AIG: The Apocalypse
Apocalypse now means the "end times". The Greek though is more simplistic. Apo (meaning lift up or part) and kalypsis (in this context meaning veil). Apocalypse for ancients was really a lifting of the veil, a clearing of the view, for the those privileged enough to witness it. In that sense, with a focus on the term privileged, this bailout of AIG is apocalyptic. The veil has been lifted, "my friends".
Yesterday I blogged about the Lehman bankruptcy, and the Lehman bankruptcy only. Good news, by the way, for Lehman IB workers reported in yesterday's FT here. So some job losses are turned around, which is something to celebrate.
Today though, I'm waking up to the news that the Federal Reserve has bailed out AIG. It appears the Fed and Treasury were convinced that an AIG bankruptcy would trigger systemic financial meltdown.
Right now, the Fed's language is extremely vague. So I don't have all that much to say. On the flip though are the concerns I raise, and they are serious concerns that anyone should be worried about.
First, and most importantly, and certainly important to attorneys like me who often represent claimants, what is going to happen to the claims of AIG's policy holders? Is the government "loan" of $85B senior to the claims of AIG's policy holders (many of whom are now dealing with the Ike disaster and assessing their loss)? Are there any strings attached to the money to insure that $20B taken away by AIG and loaned to AIG on Monday (see more on that here) is going to go back to satisfy the claims of policy holders?
Second, where does the government's money sit on the capital structure of AIG? Is it some sort of priming lien that is secured and senior to everyone else? Well, it does appear the lien is secured, by 80% of AIG and all its other assets. But is senior to everyone? And by the way, why not 100% of AIG? I don't know. And the statements out so far aren't clear to me.
Third, is there going to be an automatic stay like what would happen in bankruptcy or are junior creditors allowed to run for the hills? If the latter, what was the purpose of the loan? And if the former, isn't that going to create the same credit event that a bankruptcy would have created in the first place?
I simply don't have the details to answer any of these questions right now. And I've asked people that I thought would have those details, and they don't know either. This is scary business folks. We are in new territory. The US Government is now, de facto, the world's largest insurer.
