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Hank Greenberg Opposes AIG Bailout:

John Hinderaker has excerpts from Hank Greenberg's testimony in Congress. Greenberg was the former head of AIG who was hounded out by Eliot Spitzer.

My friend David Skeel has making a lot of noise lately arguing that Chapter 11 is an appropriate mechanism for resolving the distress of financial companies, including Lehman. He had a piece in the WSJ last week and there was an interesting piece in the WSJ yesterday that amounted to a profile of his idea. I find David's arguments on this point quite persuasive.

Not Convinced:
Insurance is an important stabilizing force. Imagine that commercial flood insurance policies were standard, and before Hurricane Andrew, FEMA totally FUBARd the FIRM and millions of homes that were floodprone were rated as immune to flood? Insurance companies wrote policies based on the FIRM. Then imagine that after Hurricane Andrew, insurance companies bankrupted, and there was no government program backing them up. That area of Florida would still be a wasteland. Property values all over the southeast would have fallen due to the fear of insurance being unreliable. No one else would write policies, due the the unreliablity of the FIRM. Mortgages would dry up.

Bankruptcy works better with some businesses than with others. Financial products, such as insurance, is not one of them because of the cash flow versus assets ratio.

The size of the nut is also a problem. Above a certain size, there simply is no one that will be able to create DIP.... government is the only one with a large enough balance sheet for it to work. That means there is no chance for an organ transplant, and any sane bankruptcy filing will be liquidation, or quickly forced into liquidation.
4.3.2009 9:19am
Calderon:
In response to Not Convinced, as Greenberg himself notes insurance subsidiaries can't file for Chapter 11, so they're not really at issue.

I agree that DIP financing probably would be an issue because I assume AIG doesn't have a lot of asset potential financiers could take a security interest in. That said, there may still be creative ways to arrange for DIP financing, and I would think the operating expenses for AIG aren't that high.

Also, one thing in reading this that hit me was that Conseco went through Chapter 11 early this decade. Conseco (at least at the time) was a sort of hybrid financial products / insurance conglomerate that was at least somewhat similar to AIG. I wonder if there are any case studies looking at how Chapter 11 worked for Conseco that could be extrapolated to what could have been done for AIG.
4.3.2009 9:54am
Soronel Haetir (mail):
Certainly if Greenburg's statement about ratings and collateral are true then I have to say the form the bailout took seems strange.
4.3.2009 10:14am
Some Dude:
Not Convinced,


Insurance is an important stabilizing force. Imagine that commercial flood insurance policies were standard, and before Hurricane Andrew, FEMA totally FUBARd the FIRM and millions of homes that were floodprone were rated as immune to flood? Insurance companies wrote policies based on the FIRM. Then imagine that after Hurricane Andrew, insurance companies bankrupted, and there was no government program backing them up. That area of Florida would still be a wasteland. Property values all over the southeast would have fallen due to the fear of insurance being unreliable.

Property values fall in hurricane-vulnerable areas because there might be a hurricane? Maybe they should. It is a hurricane-vulnerable area after all. Maybe they should drop in hurricane-vulnerable areas if they were artificially high due to the false security of an unstable insurance scheme.

No one else would write policies, due the the unreliablity of the FIRM.

No one should write policies with unreliable data. I don't think that nobody would write policies, they would just find a more rational method of quantifying risk.
4.3.2009 10:14am
Nathan_M (mail):
If Mr. Greenberg is correct that AIG had a liquidity problem, and not a solvency problem, then aren't taxpayers going to make money on the bailout? They've provided AIG with the liquidity it needed in exchange for ownership of the firm. If AIG is solvent then it will be able to repay the aid once it unwinds its positions and its liquidity problems are resolved and the government will profit handsomely from its stake in the firm.

But I would say Mr. Greenberg is wrong and AIG was insolvent. Throughout this crisis Mr. Greenberg has seemed incapable of admitting that AIG has been bankrupted by positions taken under his watch, and which he approved, and that this is his fault.

Regardless of whether AIG is actually insolvent, it is transparently untrue that "everybody" would have been better off if AIG had gone into Chapter 11 as Mr. Greenberg says. AIG's creditors would be manifestly worse off. Exactly how much worse off the creditors would have been depends, of course, on AIG's solvency.

Mr. Greenberg's confidence that bankruptcy would not have caused systemic problems in the market is predicated on his view that AIG was solvent. I would suggest that most of the evidence, such as the value of AIG's equity, the magnitude of the bailout AIG has required and the view of essentially everyone expect for Mr. Greenberg, suggests that Mr. Greenberg is wrong. Powerline is right that Mr. Greenberg is "the man who largely made [AIG] what it was", but that is not a compliment.
4.3.2009 11:12am
cathyf:
I'm somewhat disturbed that those who are advocating bankruptcy for AIG aren't discussing British bankruptcy law and specifics of how it works, since AIGFP is fundamentally a London operation. Discussing chapter 11 or 7 is just idle chitchat since US courts don't have jurisdiction over the knottiest parts of AIG.

It looks to me that AIG is in bankruptcy. Not bankruptcy according to any particular bankruptcy law of any particular country, but a sort of cobbled together and improvised version. That takes account of the fact that the derivatives, the underlyings and the collateral of any particular position have counterparties in maybe a dozen different countries, and some have counterparties which are governments (especially debt instruments -- governments are big issuers of debt instruments.)

AIGFP is being dismantled and sold off in pieces, while their positions are being unwound and/or liquidated. That sure sounds like bankruptcy to me. The people who are arguing for "bankruptcy" are asking for something impossible -- instead of a de facto bankruptcy, they are demanding that US bankruptcy courts should magically acquire juridiction over foreign sovereign governments so that they can conduct a bankruptcy using some particular clauses of some particular US laws.
4.3.2009 11:16am
Art Eclectic:
The general speculation on the finance blogs is that AIG was bailed out - and will continue to be bailed out - because of the counter parties. If one of the big boys goes down (Goldman, Citi, BofA) it will start a bond market stampede, which leads to epic economic failure as all the foreign cash leaves American businesses.

From all accounts I've read, Greenberg was as big a crook as Cassano.
4.3.2009 11:18am
einhverfr (mail) (www):
The only problem I have with Chapter 11 procedings for financial institutions is that it isn't uncommon for loans to be called in early in these cases to pay off other creditors. I have seen businesses close their doors for no reason other than the fact that Lehman Bros called in their loans early. This sort of thing makes Chapter 11 proceedings of financial institutions VERY economically disruptive.

I think that we need to see more downstream protections for borrowers before I will accept that we should let large financial businesses file bankrupcy. Of course I favor ensuring we have protections for those whose loans are in good standing and then allowing bankrupcy proceedings for such institutions. Unfortunately we aren't there yet.
4.3.2009 12:10pm
Curt Fischer:
Art Electric: Didn't the "big boys" include many European banks?
4.3.2009 12:12pm
JP22:
Prof. Zywicki -- I would strongly suggest you read the Delaware Court of Chancery opinion in AIG v. Greenberg, 2009 Del. Ch. LEXIS 15 (Feb. 10, 2009). The opinion is on a motion to dismiss, but it still seems pretty clear that Greenberg had it coming, notwithstanding Spitzer's sliminess. To quote the Vice Chancellor: "The Complaint fairly supports the assertion that AIG's Inner Circle led a -- and I use this term with knowledge of its strength -- criminal organization. The diversity, pervasiveness, and materiality of the alleged financial wrongdoing at AIG is extraordinary."
4.3.2009 1:07pm
gab:
This quote of Skeel's, "...the Lehman bankruptcy ultimately proceeded quite smoothly..." is quite possibly the stupidest thing I've seen in print in a year.

The Lehman bankruptcy led to an almost complete seizure of the credit markets. Money funds ceased to function, as did the commercial paper market, corporate bond market, and any asset market that wasn't the US Treasury market.

If that's "smoothly" then I'm Warren Buffett.
4.3.2009 1:17pm
Andy Freeman (mail):
> If Mr. Greenberg is correct that AIG had a liquidity problem, and not a solvency problem, then aren't taxpayers going to make money on the bailout?

Nope - because the US govt is chasing out the folks who can unwind AIG profitably. Moreover, they're not using the assets to pay off the liabilities, but "to do good".

The closest analogy to the latter is the "bust up" shown on the Sopranos.
4.3.2009 2:04pm
Art Eclectic:
Curt, yes it did. However, a non-USA bank going down effects foreign investment in that country, not so much ours. If one of ours goes down, you'll see the same thing happen as with Lehman (as Gab noted.) Right now it seems like The Powers That Be are going to do anything and everything to keep another Lehman from happening.
4.3.2009 2:13pm
Charlie (Colorado) (mail):
<blockquote>
But I would say Mr. Greenberg is wrong and AIG was insolvent.
</blockquote>

On what basis, Nathan?
4.3.2009 5:11pm
Charlie (Colorado) (mail):

AIGFP is being dismantled and sold off in pieces, while their positions are being unwound and/or liquidated. That sure sounds like bankruptcy to me. The people who are arguing for "bankruptcy" are asking for something impossible -- instead of a de facto bankruptcy, they are demanding that US bankruptcy courts should magically acquire juridiction over foreign sovereign governments so that they can conduct a bankruptcy using some particular clauses of some particular US laws.


I think Cathy has it exactly right here (which isn't a surprise since we've been arguing the same point at Just One Minute.) It has progressed from annoying to appalling that the press covering this, and the financial crisis in general, had so little understanding of the issues to start with, and no, six months later, still doesn't understand the damned issues.

As a result, pretty well all the commentary in the blog world has come down to slogans:

"Let them fail!" (Too late, they already did. That's why they have this mess.)

"The money is going to Goldman and those guys, some of them offshore!" (Well, duh. Who did you think AIG owed money? What did you imagine it would be used for, if not to pay debts and liquidate liabilities?)

"Let them go Chapter 11!" (Except, as Cathy points out, AIGFP is largely in the UK and about two thirds of AIG's assets aren't inside the US. What is in the US is largely in insurance companies, which can't file Chapter 11.)

And, of course, Nathan's idea that AIG isn't illiquid, but insolvent. (Maybe so, but the numbers don't seem to be coming out that way, and it's even less clear that if they were able to do cash-flow accounting they'd look insolvent.)

The point is that a lot of these things are factual questions with fairly well-defined answers; the press, by not figuring them out, is doing everyone a disservice.
4.3.2009 5:26pm
Nathan_M (mail):
@Charlie If there was any significant chance AIG has a positive value I would expect its shares to trade for more than a dollar each.
4.3.2009 5:27pm
Charlie (Colorado) (mail):

This quote of Skeel's, "...the Lehman bankruptcy ultimately proceeded quite smoothly..." is quite possibly the stupidest thing I've seen in print in a year.


Gab, while I actually agree with you, all I can say is that you must not have been reading very widely this year.

I think you and Skeel simply have different ideas of what was proceeding smoothly. Skeel is right that Lehman Bros was able to liquidate their own assets in a reasonably orderly fashion. On the other hand, you're right that the resulting panic, following the head-fake from Treasury after the Bear bankruptcy, damn near wiped out the commercial credit system in the US and risked a financial collapse that would have been like Argentina's was.

On the third tentacle, though, was the fact that Treasury and the Fed were roundly criticized after the Bear takeover/bailout for not letting Bear go bankrupt. They got their way with Lehman; unfortunately, no one went on TV after the credit freeze to say "See, we told you so!"
4.3.2009 5:34pm
einhverfr (mail) (www):

I think you and Skeel simply have different ideas of what was proceeding smoothly. Skeel is right that Lehman Bros was able to liquidate their own assets in a reasonably orderly fashion. On the other hand, you're right that the resulting panic, following the head-fake from Treasury after the Bear bankruptcy, damn near wiped out the commercial credit system in the US and risked a financial collapse that would have been like Argentina's was.


Not to mention it forced some companies out of business either temporarily or permanently simply because they had loans with Lehman Brothers..... For example, Moonlight Basin, Montana closed for business temporarily following the bankrupcy (my sister, a former employee of the resort, was laid off along with most personnel at that time). Moonlight Basin eventually worked through the mess by going bankrupt themselves.

So whether or not Lehmen Brothers' bankrupcy went smoothly, it was EXTRAORDINARILY disruptive, and if we want to use the bankrupcy courts for this sort of thing, we need more downstream protections.
4.3.2009 6:55pm

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