If AIG Goes Bankrupt
Then all of the bonus contracts are off, the management is fired and we can find out full details on all of their credit default swaps.
Is there any way that we can force them into bankruptcy?
Is there any way that we can force them into bankruptcy?
The problem with so much of the commentary on this is no one seems to laying out scenarios, so we can really know what bankruptcy (ideally a special "speed" debt-equity swap made possible by legislation) would really do:
Consider the scenario laid out here:
http://www.talkingpointsmemo.com/archives/2009/03/im_sure_the_knowledgeable_people.php
Even if it is the large western European Banks and not Hungary, the Baltic states etc. who would take the hit, having bankrupt AIG walk away from its guarantees on mortgage backed securities to European banks creates a major foreign policy dilemma for the US. US financial firms sold MBS to the European banks, often because they knew better than to hold them themselves. Then a US insurer promised to guarantee those bonds. If the European banks are left holding the bag, that will mar further the reputation of US in general, and limit future access to foreign capital by even worthy US borrowers.
You are officially and publicly invited to join this blog. It would raise the tone and might even lift the blog out of the mental gutter.
WA
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Additional things to think about if
AIG, Citigroup, etc were to be taken
into bankruptcy...
http://meganmcardle.theatlantic.com/archives/2009/02/lost.php
...It's easy to blithely say "Why don't they just make the bondholders take a haircut?" Harder when you think about who those bondholders are: insurers. pension funds. the bond component of your 401(k). Financial debt makes up something like a third of the bond market, and the largest holders are pensions and insurers.
The insurers are the biggest problem, because they're just so heavily regulated. They're not allowed to hold risky assets. Convert their bonds to equity and they will be forced to dump that equity at prices that will trend towards zero. Many insurers will see their capital impaired below the regulatory limits, requiring a government bailout.
Pension funds are the next biggest problem. They're already in big trouble because of stock market declines. The bonds are the "safe" portion of their portfolio, the stuff that's supposed ot be akin to ready cash. Convert their bonds to equity--or worse, default--and suddenly they're illiquid and even further underwater.
Nor is the 401(k) problem small. Bond funds are typically held most heavily by the people closest to retirement; they're for income, not capital gains. What is your mother going to do when a third of her mutual fund income gets converted to equity that produces no cash and can't be sold because the insurers have all had to dump their shares on the market at once? Or simply disappears into the land of bankruptcy lawsuits?
Hell, what am I going to do?
WA
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