nearly wiped out, instead of completely wiped out; in that eventuality, the taxpayer makes four times as much as all the shareholders put together. Corporate bonds, which are largely junior to this loan, are not trading at par, though they did bounce toward par last night; bond holders expect that the liquidation's taking place in an orderly manner is going to leave them with a better recovery value than would otherwise have been the case. Management has already been kicked out. Policyholders and taxpayers are the biggest winners here.
The best argument against the deal is that its ends are supposed to be achieved through bankruptcy law. I do hope that, where flaws in bankruptcy law are being highlighted, they will be improved when there's time to do that; in the here and now, I think this was well structured to penalize the guilty, protect the innocent, and maximize the value of both AIG and its parts and the financial system as a whole.
::: posted by dWj at 7:25 PM
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