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Euro area troubles, banks, and sovereign debt connections

Economist Mark Blyth talks on Europe and rescuing the banks…

See 35 minutes in on context for LIBOR troubles. (70% of the special investment vehicles designed to pump and dump mortgages belong to European not American banks … Euro banks listed their periphery debt as Tier One Capital under Basel.)

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Obama road tests hopey changey 2.0

Yves Smith spells out her strong opinion of our dilemma nationally for the elections of 2012. This particular arena of regulating banks and non banks and and accountability also takes on a wider symbolic meaning in this election cycle. How this plays out in determining national budget spending priorities through the lens of an explosion of money spent on national and state elections makes for a need for voters to pay close attention to actual issues and to gain some knowledge underlying economic understanding…a complicated task for a potentially interested public. We in Mass. have another election to follow closely through Elizabeth Warren, who has a different take on the issues.

Yves Smith at Naked Capitalism has a long post worth a visit to read the whole piece…here is a portion:

…So let’s return to the rebranding of Obama. From the Financial Times:

Barack Obama outlined a plan to toughen penalties against banks that commit fraud in a speech on Tuesday that hardened his attacks on Republicans for “collective amnesia” in backing policies that caused the financial crisis and economic downturn.

Speaking in Osawatomie, Kansas, Mr Obama summoned the spirit of another president, Teddy Roosevelt, who spoke in the same city a century ago about his “new nationalism” and the need for a fairer system that supported the middle class..

Mr Obama was scathing about the banks’ opposition to new financial regulations, saying they were only feared by “financial institutions whose business model is built on breaking the law, cheating consumers or making risky bets that could damage the entire economy”.

“I’ll be calling for legislation that makes [anti-fraud] penalties count – so that firms don’t see punishment for breaking the law as just the price of doing business.”

The misdirection is blindingly obvious. The claim is that the Administration needs new tools to get tough on banks. No, it has plenty of tools, starting with Sarbanes Oxley. As we’ve discussed at length in earlier posts, Sarbox was designed to eliminate the CEO and top brass “know nothing” excuse. And the language for civil and criminal charges is parallel, so a prosecutor could file civil charges, and if successful, could then open up a related criminal case. Sarbox required that top executives (which means at least the CEO and CFO) certify the adequacy of internal controls, and for a big financial firm, that has to include risk controls and position valuation. The fact that the Administration didn’t attempt to go after, for instance, AIG on Sarbox is inexcusable. The “investigation” done by Andrew Ross Sorkin in his Too Big To Fail (Willumstad not having a good handle on the cash bleed, the sudden discovery of a $20 billion hole in the securities lending portfolio, the mysterious “unofficial vault” with billions of dollars of securities in file cabinets) all are proof of an organization with seriously deficient controls.

But more broadly, it’s blindingly obvious this Administration has never had the slightest interest in doing anything more serious than posture. As we wrote in early 2010:

Recall how we got here. Early in 2009, the banking industry was on the ropes. Both the stock and the credit default swaps markets said that many of the big players were at serious risk of failure. Commentators debated whether to nationalize Citibank, Bank of America, and other large, floundering institutions..

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Calculated Risk commentary: Subprime Thinking

Commentary: Subprime Thinking

from Wednesday morning
re-posted with permission from the author

When I started this blog in January 2005, one of my goals was to alert people to the housing bubble, and to discuss the possible consequences of the then approaching housing bust. Residential investment has historical been one of the best leading indicators for the economy, and I was deeply concerned a major housing bust – both in terms of activity and house prices – would take the economy into recession.
There were others sounding the alarm – Robert Shiller, Tom Lawler, Dean Baker, Doris “Tanta” Dungey, and others. There was discussion of loose lending standards (including, but not limited to subprime), lack of regulatory supervision, agency problems with the originate-to-distribute model, and more. And although we might have disagreed on the exact causes of the bubble, as far as I know none of the people who are commonly credited with identifying the bubble, and predicted the bust, blamed it primarily on Fannie and Freddie or the Community Reinvestment Act (CRA).
When the Financial Crisis Inquiry Commission was announced, I was skeptical if they’d be willing to address the willful lack of regulatory supervision, and the role of Wall Street in the crisis. This morning, Shahien Nasiripour at the HuffPo wrote: Financial Crisis Panel In Turmoil As Republicans Defect; Plan To Blame Government For Crisis

The Republicans, led by the commission’s vice chairman, former congressman and chair of the House Ways and Means Committee Bill Thomas, will likely focus their report on the explosive growth of subprime mortgages and the heavy role played by the federal government in pushing mortgage giants Fannie Mae and Freddie Mac to purchase and insure them. They’ll also likely focus on the Community Reinvestment Act, a 1977 law that encourages banks to lend to underserved communities, these people said.

During a private commission meeting last week, all four Republicans voted in favor of banning the phrases “Wall Street” and “shadow banking” and the words “interconnection” and “deregulation” from the panel’s final report, according to a person familiar with the matter and confirmed by Brooksley E. Born, one of the six commissioners who voted against the proposal.

How depressing.
If Nasiripour story is correct, the explanations offered by these four individuals are blatantly false. Lets name names: Bill Thomas, Peter Wallison, Keith Hennessey and Douglas Holtz-Eakin. These are all subprime thinkers.

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Wednesday reports released

The NYT reports on the Financial Crisis Inquiry Commission.

“The Republican members of the commission appointed by Congress to investigate the causes of the financial crisis plan to release on Wednesday a document that assigns government housing policies substantial blame for the origins of the 2008 financial crisis. “

Update from MG: Here is the Republicans’ primer on the commission report which we will not see until next year. They don’t call it a report.

Also in the NYT is an Dept. of Energy report on the rare earth situation:

“The United States is too reliant on China for minerals crucial to new clean energy technologies, making the American economy vulnerable to shortages of materials needed for a range of green products” reports the NYT.

So warns a detailed report released on Wednesday morning by the United States Energy Department.

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Morgan Stanley Plans to Turn Downgraded Loan CDO Into AAA Bonds

by divorced one like Bush

Well, well, well, seems our Robert will have some more thinking to do. Via C & L to Radamisto who want’s to know if we have ADD or what comes the Bloomberg story that the money from money machine is being restarted.

Morgan Stanley plans to repackage a downgraded collateralized debt obligation backed by leveraged loans into new securities with AAA ratings in the first transaction of its kind, said two people familiar with the sale.

Morgan Stanley is selling $87.1 million of securities that it expects to receive top AAA ratings and $42.9 million of notes graded Baa2, the second-lowest investment grade by Moody’s Investors Service, according to marketing documents obtained by Bloomberg News. The bonds were created from Greywolf CLO I Ltd., a CDO arranged in January 2007 by Goldman Sachs Group Inc. and managed by Greywolf Capital Management LP, an investment firm based in Purchase, New York.

Gee, Morgan Stanley, Goldman Sachs? Two totally separate companies, just happen to be mentioned together implimenting the same strategic plans.

8/18/08 Morgan Stanley, Goldman link lending to their own creditworthiness

The Financial Times is reporting that Morgan Stanley is implementing systems that tie the prices of credit insurance on their own debt to their commitment to provide financing to their hedge fund clients. The shift would allow the bank to pull out from its funding commitments should it run into a crisis of confidence like that which wiped out Bear Stearns in only a matter of days. Goldman uses a similar arrangement that ties its lending commitments to the firm’s own bond prices.

WASHINGTON (Associated Press)

The Federal Reserve said Sunday it had granted a request by the country’s last two major investment banks – Goldman Sachs and Morgan Stanley – to change their status to bank holding companies.
The decision means that the Goldman and Morgan Stanley will be able not only to set up commercial bank subsidiaries to take deposits, giving them a major resource base, but they will also have the same access as other commercial banks to the Fed’s emergency loan program.

3/9/09 UPDATE 2-Barclays cuts price targets on Goldman, Morgan Stanley

March 9 (Reuters) – Barclays Capital cut its price targets on Goldman Sachs (GS.N: Quote, Profile, Research) and Morgan Stanley (MS.N: Quote, Profile, Research) and said it expects the former investment-banking giants to post losses for December, mostly due to asset markdowns, investment losses and “very subdued” core earnings.

Goldman Sachs and Morgan Stanley have formally asked the Federal Reserve for permission to repay a combined $20 billion in federal bailout money.

6/17/09 JPMorgan Chase, Morgan Stanley cut ties with government

In separate statements, Morgan Stanley and JPMorgan Chase said they will not issue bonds backed by the Federal Deposit Insurance Corp. The banks are striving to show they can raise funds without help from the government. Goldman Sachs and other financial institutions might follow suit.

Continuing the July 8, 2009 Bloomberg article:

A lot of banks and insurers “cannot buy anything but AAA,” said Sylvain Raynes, a principal at R&R Consulting in New York and co-author of “Elements of Structured Finance,” which is due to be published in November by Oxford University Press. “You’re manufacturing AAA out of not AAA, therefore allowing those people who have AAA written on their forehead to buy.”

While the Morgan Stanley deal is the first to involve CDOs of loans, banks have been doing the same with commercial mortgage-backed securities in recent weeks.

Jennifer Sala, a spokeswoman for Morgan Stanley, and Gregory Mount, a Greywolf partner, declined to comment.

Banks are using re-REMICs to protect against losses on residential-mortgage securities during the worst housing slump since the Great Depression…Re-REMIC stands for “resecuritizations of real estate mortgage investment conduits,” the formal name of mortgage bonds.

Nice to know We the People have their backs huh?

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There is a difference between then and now?

By divorced one like Bush

The following from Robert’s post got me thinking about railroads.

“There have been three big banking booms in modern U.S. history. The first began in the late nineteenth century, during the Second Industrial Revolution, when bankers like J. P. Morgan funded the creation of industrial giants like U.S. Steel and International Harvester. The second wave came in the twenties, as electrification transformed manufacturing, and the modern consumer economy took hold. The third wave accompanied the information-technology revolution.”

I talked about what was the same in the “second” wave then as today in my Taxation Rhetoric posting. As far as I’m concerned it had little to do with financing great industrialization and more with our first big flirt with financialization which is why we got the financial regulation in the 30’s.

As for the third wave, I believe there was the reporting of stupid money chasing anything with a dot com skirt on. Before that, in the 80’s we had “greenmail”, a smaller housing bubble and Milken et al. This got me thinking about the railroads and stories about how people would start building parallel lines just to get the big boys to buy them out. Early versions of greenmail? Stupid money chasing anything with a train. This was the biggy of the “first” wave.

So I went looking in order to write up something real to respond to Robert’s post and found that today is just like yesterday except that yesterday we actually got something when the people’s money was being used to line a private pocket.

Historical Handbook Number Forty

This publication is one of a series of handbooks describing the historical and archeological areas in the National Park System administered by the National Park Service, U.S. Department of the Interior. It is printed by the Government Printing Office and may be purchased from the Superintendent of Documents, Washington, D.C., 20402, Price 60 cents

Both companies therefore resorted to a favorite device of 19th-century railroad builders—a construction company with interlocking directorate free of Government regulation…

The 1864 Act made the United States “virtually an endorser of the company’s bonds for the full amount of its own subsidy,” and now both the U.P. and the C.P. could draw on double the amount of subsidy granted for each mile of completed road.

The Union Pacific’s construction company was the Crédit Mobilier of America. In 1864 Durant bought the Pennsylvania Fiscal Agency, a corporation loosely chartered by the Pennsylvania Legislature to engage in practically any kind of business, and renamed it the Crédit Mobilier. The directors and principal stockholders of this company were virtually the same as those of the Union Pacific. Greatly simplified, the process worked like this: The Union Pacific awarded construction contracts to dummy individuals, who in turn assigned them to the Crédit Mobilier. The Union Pacific paid the Crédit Mobilier by check (i.e., cash, for the benefit of Congress), with which the Crédit Mobilier purchased from the Union Pacific, at par, U.P. stocks and bonds, which it then sold on the open market for what they would bring. The construction contracts were written to cover the Crédit Mobilier’s loss on the securities and to return generous profits. In this manner the directors and principal stockholders of the Union Pacific, in their opposite role as directors and stockholders of the Crédit Mobilier, reaped large profits as the rails advanced.

The Big Four used an almost identical device to build the Central Pacific. Although in practice continuing to share in the management of the Central Pacific, Crocker resigned from the directorate and formed the construction firm of Charles Crocker and Company, in which Stanford, Hopkins, and Huntington were the only stockholders. The connection between the two companies was too obvious, and in 1867 the Big Four organized the Contract and Finance Company, with Crocker as president. Acting for the Central Pacific, they awarded to this company the contract for building the road from the California line to the junction with the Union Pacific, as well as for supplying all materials, equipment, rolling stock, and buildings. The chief advantage of the Contract and Finance Company over the Crédit Mobilier, as railroad historian Robert E. Riegel pointed out, “was that it was able to get its accounts into such shape that no one has ever been quite able to disentangle them.”

It all sounds so deja vu. But, unlike our $1 trillion and climbing paranoia driven military program we invested in today, these guys got us a real asset that paid dividends and they did it in 4 years instead of the 10 years planned for while lining their pockets.

Such techniques not only pushed the railroad to completion in record time, but also made its financiers extremely wealthy men. The Union Pacific cost about $63.5 million to build, of which about half represented the Government s loan. The best estimate of profits gained is about $16.5 million, although the enormity of this figure emerges only when it is understood that at no one time did invested capital exceed $10 million. Profits thus amounted, not to 27-1/2 percent, but to more than 200 percent. The Central Pacific’s figures are more difficult to arrive at, mainly because many of its books were “accidentally” destroyed by fire during the Congressional investigation of the Crédit Mobilier, The best authority, however, places the cost of construction at $36 million. The company received land grants and Government bonds valued at $38.5 million, while Stanford admitted that $54 million in Central Pacific stock transferred to the Contract and Finance Company in payment of construction contracts represented virtually net profit.

Alas, there was a price to pay, a lesson that should have been learned. It took 1929 to actually learn it.

There was an inevitable reckoning. Both railroads were burdened with inflated capitalization that meant decades of high rates and operating losses. The Crédit Mobilier investigation in 1872, moreover, brought the railroads bad publicity that strained relations with the public and the Government for many years and produced hostile legislation. Nevertheless, almost all railroad historians, while deploring the financial buccaneering of the Pacific Railroad builders, agree that only through such methods could the railroad have been built without far more liberal Government aid.

Did you catch that? We either put up the money or we let the private sector do it at a higher cost? Another lesson we seem to not want to learn (health care anyone?).
And, how did our governmental department view all this creative financing in 1969?

Their methods were those of the 1860’s, employed by most of their contemporaries in business—practices condemned as thoroughly unethical by today’s standards. Thus the truly great achievement of hese men has been tarnished by the judgment of a later generation. They were, in fact, the first victims of the revulsion against such methods that swept the country during the early 1870’s.

It’s just heart breaking that they only got 200% on their money.

See, it’s always there. ALWAYS, THERE. And, just like 1969, we hear cries that the perpetrators are victims. Just simple mistakes made. Of course, that would imply some lessons were learned. That we are repeating again today, yesterday, puts the lie to the entire argument of victum and mistake. Yet, as I said, we got something for all this personal self interest with the peoples money in the past, unlike today’s privatization of the: military, health care, schools, roads, utilities, environment. All failing, all in need of major capital investment. All representing investment made, value lost.
Munsey’s Magazine 1903 reprint:

The money invested in the railways that we had in operation in 1880 was comparatively a few millions. Today the railway systems of the United States represent an investment of three billions and a yearly earning capacity of hundreds of millions.

In today’s money, that 1903 railroad investment has a value of:

$757,220,398,593.20 using the Consumer Price Index
$604,412,640,969.90 using the GDP deflator using value of consumer bundle
$3,333,116,883,116.90 using the unskilled wage
$4,369,728,261,008.50 using the nominal GDP per capita
$16,503,666,443,504.30 using the relative share of GDP

What a shame we let ourselves be talked into the “creative destruction” of the rail system, an asset that represents $3.3 trillion dollars in unskilled wages. That’s a lot of labor just gone. It represents a relative share of GDP bigger than our actual current GDP! It makes you think about who has managed their wealth better; the US? or Europe who did not creatively destroy their original investment, but built upon it and thus saved themselves from having to generate as much income as we have had to in order to have our now killing us (war for oil?, pollution, resource waste, etc), personal transportation system. I guess that is why we don’t get to have 6 weeks vacation for all, we have to work to rebuild what we had. Can you say Rat Race?

Can we broaden the discussion now?

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Not Quite Hoisted from Comments: Laugh or Cry?

Tom Bozzo

…in the absence of blogging inspiration, had the exchange below the fold today on a well-known social networking website.

Tom is Dear Markets, just because I don’t have any money in stocks that I can’t afford to lose doesn’t mean I want to lose the money [*]. Kthxbai.

Friend 1: Laughing. With just the very slightest tinge of hysteria…

Tom: I comfort myself with the thought that the lost value of the kids’ college fund would… pay for approximately one [Fancy Pants University] textbook in the early 2020s.

Friend 2: We will be back to a barter system by 2020. I believe a standard 3 credit course will cost 3 cans of Spam and two nine volt batteries.

Friend 3: (fingers in ears) lalalalalalala…

Tom: [Friend 2], that may not be the worst thing unless Jim Kunstler is right and the 2020 economy [**] consists of 3 cans of Spam and two 9V batteries.

Friend 1: God, has anyone seen this week’s issue of New Scientist? Algal mats, solar power, and the apocalypse. I think I’ll join [Friend 3] with my fingers in my ears… [link added]

Friend 4: I only will say that I think it’s a very good thing your wife and I knit. That will be a valuable skill in the new economy.

Tom: [Friend 1], Should our high-ish latitude inland location prove valuable (i.e. should the Mississippi hold back the Great Plains Desert), the party will be at our house. Install the photovoltaics and pass the ammo! [Friend 4], knitwear for the apocalypse! I like it! [***]


[*] I am both down and not-down with Brad DeLong and Konstantin Magin on forward-looking market returns.

[**] I.e., real GDP.

[***] Unfortunately, it is not likely to pay the pre-apocalypse mortgage.

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The Two Sides of AIG

In this corner, as previously mentioned, Yves Smith goes for the slam dunk:

Let’s see, the credit default swaps market, due to some netting, is now somewhere north of $30 trillion (as opposed to its earlier “north of $60 trillion” level). Investment banks were believed to have hedged most of their exposure via offsetting contracts, but AIG wrote naked protection. And as jAIG itself is at risk of getting downgraded again, the collateral posting requirements keep rising.

Some analysts (including Chris Whalen of Institutional Risk Analytics) have offered theories as to how the government could void a lot of CDS (some have argued for getting rid of them altogether, others argue for eliminating them in cases where the protection buyer does not hold the underlying bond/exposure). Before you say, “they can’t do that”, recall the effective confiscation of gold in the Great Depression. rationing, wage and price controls, the suspension of habeus corpus. There is a good deal that the Feds could do if they chose to, trust me. But it’s easier to bill the poor chump taxpayer than take on the financiers, even after they done so much damage.

And in the other corner, I am joined by Felix Salmon, who rejects the slam:

The scandal here is not the size of the losses from the global financial meltdown — those are losses which sooner or later, in one form or another, would have had to be borne by the government anyway.

The problem, as obliquely noted by me (“So there is a viable, separable business that is making pennies [US$0.01] while the rest of the firm loses Benjamins [US$100.00]”) and explicitly declared by Yves is summarized well by Felix, in a statement to which I suspect all three of us would agree:

Rather, the scandal is that AIG could have earned billions of dollars by selling insurance against a meltdown, even as it was wholly incapable of paying out on those policies. I wouldn’t be surprised to learn that Hank Greenberg was still a billionaire, even as the policies his company wrote have cost the average American household some $1,600. It’s time for his wealth to be confiscated: it might be only a drop in the bucket compared to AIG’s total losses, but it would feel very right.

As I suggested yesterday of the successor-AIG, “So long as that board doesn’t include Hank Greenberg, I’ll be cautiously optimistic.”

The problem is that’s probably not the way to bet. More on that later; for now, keep watching Joe Nocera deliver the goods and summarize the issue:

Yet the government feels it has no choice: because of A.I.G.’s dubious business practices…it pretty much has the world’s financial system by the throat….

A bailout of A.I.G. is really a bailout of its trading partners — which essentially constitutes the entire Western banking system. [edits mine*]

By the way, Joe, Yves, citing an early Bloomberg report, named some names:

Goldman Sachs Group Inc., Societe Generale SA, Deutsche Bank AG and Merrill Lynch & Co. are among the largest banks that bought swaps from AIG, according to a person familiar with the situation. The insurer handed over about $18.7 billion to financial firms in the three weeks after the September bailout, said the person, who declined to be named because the information hasn’t been made public.

*Which improves the NYT editing, since the fact of the “housing bubble” has nothing to do with AIG’s mis- and malfeasances.

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This Makes More Sense–or Does It?

Dr. Black (you know the site) links to AIG Strike Three. And unlike the Citi debacle previously discussed (relatively) positively and rather negatively here, this one makes some form of sense.

The difference comes down to the meaning of an accounting concept: ongoing concern.

More below the break (yes, this might get wonkish. It’s me, after all.)

The Big C and AIG are both large entities with several pieces. Some of those pieces are successful; some of them are AIG Financial Products. Some of them—Citibank branches and office space, for instance—fall somewhere in between.

What we do know is that it is currently not possible to slice and dice The Big C so that something would be left that would be an “ongoing concern.” Those assets that are part of the company are dwarfed by the liabilities, and run across business lines. It’s not as if you could just magically, say, sell Smith Barney, spinoff any remaining insurance business, and ritually execute Vikram Pandit and produce a working company from the remains. At best, it’s a Good Start. There’s a reason I refer to the company as The Big C: it’s in the lymph nodes, the brain, the lungs, and the brain. You probably couldn’t even survive with “just” the Retail and Private Banking operations.

Any auditor who releases The Big C’s next 10-Q and describes the firm as a(n) “(on)going concern”**—with the attendant implication that there is a functional business model there and that the firm can create the future unencumbered* cash flows to remain viable—should be barred from the accounting profession.

AIG is different. Think Enron: there are pieces of the business that are still viable (now, the insurance and re-insurance pieces; then, the power plants and transmission facilities), but they are dwarfed by the losses at AIGFP. So there is a viable, separable business that is making pennies while the rest of the firm loses Benjamins.

The difference is that there is a possible end in sight. AIG-Prime could go back to doing the things AIG knew how to do, and stay away from the things that made Hank Greenberg rich and pauperized U.S. taxpayers.***

So, if we were to assume that a leaner, less mean AIG will come out of this, can we look at the plan changes and say they point toward a goal?

Unlike The Big C, the answer is clearly “yes.”

Under the deal, the interest rate on AIG’s credit line from the government would be cut to match the three-month London Interbank Offered Rate (Libor), now about 1.26 percent, a source with direct knowledge of the matter said.

This is perfectly reasonable for the moment: AIG is a financial institution, the reconceived version will be a financial institution of respectable size and strength, and the current version has the strong support of the U.S. government, which can borrow well inside LIBOR. While I suspect the final company will end up looking more like State Farm than Morgan Stanley, it’s not out of the question that it could borrow at LIBOR, which is approximately a AA rating level anyway—a perfectly reasonable assumption for the reconstitution of a formerly-AAA company with some carryover liabilities.

The additional equity commitment would give AIG the ability to issue preferred stock to the government later, the sources said.

This would presumably be the reverse of the deal with The Big C: “equity” for debt. Again, a sign that regulators expect there to be a survivor/successor firm of the current mess.

The most interesting quote in the piece is:

[Robert Haines, senior insurance analyst at CreditSights] said. “The counterparties on most of the book are (European) banks that would be hammered if the U.S. walked away.”

Note that Mr. Haines does not speak of AIG as an independent entity. Note also that, in supporting the AIGFP fiasco/deals, the U.S. can reduce the overall size of the bailout needed while ensuring that domestic entities retain full access to capital markets. It doesn’t make anyone happy, but the option is worth keeping open.

Then we get to the meat of the deal:

AIG will also give the U.S. Federal Reserve a preferred interest in its American Life Insurance Co (Alico), which generates more than half of its revenue from Japan, and Hong Kong-based life insurance group American International Assurance Co (AIA) in return for reducing its debt, they said.

The U.S. doesn’t really want to own either of these, but they have a promise to be valuable assets.

The government likely will get a 5 percent cumulative dividend on its ownership stake in Alico and AIA, said one source. AIG had been trying to sell Alico and part of AIA in a bid to raise money to pay back the government.

Sales of these assets are still a possibility, with some bids already received, said one person. [italics mine]

Think very carefully about the italicized part above. Markets clear—but they don’t always flow well. Combining the two, it appears that the government is effectively giving AIG a bridge loan on those two entities. In the worst case, it will become a “pier loan” (h/t CR), but that’s not the way to bet, especially if others follow the Chinese model of buying international assets while they are cheaper.

The rest of the moves look as if the outlines of the new company are already falling into place:

AIG may also securitize some U.S. life insurance policies and give them to the government to further reduce its debt, the source said.

The company may securitize up to $10 billion under that plan, one of the sources said.

The debt-to-equity swap would help AIG repay much of the roughly $38 billion it has drawn from its government credit line, the source said.

Translation: we know this business, and can do it well and continue it.

Last year, AIG said it planned to sell all assets except its U.S. property and casualty business, foreign general insurance and an ownership interest in some foreign life operations, to pay back the government.

While the company has announced some sales, it has found it difficult to find buyers and get a good price for assets amid the financial crisis.

Translation, again: if the market ever comes back, this is what we plan to look like. And we will again be a “going concern.”

In short, unlike The Big C, there is a plan, there are moves afoot to move closer to the end game, and targets by which they plan to keep the viable parts of the business going. For instance,

The company now plans to spin off up to 20 percent of the property-casualty business in an initial public offering, said a person with direct knowledge of the plans.

The business would be renamed to differentiate it from AIG, and have its own board of directors.

So long as that board doesn’t include Hank Greenberg, I’ll be cautiously optimistic. The other piece of spinoff is more problematic:

To aid the auction of at least one major asset, the government could help potential buyers of aircraft lessor International Lease Finance Corp with financing, the sources said.

ILFC has some debt coming due in 2009 and, if needed, AIG could use its new equity commitment to help potential buyers with that, one of the sources said.

This is a piece that probably still needs to exist for non-business reasons, at which point we might be able to argue that there could be a Public Good in government support of its sale. Under any condition, it doesn’t fit into the trimmed-down model of AIG-Prime that appears to be envisioned.

None of this means there won’t be another round—asset sales are very dependent on buyers—or that they should be paying non-contractual bonuses this month (which they are). The company still needs to reach its full restructuring, and this is not exactly a prime time to be a seller in the marketplace. But at least this restructuring/new bailout has a clear Endgame in sight.

*I use “unencumbered” in place of the usual “free” for the sake of clarity.
**It appears that “Ongoing concern” is used in the U.K., “going concern” in the U.S. I won’t pretend to know which will be the standard as accounting standards are weakened standardized.
***This is, of course, another case where I will point to the results and ask how anyone can take “we’ll get 2/3s of the money back” seriously. But that dead horse has been soundly beaten for the moment, so I’ll leave the tanning of the hide to Yves (She likes the new deal a lot less than I do) and Paul (who hasn’t discussed it yet, since he’s still rewriting 2 Henry VI and checking out The Great Solvent North) and the rest.

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Another Meme Busted beyond Repair

Brad DeLong sends us to Rex Nutting at MarketWatch:

U.S. nonfarm payrolls plunged by an astonishing 533,000 in November, the worst job loss in 34 years, the Labor Department reported Friday.

It’s only the fourth time in the past 58 years that payrolls have fallen by more than 500,000 in a month. Since the recession began 11 months ago, a total of 1.9 million jobs have been lost.

The unemployment rate rose from 6.5% in October to 6.7% in November, the highest jobless rate since October 1993.

Of course, October 1993 was part of a steady decline in the unemployment rate. (Always check those derivatives.)

And it, arguably, gets worse:

In a separate survey of households, the government found that employment fell by 673,000, the largest lost since August 2001. Unemployment rose by 251,000 to 10.3 million, while 637,000 people dropped out of the workforce. [emphases mine]

Anyone else remember when the Household Survey was being pushed by, e.g., Kudlow as the “true measure” of the economy?

Wonder if he’ll do that today.

UPDATE: Can’t tell if he did, but it’s “nice” to know some things never change.

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