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79.9%.
As a human being with an instinctive fondness for round numbers, I was a bit puzzled by the government's purchase of a 79.9% equity stake in AIG. But Steven Davidoff explains the situation: "The government purchases 79.9 percent of the company in question. It can’t be more than that, because if it goes over the magical number of 80 percent, the company’s debts are then required to be consolidated onto the federal government’s balance sheet. Keeping it at 79.9 percent allows the government to maintain the fiction that it is still not responsible for the company’s solvency."
Additionally, what the government bought was, in essence, stock-once-removed. They got warrants that can become stock. This preserves the fiction that they don't own AIG, though the difference here is is the difference between me buying your house and moving into it and me buying your house and letting you live there until I change my mind.
COMMENTS (5)
If we're going to be nationalizing American businesses, shouldn't we take a tip from Hugo Chavez and, I dunno, nationalize businesses that actually make money? Instead of one's that are on the verge of bankruptcy so tax payers can be stucking footing the bill?
Posted by: Kevin S. Willis | September 17, 2008 12:15 PM
It's enraging. If we the taxpayers are paying for the bad past management of a previously privately owned company, then we should at least OWN it.
Posted by: Beth W | September 17, 2008 1:10 PM
the government's purchase of a 79.9% equity stake in AIG
It's not really a purchase, as the government is really buying anything. The Federal Reserve Bank of New York is extending an $85 billion line of credit, to be repaid within two years with more than 11 percent interest. One of the terms of the loan is that the US government gets 79.9% equity interest in the company. Who knows how this will actually turn out, but in theory this could be a money-maker for us. Just think of it that way.
Posted by: Herschel | September 17, 2008 3:05 PM
If we're going to be nationalizing American businesses, shouldn't we take a tip from Hugo Chavez and, I dunno, nationalize businesses that actually make money?
Um, no, Kevin. There's no reason for us to emulate Venezuela, because, not being a socialist state, we generally prefer free (albeit prudently regulated) markets. Profitable firms pay taxes and salaries, purchase goods and services, and add value to our economic output. There's no reason to nationalize them.
VERY large financial firms that are on the brink of collapse sometimes invite the action of the government, because inaction would hurt millions of innocent people.
Also, as a commenter noted above, it's possible -- I'd say fairly likely given the possibility of mispricing on the downside -- that the AIG deal will make money for the US taxpayer in the end.
Posted by: Jasper | September 17, 2008 7:54 PM
O.K. Here is the math for those that are concerned on the taxpayer exposure. Fed Res. made a 85B loan for 2 years at LIBOR + 850 bps (approx. 11.70% currently). The Treasury is borrowing at approximately 1.65% for 2 years.
A spread of 10% on $85 Billion is $8.5 billion per year (if not paid back early), which would net the Federal Reserve $17 Billion in income.
They took a 79.9% stake in the company that has assets of over $1 trillion. They will oversee the disposition of at least $85 Billion in assets to repay the loan out of that $1 trillion over the two years to ensure that they are getting fair prices, not forced firesale prices.
Not a bad deal for the taxpayer for those that understand the math and don't jump on the media induced panic bandwagon that assistance to the companies are a bad thing.
For a profitable exchange, the Fed reduces the risk that the company is unwound and affects far-reaching items such as small-business insurance and terrorism insurance among many, many other items.
Posted by: CM | September 18, 2008 5:09 PM