Wednesday, September 17, 2008

There is no long term...

Yesterday's post ended with the comment that wiping out AIG shareholders "would be a short term solution but in the long term could be a terrible market and economic choice". The short term was overnight. The long term was today. The government's Putin like confiscation of an 80% equity stake in AIG creates a new definition of the term "moral hazard".

Monday's financial post began with an analogy to Ike and Gustav and then said "the thought that it could be like Katrina with levees breaking 36 hours not pleasant". The levees have broken. Picking up the pieces is now a long term project and unlikely something that will be solved by cyclical bounce in equity prices. Readjust folks, you now permanently have less money.

Today's morning post suggested two mergers. One has been around a long time, JPM and WaMu, but it is back on the front burner. As mentioned the other day former WaMu CEO Killinger had saved his skin for a short time by agreeing to a put for TPG but amazingly TPG has agreed to give up that right today. If JPM pays, say $4, I guess TPG decided that getting half of its money back plus stock in the best run financial company was better than a one time payout. Actually I don't get it. None of these folks give an inch, so as said earlier today there must be some arm twisting going on as well. The real stretch here was Wachovia/Morgan Stanley but it now seems to be real. You might say that it's like tying two bricks together and hoping they will float, but that's what they said about Manufacturers Hanover and Chemical and it led to the company that bought Chase and bought JPMorgan and bought Banc One so it could ultimately be a good thing.

The AIG deal is difficult to evaluate. Had a deal not been done would the Dow be down 2000 and dealers around the world be unable to calculate the value of any credit security that is below AA. Maybe. We can't know. We do know this here. The 80% confiscation of AIG stock was a horrendous mistake. Does GE come under a liquidity run due to its big financial services division and now get bought by the government as well. This is the short sellers dream. They become fabulously rich and the country they live in takes the loss, the taxpayers take the loss. Are we really modeling ourselves after the oligarchs of Russia and the obscene mega wealth capitalists of China. AIG was a difficult decision but there was no need to rush. They have, had, so many valuable assets that a bridge loan backed up by the aircraft leasing operation or the Asian insurance operation could have been put in place to come up with a reasonable solution. Fannie and Freddie are no comparison. They were always viewed by the market as government entities, mainly just back office operating companies, and the huge salaries that were paid there were funneled in part back to members of Congress. It was government controlled graft, by both parties. AIG is totally different. There is immense value in this company. For the government's political face they took almost all of it, and of course they will have no idea what to do with it. Government bureaucrats are experts in where to go to lunch and how best to exploit vacation and sick days. Their oversight of a company as brilliant as AIG was is ludicrous. There is no long term. It's all happening now.

I sure hope that I'm wrong.


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