AIG: Maurice Greenberg article in the Wall Street Journal almost caused a stroke. I’m not sure I’ve read such a biased and self-serving editorial in a long, long time. I am quite surprised that the wsj I would post such complacent nonsense. Be that as it may, we all know that Big Mo controls AIG stock both directly and through his management of CV Starr, so let’s just say we know where he comes from. When he starts with the ransom inconsistency argument, he sort of listens to me. But when he went on to praise the Citigroup package while criticizing the AIG deal, I couldn’t help but call it a lie.
To date, the government has shown anything but a consistent approach. It did not provide assistance to Lehman Brothers. But he pushed through a highly publicized and now abandoned plan to buy troubled assets. The government also pushed through a punitive program for American International Group (AIG) that benefits only the company’s credit default swap counterparties. And now he’s buying redeemable non-voting preferred shares in some of the country’s biggest banks.
The Citi deal makes sense in many ways. The government will inject $20 billion into the company and act as guarantor of 90% of the losses derived from $306 billion in toxic assets. In exchange, the government will receive $27 billion in preferred stock that pays an 8% dividend and warrants, giving the government a potential equity interest in Citi of up to approximately 8%. Citi’s board is to be congratulated for insisting on a deal 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.
Continuing 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 shareholders of AIG, and wipe out the savings of retirees and millions of other ordinary Americans. This is not what the economy in general needs. It’s a lose-lose proposition except AIG’s credit default swap counterparties, which will benefit from the new deal.
Instead, the government should apply the same principles 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 counterparty guarantee requirements, which have consumed the vast majority of government-provided funds to date.
The purpose of any federal assistance must be to preserve jobs and allow private capital to take the place of government once private capital becomes available. The structure of the current agreement between AIG and the government makes this impossible.
The government’s role should not be to force a business out of business, but to help it stay in business so it can continue to be a taxpayer and employer. This requires reviewing the terms of the federal government’s assistance to AIG to avoid the breakdown of that company and the devastating consequences that would follow.
Hank, you have got to be kidding. American taxpayers saved Citigroup’s life, and therefore we can obtain 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 assertion that “the purpose of any federal assistance should be to preserve jobs and allow private capital to take the place of government once private capital becomes available.” But that has nothing to do with post-restructuring equity ownership. He then strikes a chord by saying, “Continuing the status quo will result in the loss of tens of thousands of jobs, ensure billions of dollars in losses for the pension funds that are major shareholders of AIG, and end the retirement savings. and millions of other ordinary Americans.” Well, Hank, that’s 100% yours. YOU should have thought things through before you built a company and culture that gambled it all and lost. Tell that retiree, that pensioner how the you fucked up. That’s called integrity. This thinly veiled call for a personal bailout is both insulting and offensive. And I’m not buying it. I’m sure my fellow American taxpayers aren’t either.
Private capital: The daisy chain of secondary sales of PE LP interests will almost certainly accelerate. It’s one of those slow-motion train wrecks that’s painful to watch. The calculation is easy to understand: public stock values plummet, PE values are stickier and fall more slowly, PE as a percentage of total assets rises to unacceptable levels, precipitating a selloff of PE LP shares . An interesting feature of this dynamic is autocorrelation, where PE values are slow to adjust despite public market comparables being available. If industrials are down 40%, don’t you think a portfolio of PE holdings in industrials should be traded? well 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 endowments have to get rid of things, and they’re trying to do it at a fraction of their base. But even at clearance prices it’s hard to move merchandise. In the coming months we will see how desperate these investors are. Could we see KKR trade at 30 cents on the dollar? It’s possible. And terrifying.
Risk capital: I attended an interesting brownbag today with my friends at betaworks. Much of the discussion focused on financing in today’s hostile environment. These are some of the data that emerged from the dialogue:
- Be prepared to live with your current investment syndicate.
- If possible, have a wealthy investor as part of your syndicate.
- Raise 18-24 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 cuts from the latest round plus and priority repayment of principal so that they are paid in full before anyone else gets anything. It looks, smells and feels like a jam. That’s why it’s so important to have 24 months of capital in the bank up front.
- In these times of recession, coalitions are formed between the Management and the New investors vs. former investors. This misalignment of interests can lead to stagnation and bring a company to the brink of the abyss.
There was much more, but these were the high points. Even with today’s difficulties, there was still a lot of enthusiasm for new ventures and new ideas, confident that the money would go to those who truly deserve it. In short, there is hope.