March 18, 2009
AIG: And Worse
We now find out that AIG was incompetent in unwinding its problems with government money. And for these its experts get bonuses?? AIG was unwinding its credit default swap positionswith government money by buying the assets that were underlying the positions. This, in theory, makes sense. Rather than pay increased collateral for the increased risk of default by AIG on the contracts, AIG buys the debt instruments insured by the credit default swap from the counterparty and cancels the swap contract. The problem?? AIG overpaid for the underlying assets; paying par value for assets that have discounted value due to increased credit risk. The counterparty then pockets the gain from the overpayment and taxpayers take the hit. Taxpayers break even only if the can resell the assets at par value when markets recover. Even if the counterparty does not own the underlying assets it will go out and buy cheap and sell them dear to AIG that pays with government money. To make a long story short: AIG is playing the sucker in these unwinding strategies with taxpayer money. Can it get worse??
AIG: It Gets Worse
The scramble of politicians in response to populist outrage over the AIG bonuses gives one a sense of what it was like on the Titanic when it startedd to started to go down. Hostile folks are milling outside the AIG building looking at armed guards, AIG personal are resigning and not coming to work, and AIG and politician e-mail boxes are overflowing with venom. Politicians and pundits are panicked and saying very, very silly things: AIG employees should commit sucide; the government should tax 100% of the bonuses; the government as shareholder should claw back the bonuses. Traditional corporate law has answers: The CEO of AIG< Liddy, can break the contracts, wait for lawsuits, if any, make his defenses on the circumstances of the individual contracts, and settle those suits that have merit. If Liddy does not do so he (and the board of directors) can be sued by shareholders (for waste or breach of fiduciary duty) or removed by shareholders (or both). The government's AIG shares are owned by a trust with trustee appointed by Geithner. If they refuse to act the government has to sue or remove them (from breach of a trustees duty to a beneficiary or for a breach of the trust agreement). If Liddy's defense is that Geithner passed on the contracts and ratified them (as a representative of a controlling shareholder) then Giethner should be removed by our political process. The President should fire him and if the President does not he should be accountable at the next election. It is not complicated.
The contractual defenses are an array of traditional long-shot defenses--duress, fraud, unconscionability, impracticality, force majeur -- to set aside the deal and contract interpretation doctrines to recall payments that are not owed due to unsatisfied conditions or other terms. The "sanctity of contracts" worry of Sorkin of the New York Times is a laugher. Where was he when high paid ball players refuse to show up to work unless contract terms in place on salary where not increased due to a good past season?? Contracts are enforced by reputation and by law. AIG is not worried about its reputation any more; it has none -- good business still are and still will be if AIG breaches. In court AIG has defenses and will settle based on the costs to plaintiffs of suing and the likely of AIG prevailing on a long-shot defense -- normal stuff. Contracts, Mr. Sorkin, will survive just fine thank you.
March 16, 2009
AIG executives are claiming from $165 million to $450 million, depending on who you believe, in contractually stipulated bonuses after the company lost $60 billion last quarter, the largest quarterly loss by a private corporation in modern history. The government has loaned or otherwise granted AIG with $170 billion in cash and has executed value guarantees for another several hundred billion dollars of toxic assets. Needlesstosay, the press is all over the story and politicians are outraged, outraged. The truth of the matter is that the government is using AIG to funnel money government money to other banks, both international and domestic, that the government could not, politically and/or legally, otherwise fund. Why should United States taxpayers bailout out French, British, German, Swiss, and UAE banks?? Why should taxpayers give money to Goldman Sachs or Merrill Lynch?? The entire AIG bailout is tawdry and dirty. The government should have refused any funds and forced the AIG holding company into bankruptcy, which would have led to AIG spinning off its profitable insurance subsidiaries.