Wednesday, September 17, 2008

Hold the Horses?

Just as we thought that the end of the world was upon us, comes news that it might have been temporarily postponed. After doing nothing to save Lehman Brothers from bankruptcy over the weekend, the Fed finally blinked and has decided to extend a 'bridge loan' of $85 billion to AIG, which otherwise would have filed bankruptcy on Wednesday (it had apparently already engaged the same bankruptcy lawyers as Lehman to handle their paperwork. If only Weil Gotshal & Manges were a public company. Now, there's a growth stock for you!). Under the terms of the deal, in return for the lifeline, the US government will get an 80% stake in the company. The line of credit is available for two years, will accrue interest at 3M LIBOR + 850 and will be repaid by the sale of AIG's assets.  The loan is collateralized by all the assets of AIG and the US government has right to veto the payment of dividends to common and preferred shareholders.  This basically means that shareholders of AIG will be 'severely diluted' (read wiped-out).

It also means that AIG will eventually be liquidated, likely sooner rather than later, just not at the fire sale prices that would have been the result of a bankruptcy. Considering that AIG has over $1 trillion in assets (again, with the 't'!), a bankruptcy slash fire sale would have made the Lehman situation look like a Thanksgiving sale at Macy's. Plus, with the agencies downgrading AIG by two (Moody's, Fitch) to three notches (S&P), it would be required to post an additional $13.3 billion of collateral, money it simply did not have.

In sum, AIG "could not be allowed to fail."

In other news, Barclays PLC has agreed to buy the US investment bank of Lehman Brothers for $2 billion and about 9,000 employees of the investment bank will join Barclays. Not included in the sale are any of "Lehman’s real estate, real-estate-backed securities, derivatives positions or over-the-counter trades." So, Barclays is basically buying the 'good' parts of Lehman and is getting almost exactly the same deal it wanted when it was negotiating a sale of Lehman over the weekend but Dick Fuld had put the kibosh on those plans.

But because Lehman, the holding company, is under bankruptcy protection, Barclays can pick and choose the parts of the company it wants and leave the rest to be liquidated by the bankruptcy court. So Lehman's filing bankruptcy got Barclays the deal Lehman wouldn't do to save itself.

Oh, the irony.

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