Friday, October 01, 2010

What If AIG Had Been Allowed To File A Conventional Chapter 11 Bankruptcy?

Yesterday's faux-repayment announcement by AIG rivaled GM's various announcements of debt repayment and an IPO for trying to disguise reality.

If you read the details, all that's really occurred is that Treasury has taken common shares to swap out the TARP's preferred shares in AIG. Hardly earth-shaking, is it?

The cognoscenti on CNBC yesterday morning were all a twitter about this development, with at least one co-anchor or guest host gushing that the TARP fund won't lose money, that AIG will ultimately not be a loss for the taxpayer, etc.

This got me thinking about the closest comparison to AIG- GM. Yesterday, I wrote this post about Paul Ingrassia's review of auto czar Steve Rattner's book on the administration's takeover of GM. In it, I observed, quoting from a prior post,

"Maybe if GM were allowed to go through a normal bankruptcy, and another firm had bought and reorganized various divisions of the old GM, all that borrowed Canadian and US money may have stayed in the private sector and funded other, better jobs with new firms."

What if AIG had also been allowed to proceed through a conventional, orderly Chapter 11 reorganization? As I wrote in one of many posts on this topic, found under the label "AIG,"

"I think Jenkins' idea is sound, but he omitted one very credible alternative that Geithner & Co. have never discussed.

That is, a simple carving out of AIG's financial products unit for placement into bankruptcy. Such a move would have isolated the troubled portion of the insurer from the heavily-regulated insurance operations.

Once in bankruptcy, AIG's counterparties would no longer have a right to 100% payments for positions. But an orderly disposition could have occurred, again avoiding needless losses to US taxpayers.

It continues to mystify me why only one Journal contributor has ever raised this option. It's the default path for failing companies, and should have been the preferred option for AIG.

Geithner may or may not have been guilty of various malfeasances or neglectful inactions in the AIG situation. But one thing is sure. He and his team were surely guilty of a lack of creativity and perspective on the situation."
In other posts, I suggested, as have others, that AIG could have been easily broken into three pieces: a group of conventional, state-regulated, solvent insurance units; a collection of asset management businesses which held, in trust, other peoples' money, and, finally; the problematic financial engineering and swaps-writing business units. Only the third was insolvent. As one Journal editorialist noted, a court could simply have assigned uniform haircuts to all counterparties and reduced the excess liabilities of the third unit.
That done, it could have been either closed or sold to the highest bidder.
But, like GM, our government chose to use taxpayer dollars to 'rescue' a firm which could have more efficiently and effectively been reorganized under existing Chapter 11 protections, with investors paying a market-determined value for any surviving operations and shareholders taking appropriate losses in bankruptcy.
So taxpayers footed the bill to keep dubious operations afloat and essentially prop up questionable asset values.
Wouldn't it have been a much better use of capital to allow investors and a bankruptcy court to determine asset values and use private money to reorganize, sell and/or liquidate various elements of both GM and AIG?
Then we wouldn't have this unholy entanglement of government and private sectors. Or the questionable use of taxpayer money to favor a few companies over others which went bust.
Then there's the question of opportunity costs. It's debatable that taxpayer funds will ever earn an appropriate, risk-adjusted return for the money pumped into either GM or AIG.
There was always an existing, appropriate path for handling GM and AIG- conventional Chapter 11 reorganization and, where necessary, bankruptcy.
What we see now is many government, GM and AIG officials, and selected pundits, misleading taxpayers about just what risks their money incurred for these bailouts, and what the appropriate return should have been or be in the future.
A classic example of a magician's misdirection and diversion from the real action, which, in this case, is that these companies should have been consigned to bankruptcy court where private investors could risk their own capital.

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