AIG, private equity and venture capital

AIG: Maurice Greenberg’s piece in today’s Wall Street Journal nearly provoked a stroke. I’m not sure I’ve read such a wacky, self-serving editorial in a long time. I’m pretty shocked that the WSJ would publish such a pandering drivel. Anyway, we all know that Big Mo controls shares of AIG both directly and through his management of CV Starr, so let’s just say we know where he’s coming from. When he started the bailout inconsistency argument, he kind of had my ear. But as he continued to praise the Citigroup deal while berating the AIG deal, I couldn’t help but call bull$hit.

So far, the government has shown anything but a consistent approach. Lehman Brothers was not endorsed. But it pushed for a much publicized and now abandoned plan to buy distressed assets. The government also pushed for a punitive program for American International Group (AIG) that would benefit only the company’s credit default swap counterparties. And it’s now acquiring redeemable non-voting preferred stock from some of the country’s largest banks.

The Citi deal makes sense in a number of ways. The government will inject $20 billion into the company and act as guarantor for 90% of losses resulting from $306 billion in toxic assets. In return, the government will receive $27 billion in preferred stock, paying an 8% dividend and warrants, giving the government a potential stake in Citi of up to about 8%. The Citi board of directors should be congratulated for insisting on a deal that both preserves jobs and benefits taxpayers.

But the government’s strategy for Citi is markedly different from its initial response to the early companies experiencing liquidity crunches. One of those companies was AIG, the company I ran for many years.

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Perpetuating the status quo will result in tens of thousands of job losses, include billions of dollars in losses to pension plans that are significant shareholders of AIG, and wipe out the savings of retirees and millions of other ordinary Americans. That’s not what the broader economy needs. It’s a lose-lose proposition for all but AIG’s credit default swap counterparties, which are getting well under the new deal.
The government should instead apply the same principles it applies to Citigroup to create a win-win situation for AIG and its stakeholders. First and foremost, the government should provide a federal guarantee to meet AIG’s collateral requirements for counterparties, which have consumed the majority of government-provided funding to date.

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The purpose of any government support should be to preserve jobs and allow private capital to take the place of government once private capital becomes available. The structure of the current AIG intergovernmental agreement makes this impossible.

The role of government should not be to put a company out of business, but to help it stay in business so that it can continue to be a taxpayer and an employer. This requires a review of the terms of the federal government’s support for AIG in order to avoid the dissolution of that company and the devastating consequences that would result.
Hank, you must be joking. The US taxpayers saved Citigroup’s life, and for that we can get up to 8% of the company. THIS is called a “penal program” in Hank’s language for the US taxpayer. In my world, when you bail out a company, you own all of the equity, not 1/12 of the equity. The fact that the taxpayer gets up to 80% of AIG — that’s starting to make sense now. I agree with Big Mo’s assertion that “the purpose of any government support should be to preserve jobs and allow private capital to take the place of government once private capital becomes available.” But that has nothing to do with holdings after the restructuring. He then draws hearts by saying, “Perpetuating the status quo will result in the loss of tens of thousands of jobs, ensure billions of dollars in losses to pension funds, which are major AIG shareholders, and wipe out the savings of retirees and millions of other ordinary ones.” Americans.” Well, Hank, that’s 100% up to you. YOU should have thought twice before you built a company and a culture that risked everything — and lost. You’re telling this retiree, this retiree, like you screwed them. That’s called integrity. This thinly veiled call for personal rescue is both insulting and insulting. And I’m not buying it. I’m sure my fellow US taxpayers aren’t either.

private equity: The chaining of secondary sales of PE-LP holdings will almost certainly accelerate. It’s one of those slow motion train wrecks that’s painful to watch. The calculus is easy to understand: public stock values ​​are plummeting, PE values ​​are more stable and falling at a slower rate, PE as a percentage of total assets is rising to unacceptable levels, sparking a wave of PE-LP holdings sales. An interesting feature of this dynamic is autocorrelation, where PE values ​​are slow to adjust regardless of the available benchmarks in the public market. When industrials are down 40%, don’t think a portfolio of PE holdings should be trading in the industrials sector well over 40% down because of insolvency? However, this is not the way many PE funds see the world. Regardless, the secondary market is just that — a market — and the rebates offered on marquee funds like KKR and Terra Firma reflect that reality. Pensions and endowments need to throw things away and are trying to do so at a fraction of their base. But even at clearance prices, the goods are difficult to move. Over the next few months, we’ll see just how desperate these investors are. Could we see KKR trading at 30 cents on the dollar? It is possible. And scary.

venture capital: Today I took part in an interesting brown bag with my buddies at betaworks. Much of the discussion revolved around funding in today’s hostile environment. Here are some of the tidbits that emerged from the dialogue:

  1. Be prepared to live with your current investment syndicate.
  2. If possible, have a well-funded investor as part of your syndicate.
  3. Raise capital for no less than 18-24 months. This can be done through a combination of raising capital and reducing operational consumption.
  4. Restructuring gets ugly. Investors, whether inside or outside, are demanding both last-round haircuts plus and a priority return of principal so that they are paid back in full before anyone gets anything. Looks, smells and feels like down fill. That’s why it’s so important to have 24 months of capital in the bank up front.
  5. In these bad times, coalitions form between management and new investors vs. old investors. This misalignment of interests can lead to stagnation and push a company to the brink of collapse.

There was a lot more, but those were the highlights. Even with today’s difficulties, there was still plenty of excitement about new ventures and new ideas, with confidence that the money would go to those who truly deserved it. In short, there is hope.

By: Binaryoptiontradingsignals