Re: So what would happen if AIG was forcedinto bankrupsy (pre-planed)

[David Farber <dave () farber net>]

Begin forwarded message:

From: "Steve Papa" <spapa () Endeca com>
Date: March 18, 2009 8:46:00 AM EDT
To: <dave () farber net>
Subject: RE: [IP] Re:   So what would happen if AIG was forcedinto  
bankrupsy (pre-planed)

Dave,

There is an interesting opportunity that I believe our Congress missed.
As mentioned below the core issue is the CDS obligations. Ideally AIG
would have been able to simply "return" the CDS fees they received and
cancelled the insurance. Instead, we propped up AIG with $100B+...AIG
made good on their CDS obligations and paid the billions to Goldman,
etc. (who then proceeded to pay those billions in bonuses -- far more
than what AIG allegedly paid out).

A potentially better approach would have been to create a corporate
excise tax (like the bonus tax being proposed) on all proceeds from CDS.
Make the tax so onerous that if AIG then simultaneously offered to allow
the cancellation of a CDS obligation in return for a refund of fees..the
cancellation of the CDS instrument would be better financially for both
parties. Such a move would effectively cancel out the CDS market as it
stands today. Furthermore it would stop the cycle of funneling money
into AIG simply to reward the folks that betted in the casino. As a
reminder it is the CDS market that is described as a >$50trillion
outstanding liability hanging over all our heads so cancelling this out
is a requirement to eliminate the opaque risk present in the system.

Sadly - this would have been very valuable to do in November. I do not
know how much more AIG will payout on CDS's....it would be nice to know
if Congress is even tracking that.

Steve




-----Original Message-----
From: David Farber [mailto:dave () farber net]
Sent: Wednesday, March 18, 2009 8:11 AM
To: ip
Subject: [IP] Re: So what would happen if AIG was forcedinto bankrupsy
(pre-planed)



Begin forwarded message:

From: Lars Poulsen <lars () beagle-ears com>
Date: March 17, 2009 9:19:04 PM EDT
To: dave () farber net
Subject: Re: [IP] So what would happen if AIG was forcedinto bankrupsy
(pre-planed)

David Farber wrote:
> Bankrupsy judges have been know to get contracts cancelled with
> employees (ask the airlines) and to get monies back paid like AIG paid

> it.
> Seems to me the USG would be in no worse shape nor would AIGs
> creditors.

Whatever the *reality* (we all know that AIG is toast), the game has
been to AVOID declaring AIG bankrupt. Rather, the goal has been to run
out the clock while many of its credit default swaps expire without
getting renewed. Rumor has it that this has been quite successful:
The $180B capital infusion has allowed $300B of CDS contracts to expire.

Certainly, a bankruptcy judge can cancel contracts; indeed the point of
bankruptcy is to put the world on notice that the subject company (or
person) has been recognized to be unable to fulfill its (his)
contractual obligations, and the judge is now in charge.

In some instances, the *threat* of suing for bankruptcy has convinced
creditors and contract partners that they would be better off
voluntarily backing off on their contractual rights and get *something*
rather than get nothing in a bankruptcy court, but in this case, AIG's
management and other beneficiaries of the bonuses know very well that
the government thinks that it cannot affort to take AIG to bankruptcy
court.

If AIG was declared bankrupt, and has insufficient assets to pay all its
obligations, the creditors are worse off, than if they have some hope
that thay may get paid. At present, they can at least pretend that they
think they will get paid (and some of them will - indeed some of them
have already been paid).

Ann Marie Plubell <amplubell () yahoo com> wrote:
> "Outside counsel has advised that these are legal, binding
obligations  > of AIG, and there are serious legal, as well as business,
consequences  > for not paying." (Source Liddy letter to Geitner, March
14, 2009)  > Could it be a firm as excellent as Weil Gotshal rendered
this advice?

If the lawyers were retained by AIG's executive team, and they think of
the government as an outside party that AIG must maneuver to defend
itself against (and the law firm's web page implies that this is the
case), then the government should not rely on their opinion but ask its
own lawyers. I think that is what is happening now, at president Obama's
insistence.

I think an argument can be made that when congress passed a law imposing
caps on executive compensation in companies that henceforward received
"extraordinary assistance", and AIG subsequently received such
assistance, these compensation agreements became nullified to the extent
that they would lead to compensation above the cap.

/ Lars Poulsen




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