AIG Takes 85 Billion Fed Loan, Agrees to be Nationalized

AIG signs up for $85 billion Fed loan
By Alistair Barr,
MarketWatch
1:25 p.m. EDT Sept. 24, 2008

Insurer effectively 'nationalized' after failing to raise capital in private market

SAN FRANCISCO (MarketWatch) -- American International Group shares fell more than 10%on Wednesday after the giant insurer agreed to be effectively nationalized late Tuesday.

AIG narrowly avoided bankruptcy last week after the Federal Reserve stepped in with a massive bailout.

Some big AIG shareholders have reportedly been trying to raise capital in private markets to avoid the government seizing control of the company.

But late Tuesday AIG said it signed a definitive agreement with the Federal Reserve Bank of New York for a two-year, $85 billion revolving credit facility.

As part of the deal, AIG will issue a series of Convertible Participating Serial Preferred Stock to a trust that will hold the new securities for the benefit of the Treasury. The Preferred Stock will get almost 80% of any dividends paid on AIG's common stock and will give the government almost 80% of the voting power. The securities will then be converted to common stock at a special shareholder meeting, AIG said.

The agreement leaves "AIG essentially nationalized," Bijan Moazami, an analyst at Friedman, Billings, Ramsey, wrote in a note to investors on Wednesday. "Shareholder efforts to prevent the government from taking an equity stake in AIG will prove fruitless."

Indeed, AIG's new chief executive Edward Liddy said the company made an "exhaustive effort" to borrow money in the private market, but failed.

"This facility was the company's best alternative," Liddy added in a statement late Tuesday
.
AIG shares dropped 13% to $4.36 during afternoon trading on Wednesday.

Asset sales, dilution

Liddy said AIG is developing a plan to sell assets and use the proceeds to repay the government loan, hopefully emerging later as a smaller but profitable company.

FBR's Moazami expects AIG to borrow all the $85 billion immediately, partly because the company will have to pay hefty fees and interest on the money it doesn't use. The agreement with the Fed requires the insurer to pay an annual interest rate of 8.5% on the money it doesn't borrow from the loan facility.

AIG has to pay back the $85 billion from the proceeds of certain asset sales and the issuances of new debt and equity, the company said.

AIG has "little to no" capacity to borrow more money in private markets, so if it has to raise capital to repay the Fed the insurer will probably have to sell more common shares, diluting current investors even more, Moazami warned

The Failed Bankers Rescue of 1929 Redux

“This is scare tactics to try to do something that’s in the private but not the public interest,” said Allan Meltzer, a former economic adviser to President Reagan, and an expert on monetary policy at the Carnegie Mellon Tepper School of Business. “It’s terrible.”

Alan Meltzer of Carnegie Mellon just finished excoriating the Bernanke-Paulson plan on Bloomberg television and he is right. We need to allow the markets to work through this longer, to use the facilities we have in place, to allow the Fed if necessary to add liquidity to the markets if they feel the need and the situation calls for it.

But purchasing specific bad debt from specific banks with no strings attached is crony capitalism, with dividends to be paid, stock gains to be taken, management compensation to remain at lofty levels. It is a repugnant to the republic and free markets.

And it is increasingly difficult to believe that this proposal is being made in good faith with the intentions and objectives as stated.

...several leading Wall Street bankers met to find a solution. The group included Thomas W. Lamont, acting head of Morgan Bank; Albert Wiggin of the Chase National Bank; and Charles E. Mitchell, of National City Bank. They chose Richard Whitney, vice president of the Exchange, to act on their behalf.

With the bankers' financial resources behind him, Whitney placed a bid to purchase a large block of shares in U.S. Steel at a price well above the current market. As amazed traders watched, Whitney then placed similar bids on other blue-chip stocks.
Although a similar such tactic had ended the Panic of 1907, this action halted the slide that day and returned stability to the market only temporarily.

We may have finally figured out Ben's game and connected some of the dots that did not seem to make any sense in isolation. It was in his explanation of why the Treasury should pay well over market prices for the toxic bank debt held by Wall Street. (We're not willing yet to speculate on Hank's game yet.)

This morning in response to a question about why the Treasury should not penalize or demand anything in return from the banks for buying distressed assets in return for the risk, and pay closer to hold to maturity prices, Ben said that this would not be fair since all the banks stand to benefit from this action.'

The point of this exercise is not to help two or three banks or ten banks which are in trouble.

The point of this exercise is to try and support the debt markets by buying assets at prices well above the market, and to do it quickly and in size in the hope of forestalling a likely debt market and stock market crash. They are going to give the money to the banks for worthless assets because they want to gear up x10 using the fractional reserve money multiplier. Its a helicopter drop to the Wall Street banks. They will take a hefty cut for themselves for taking the package and doling it out like third world warlords handing out Red Cross aid.

This is eerily similar to the actions taken by the Morgan's Lamont and the NY banks in putting together a pool of money, and halting the Crash of 1929 by having Dick Whitney walk across the street, and loudly start buying stocks at above market prices to "restore confidence" in the markets. This did work, for a day.

It is also similar to a tactic Morgan himself and the bankers used in 1907 to halt the liquidity panic caused by some specific bank failures caused by overextension in bad assets.

Why are these policy failures? It presumes that the markets are wrong, and that they are pricing risk incorrectly. Further, it does nothing to change the dynamics and fundamentals underlying the markets assumptions except to hold out a federal subsidy at an above market price. The traders will come back and hit that subsidy over and over until it is exhausted, as the currency traders hit sterling when the Bank of England tried to support it above the market.

We think this will not work, is a policy error, because buying assets above market price will not stop this juggernaut of a collapsing bubble, and will merely throw 700 billion of capital we will sorely miss later down a hole, specifically benefiting a remarkably few individuals who will skim most of it before it is obliterated. It will inflate the currency and soon be exhausted. It will accomplish nothing and only make it worse for many who fail to take action to protect themselves, being deceived by this market manipulation.

In short, Bernanke's proposal fixes NOTHING. It provides some getting out of town money for some of the worst of the insiders of this financial fiasco.

That's why he needs this today or tomorrow. Because the US equity markets are in the process of crashing. And he is attempting the same type of banker's rescue that was attempted in 1929.

Sweeping actions will not work. We cannot fix this by reflating the bubble and pricing the assets back up to bubble levels. This would buy a little time at best.

We need to get in and tie off the bleeding parts, the truly insolvent banks, sort out which are good and which are foul, and cut them off in bankruptcy like Lehman. This cannot be done by banking insiders because of the obvious conflicts of interest which are profound, even in self-proclaimed purely objective Ben.

One last thing to think about. We are having these discussions about the fate of our biggest banks. Which ones to save and how? Which ones to take into conservatorship and manage their affairs as a major creditor. Which ones to fail and liquidate. How best to firewall the side effects.

What are our creditors overseas saying about us? About the US and the sovereign debt and our impending insolvency? And don't think they are not having these discussions, perhaps without our direct involvement.

There came a Wednesday, October 23rd, when the market was a little shaky, weak. And whether this caused some spread of pessimism, one doesn't know. It certainly led a lot of people to think they should get out. And so, Thursday, October the 24th -- the first Black Thursday -- the market, beginning in the morning, took a terrific tumble. The market opened in an absolutely free fall and some people couldn't even get any bids for their shares and it was wild panic. And an ugly crowd gathered outside the stock exchange and it was described as making weird and threatening noises. It was, indeed, one of the worst days that had ever been seen down there."

"There was a glimmer of hope on Black Thursday...About 12:30, there was an announcement that this group of bankers would make available a very substantial sum to ease the credit stringency and support the market. And right after that, Dick Whitney made his famous walk across the floor of the New York Stock Exchange.... At 1:30 in the afternoon, at the height of the panic, he strolled across the floor and in a loud, clear voice, ordered 10,000 shares of U.S. Steel at a price considerably higher than the last bid. He then went from post to post, shouting buy orders for key stocks."

"And sure enough, this seemed to be evidence that the bankers had moved in to end the panic. And they did end it for that day. The market then stabilized and even went up."

"But Monday was not good. Apparently, people had thought about things over the weekend, over Sunday, and decided maybe they might be safer to get out. And then came the real crash, which was on Tuesday, when the market went down and down and down, without seeming limit...Morgan's bankers could no longer stem the tide. It was like trying to stop Niagara Falls. Everyone wanted to sell."

"In brokers' offices across the country, the small investors -- the tailors, the grocers, the secretaries -- stared at the moving ticker in numb silence. Hope of an easy retirement, the new home, their children's education, everything was gone."

Warren Buffet Goes Dumpster Diving and Gets the Gold, Man

Goldman is paying Warren a pretty rich return for his buy-in.

Did they give up hope on Hank and Ben for a government handout?

Or did Warren just decide to get a place at the table with the new ruling power in the US?

American Banker
Berkshire to Buy $5B of Preferred Stock from Goldman Sachs
By Jack Herman
September 23, 2008

Berkshire Hathaway Inc. will buy $5 billion worth of perpetual preferred stock from Goldman Sachs Group Inc. in a private offering, Goldman Sachs announced today.

The preferred stock will pay a 10% dividend and will be callable any time at a 10% premium. Berkshire will also receive warrants to purchase $5 billion worth of common stock within five years and a strike price of $115 per share.

Along with Morgan Stanley, Goldman Sachs announced Sunday it would convert into a bank holding company.

"We are pleased that given our longstanding relationship, Warren Buffett, arguably the world's most admired and successful investor, has decided to make such a significant investment in Goldman Sachs. We view it as a strong validation of our client franchise and future prospects," Lloyd C. Blankfein, chairman and chief executive officer of Goldman Sachs Group Inc., said in a statement. "This investment will further bolster our strong capitalization and liquidity position."

"Goldman Sachs is an exceptional institution," Warren Buffett, chairman and CEO of Berkshire Hathaway, said in a statement. "It has an unrivaled global franchise, a proven and deep management team, and the intellectual and financial capital to continue its track record of outperformance."

FBI Looking for Financial Misdeeds on Wall Street

May as well throw a cordon around Manhattan and bring in everyone wearing a power tie, suspenders, or designer shoes from Bergdorf's.

"...the FBI's hunt for culprits in the nation's subprime mortgage crisis focused on accounting fraud, insider trading, and failure to disclose the value of mortgage-related securities and other investments."

Associated Press
FBI investigating companies at heart of meltdown
By LARA JAKES JORDAN
09.23.08, 8:09 PM ET

WASHINGTON - The FBI is investigating four major U.S. financial institutions whose collapse helped trigger a $700 billion bailout plan by the Bush administration, The Associated Press has learned.

Two law enforcement officials said Tuesday the FBI is looking at potential fraud by mortgage finance giants Fannie Mae and Freddie Mac, and insurer American International Group Inc. Additionally, a senior law enforcement official said Lehman Brothers Holdings Inc. also is under investigation.

The inquiries will focus on the financial institutions and the individuals that ran them, the senior law enforcement official said.

The law enforcement officials spoke on condition of anonymity because the investigations are ongoing and are in the very early stages.

Officials said the new inquiries bring to 26 the number of corporate lenders under investigation over the past year.

Spokesmen for AIG, Fannie Mae and Freddie Mac did not immediately return calls for comment Tuesday evening. A Lehman spokesman did not have an immediate comment.

Just last week, FBI Director Robert Mueller put the number of large financial firms under investigation at 24. He did not name any of the companies under investigation but said the FBI also was looking at whether any of them have misrepresented their assets.

Over the past year as the housing market cratered, the FBI has opened a wide-ranging probe of companies across the financial services industry, from mortgage lenders to investment banks that bundle home loans into securities sold to investors. Mueller has previously said the FBI's hunt for culprits in the nation's subprime mortgage crisis focused on accounting fraud, insider trading, and failure to disclose the value of mortgage-related securities and other investments.

The investigations revealed Tuesday come as lawmakers began considering whether to approve emergency legislation that would give the government broad power to buy up devalued assets from troubled finance....

Additionally, the FBI is investigating failed bank IndyMac Bancorp Inc. for possible fraud. Countrywide Financial Corp., formerly the nation's largest mortgage lender and now owned by Bank of America Corp., is also under scrutiny.