The news that the Treasury Department and the Federal Reserve caved in to AIG’s demands for a more generous bailout is a bad omen for bailout. It shows every company involved in the bailout–from investment banks, to commercial banks, to private banks, to insurance companies, to automakers–that they should take the money now and not worry about the strings attached or the costs: those can always be cut later.
The original $85 billion bridge loan facility to AIG was officially intended as allowing for an orderly sale of AIG assets. Behind the scenes government officials were saying that this wasn’t a rescue of AIG, it was a liquidiation. AIG was going to pay hefty interest on the loan, partly to make sure taxpayers would get a return for their investment in the company and partly to get AIG to pay off the loans as quickly as possible. It only took AIG two months to rework the deal into a long term loan with a relatively low interest rate. What’s more, the government is now going to buy up assets, cancel liabilities and make an equity contribution.
What are the lessons for other recepients of bailout bucks?
First of all, don’t worry about the promsies you’ve made to the government about dividend payments. When the going gets rough, just explain to the government that you can’t afford to make them.
Second, don’t worry about restrictions on bonuses. You’ll be able to recut this deal later. Just tell the Treasury you’ll lose your key people if you can’t pay them well enough.
Third, don’t worry about limits on dividends to shareholders. Simply claim that those restrictions are preventing you from raising necessary private capital.
Fourth, don’t worry about restrictions on what you can do with the money. Don’t make loans under pressure from the government. Don’t sell off troubled businesses. Make acquisitions. Invest in Chinese infrastructure. These Treasury guys are spineless. They’ll never stop you. What’s more, government officials have no upside incentive to police you. This is basically unencumbered cash.
Fifth, there’s always more money. Once the government has invested billions in your business, the marginal cost of adding additional dollars compared to the loss from your failure guarantees that you’ll always be able to get more money from the goverment.
Congratulations to everyone on your future ability to recut the deal with the government. And when we say “everyone” we mean everyone except the taxpayers. You’re out of luck.
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