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ANALYSIS
March 2, 2009
Sagging Index no longer reflects what’s going on in the market, some say, Replacements? Google it, to start.
March 2, 2009
Downward price spiral will actually boost the cost of capital for most companies. CFOS, take note.
March 2, 2009
The latest bailout at AIG could be a preview of how the president will deal with Wall Street.
March 2, 2009
No corporate defaults. Big debt offerings. Percolating CP issuance. Things may be looking up in the capital markets.
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March 2, 2009 4:28 PM ET
Instead of throwing more taxpayer money at AIG, a former economist at Freddie Mac has a different plan. The government should insist that the insurer’s counterparties stop demanding more collateral on AIG swaps as the value of the underlying assets falls, says Arnold Kling, a former economist at the mortgage lender and now an adjunct scholar with the Cato Institute. The Treasury today announced that it would supply another $30 billion in taxpayer funds on top of the $153 billion the embattled insurer has already received, after the company announced a loss of $62 billion in the quarter that ended on Dec. 31. Much of the loss reflected a decrease in the value of assets AIG insured through credit default swaps sold to U.S. and European financial institutions. “Given the systemic risk AIG continues to pose and the fragility of markets today, the potential cost to the economy and the taxpayer of government inaction would be extremely high,” the government said in a statement. While a growing number of experts have called for an exchange to be set up to help reduce that risk, skeptics contend that the idea will do little—even if it could be put in place immediately. Instead, these critics say that the government should force AIG customers to stop demanding more collateral for the credit default swaps they hold. The problem with a CDS exchange, Kling said in an interview with Financial Week, is that there’s no natural seller of swaps, unlike with commodities, so none of those sellers would have sufficient capital to back up its commitments. And so long as sellers are inadequately capitalized, Kling said, “the exchange would have no way to protect itself, which creates an almost impossible position for the exchange.” AIG is a case in point, as its takeover last September by the government indicates. While the insurer sold more than $400 billion in contracts on the strength of its AAA rating, it did not have anywhere enough capital to meet the collateral calls of its counterparties once the value of the assets it sold CDS against began to fall. To free taxpayers from having to supply AIG with ever more capital, Mr. Kling recommends that the Treasury act as a “stern sheriff” and force its counterparties to cease and desist by imposing financial penalties on such demands, even though their contracts allow them to continue making them. “The collateral calls make it harder for [AIG] to raise money and stay in business,” he said. So the Treasury should tell AIG’s counterparties that ‘you’re just going to have sit and wait it out.” Mr. Kling likened such calls to a bank run that bank regulators would normally be quick to stop He offered the same view in testimony to the House Committee on Oversight and Government reform during a December 9 hearing on the collapse of Fannie Mae and Freddie Mac but said he got no response. “The Congressmen were just too exhausted,” he said.
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