AIG: Maurice Greenberg’s piece in the Wall street journal it almost caused a stroke. I’m not sure I’ve read such a biased and selfish editorial in a long, long time. I am quite surprised that the WSJ I’d post such complacent nonsense. Be that as it may, we all know that Big Mo controls a lot of AIG stock both directly and through its CV Starr management, so let’s say we know where it comes from. When he starts with the ransom inconsistency argument, he listened to me. But when he went on to praise the Citigroup package while berating the AIG deal, I couldn’t help but call it a bull $ hit.
To date, the government has demonstrated anything but a consistent approach. It didn’t help Lehman Brothers. But he lobbied for a highly publicized and now abandoned plan to buy troubled assets. The government also lobbied for a punitive program for American International Group (AIG) that benefits only the company’s credit default swap counterparties. And now it’s buying non-voting, exchangeable preferred shares in some of the largest banks in the country.
The Citi deal makes sense in many respects. The government will inject $ 20 billion into the company and will act as guarantor for 90% of the losses derived from $ 306 billion in toxic assets. In return, the government will receive $ 27 billion in preferred shares that will pay an 8% dividend and warrants, giving the government a potential equity stake in Citi of up to approximately 8%. Citi’s board of directors is to be commended for insisting on an agreement that preserves jobs and benefits taxpayers.
But the government’s strategy for Citi differs markedly from its initial response to the first companies to experience liquidity crises. One of those companies was AIG, the company I ran for many years.
Maintaining the status quo will result in the loss of tens of thousands of jobs, lock in billions of dollars in losses for the pension funds that are major AIG shareholders, and wipe out the savings of retirees and millions of other Americans. common. This is not what the economy in general needs. It’s a lose-out proposition except for the counterparties to AIG’s credit default swap, who will be offset under the new deal.
Instead, the government should apply the same principles that it is applying to Citigroup to create a win-win situation for AIG and its stakeholders. First, the government must provide a federal guarantee to meet AIG’s counterpart guarantee requirements, which have consumed the vast majority of government-provided funds to date.
The purpose of any federal assistance should be to preserve jobs and allow private capital to take the place of government once private capital is available. The structure of the current AIG-government agreement makes this impossible.
The role of the government should not be to force a company to close, but to help it stay in business so that it can remain a taxpayer and an employer. This requires reviewing the terms of the federal government’s assistance to AIG to prevent that company from breaking up and the devastating consequences that would follow.
Hank, you have got to be kidding me. American taxpayers saved Citigroup’s life, and for that we can get up to 8% of the company. THAT is called a “punitive program” in Hank’s parlance. for the American taxpayer. In my world, when you save a company, you own ALL of the equity, not 1/12 of the equity. The fact that the taxpayer gets up to 80% of AIG, now that starts to make sense. I agree with Big Mo’s statement that “the purpose of any federal aid should be to preserve jobs and allow private capital to take the place of government once private capital is available.” But that has nothing to do with post-restructuring equity ownership. He then touches the heartstrings by saying, “Maintaining the status quo will result in the loss of tens of thousands of jobs, lock in billions of dollars in losses for the pension funds that are major AIG shareholders, and end losses. Retiree Savings And Millions Of Other Ordinary Americans “. Well, Hank, that’s 100% yours. YOU should have thought things through before building a company and culture that risked everything and lost. Tell that retiree, that pensioner how you screwed them up. That is called integrity. This thinly veiled call to be rescued personally is both insulting and offensive. And I don’t believe it. I’m sure my fellow American taxpayers aren’t either.
Private capital: The daisy chain of secondary sales of PE LP interests is almost certain to accelerate. It’s one of those slow motion train crashes that is painful to watch. The calculation is easy to understand: public stock values plummet, PE values are stiffer and fall more slowly, PE as a percentage of total assets rises to unacceptable levels, precipitating an interest selloff of PE LP. An interesting feature of this dynamic is autocorrelation, where PE values adjust slowly despite the public market comparables that are available. If industrials are down 40%, don’t you think a portfolio of PE holdings in the industrial sector should be traded? far beyond 40% discount due to lack of liquidity? However, this is not the way many PE funds choose to view the world. Regardless, the secondary market is just that, a market, and the discounts that are placed on marquee funds like KKR and Terra Firma reflect this reality. Pensions and donations have to get rid of things, and they are trying to do so at a fraction of their base. But even at auction prices it is difficult to move the merchandise. In the coming months we will see how desperate these investors are. Could we see KKR trading at 30 cents on the dollar? C’est possible. And dreadful.
Risk capital: Attended an interesting brown bag today with my friends at betaworks. Much of the discussion revolved around financing in today’s harsh environment. These are some of the details that emerged from the dialogue:
Be prepared to live with your current investment union.
If possible, have a wealthy investor as part of your union.
Raises 18 to 24 months of capital, no less. This can be done through a combination of raised capital plus a reduction in operating consumption.
The restructurings are getting ugly. Investors, whether internal or external, are demanding both last-round haircuts plus a priority return of capital, so that they are fully repaid before anyone else gets anything. It looks, smells and feels like a crowd. That is why it is so important to have 24 months of capital in the bank in advance.
In these downtimes, coalitions are formed between management and new investors vs. Former investors. This misalignment of interests can lead to stagnation and push a company to the brink.
There was a lot more, but these were the high points. Even with today’s hardships, there was still a lot of enthusiasm for startups and new ideas, confident that the money would reach those who truly deserve it. In short, there is hope.