What do you folks think about calls to renegotiate the terms of AIG's bailout loan from Uncle Sam? AIG's former head honcho, Hank Greenberg, warns that the current deal could spell doom for AIG, which wouldn't serve anyone's purposes. The Wall Street Journal seconded that motion in an editorial today, and I tend to agree.
Mr. Greenberg, who has suggested AIG would have been better off declaring bankruptcy rather than accepting the loan terms laid down by the Fed for its $85 billion bailout (which was followed by a second line of credit of $37.8 billion), sent a letter to the company's new CEO, Edward Liddy, attaching a plan to save AIG. (Click here for the full article.)
As reported by our own Dan Hays, Mr. Greenberg–making his living these days as chairman and CEO of C.V. Starr and Company, after being driven out of AIG following the finite re accounting scandal–complained that the initial loan carried an onerous actual interest rate in excess of 14 percent, and on top of that, the government receives 79.9 percent of the ownership of AIG.
The bottom line,” Mr. Greenberg warned, is “this means AIG cannot pay off this loan from the proceeds of selling assets in this market, nor can it pay the annual interest rate from earnings.
As a result of this “lose/lose plan,” he predicted, thousands of jobs will be lost, pensioners will lose their savings, and millions of shareholders will be disenfranchised.”
Nobody wants that, right? But what's the alternative? Mr. Greenberg suggested that if the loan were changed to non-voting preferred stock, with an approximately 5-to-6 percent dividend and a 10-year right of redemption for AIG at a 10 percent premium, this could be turned into a win/win situation.
At the very least, AIG should be afforded the same borrowing terms as other companies, huffed Mr. Greenberg, noting that since AIG's precarious state became evident early on in the financial meltdown, the Federal Reserve has made loans to other firms on terms far less onerous than those imposed on AIG
Meanwhile, in its editorial today, headlined “Plan B For AIG,” The Wall Street Journal said “the federal bailout needs a private rescue.”
“The survival of a great American business may now depend on whether private investors will be allowed to succeed where government seems to be failing,” the Journal opined, warning that the federal bailout, under its current terms, is “threatening to become a loser for taxpayers.”
The newspaper argues that the loan terms are “so onerous that AIG may have to be sold in pieces at fire-sale prices,” noting that Uncle Sam is charging AIG “more than 10% interest on the entire $85 billion, even if the company doesn't borrow that much.”
The Journal drives home its point by contending that the second loan–at far more attractive terms–had to be shelled out to help AIG survive the first and potentially deadly loan deal.
“But the first transaction is still crushing the company, forcing a virtual liquidation,” the Journal warned. (Click here to read the entire Journal editorial.)
No one has any sympathy for AIG, not after one of its units recklessly traded credit default swaps on questionable mortgage securities, and nearly brought our entire financial system down with it.
But now that taxpayers are on the hook for $122 billion and counting, and AIG is threatening to become a black hole for Uncle Sam, we cannot afford to cut off our collective nose to spite our face. The loan deal, after all, was concocted in great haste under enormous pressure, with the stability of our financial infrastructure in the balance.
Just like Treasury and the Fed have rethought how best to deploy the $700 billion in capital allotted to help prop up the financial system under the bailout package hastily approved by a frantic Congress, perhaps it's time to step back and reconsider what not only is best for AIG, but for taxpayers and the financial system as a whole.
It serves no one's purpose to force AIG to dump its prime properties at deep discounts.
“The priority going forward shouldn't be further punishing AIG shareholders and its employees but trying to get the best deal for everyone involved, including the government,” concluded the Journal.
As disappointed as I am with the irresponsible lack of risk management within AIG on the subprime derivative products that has nearly ruined one of America's most successful and prominent companies, it makes no sense to take punitive steps if it will defeat the purpose of granting the government loan in the first place–to keep the company stable and give it a chance to turn itself around.
If that means rethinking the terms of the original loan, so be it.
What do you folks think?
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