I was reading this Washington Post articlein the morning about the re-design of bailout package of AIG (see my post on AIG problems here). The article talks about AIG officials in touch with base to make the bailout package less severe for AIG. I thought this article is merely a thought.
However, article has been bang-on and Fed and Treasury have redesigned the package exactly on lines of the article. Key features are:
- Equity Purchase : The U.S. Treasury on Monday announced that it will purchase $40 billion of newly issued AIG preferred shares under the Troubled Asset Relief Program. This purchase will allow the Federal Reserve to reduce from $85 billion to $60 billion the total amount available under the credit facility established by the Federal Reserve Bank of New York
- Credit Facility: The interest rate on the facility will be reduced to three-month Libor plus 300 basis points from the current rate of three-month Libor plus 850 basis points, and the fee on undrawn funds will be reduced to 75 basis points from the current rate of 850 basis points.
I don’t know what first means as AIG has already overshot the borrowing limit. What is worrying is the credit facility as it has lowered the cost for AIG shareholders. With this goes all the talk by US policyholders that AIG has been penalised for all its excesses. As things have become better since September 2008. AIG has quickly got a better deal from US government.
If this was not enough, comes more financial wizardry from US Fed-Treasury combine. They have become experts at all this. They have set up 2 additional facilities with NY Fed:
Residential Mortgage-Backed Securities Facility
In one new facility, the New York Fed will lend up to $22.5 billion to a newly formed limited liability company (LLC) to fund the LLC’s purchase of residential mortgage-backed securities from AIG’s U.S. securities lending collateral portfolio. AIG will make a $1 billion subordinated loan to the LLC and bear the risk for the first $1 billion of any losses on the portfolio. The loans will be secured by all of the assets of the LLC and will be repaid from the cash flows produced by these assets as well as proceeds from any sales of these assets. The New York Fed and AIG will share any residual cash flows after the loans are repaid.
Collateralized Debt Obligations Facility
In the second new facility, the New York Fed will lend up to $30 billion to a newly formed LLC to fund the LLC’s purchase of multi-sector collateralized debt obligations (CDOs) on which AIG Financial Products has written credit default swap (CDS) contracts. AIG will make a $5 billion subordinated loan to the LLC and bear the risk for the first $5 billion of any losses on the portfolio. In connection with the purchase of the CDOs, the CDS counterparties will concurrently unwind the related CDS transactions. The loans will be secured by all of the LLC’s assets and will be repaid from cash flows produced by these assets as well as the proceeds from any sales of these assets. The New York Fed and AIG will share any residual cash flows after the loans are repaid.
Well, some lessons never seem to be learnt. Private sector fin wizardry has been repalced by public sector wizardry and it is difficult to make sense of anything in garb of public money. The press release states:
These new measures establish a more durable capital structure, resolve liquidity issues, facilitate AIG’s execution of its plan to sell certain of its businesses in an orderly manner, promote market stability, and protect the interests of the U.S. government and taxpayers.
Really? What is also going on is though US govt has lowered its credit line from USD 85 billion to USD 60 billion. it has increased its exposure to much exotic RMBS and CDS assets worth USD 21.5 bn + USD 25 bn (total 46.5 bn). So, one thing has been replaced by other amidst much complexity and SPVs (see this Swiss deal as well).
Another thing that comes to my mind is this is pretty much what original TARP (see the primer on TARP here) was supposed to do- transfer toxic assets to US Treasury. So, US Treasury/Fed simply have a seperate TARP for AIG because AIG does not come under its perview. The press release mentions:
The Federal Reserve Board has authorized the New York Fed to establish two new lending facilities relating to AIG under section 13(3) of the Federal Reserve Act. These facilities are designed to alleviate capital and liquidity pressures on AIG associated with two distinct portfolios of mortgage-related securities.
Fiscal policy is needed to alleviate this crisis, but not such fancy i-banking deals. Without much idea about these deals and public money being spent, I am getting more sure about the next crisis in making.