With the FRE / FNM bailout, the government took an option to purchase 79.9% stakes in each company, as well as $1 billion of senior preferred stock. So based on my back of envelope calculations, that would put a value of about $250 million on the existing common stock in each company. For what it's worth, FRE has a market cap of 167 million at today's close, and FNM 514 million. According to my reading, the reported bailout of AIG might take a similar form - a 80% stake in exchange for a $85 billion loan. Using similar calculations to the FRE / FNM situation, this would put a value of about $21.25 billion on AIG stock, which is well above its 4pm and 8pm values. So at first glance, this looks like a bailout for shareholders. Am I missing something?
You are incorrectly accouting a "loan" as an asset. Than again, does any of this stuff make any sense at all?
Yeah, shareholders equity is the residual amount above assets-liabilities. Since assets and liabilities will go up by the same amount, it doesn't really change shareholders equity (The loan amount is owed to creditors not common stock bag holders)
Thanks for your reply The Kin. Hopefully the formal announcement of the plan will have the detail for which I am looking. With the FRE/FNM announcement, the 79.9% stake was explicitly given a $1 billion par value per company. The details of the AIG plan only state that there is a $85b loan, but no par value for the 79.9% stake has been given.
Thanks for your reply. I understand the balance sheet mechanics (A=L+shareholders), however given that AIG stock has fallen to $2.60 or so, it is possible that the stock could rise tomorrow. With the FRE/FNM bailout, the (79.9%) senior preferred stock had a value of $1 billion, which provided a low value for the existing common stock.
http://www.federalreserve.gov/newsevents/press/other/20080916a.htm The Federal Reserve Board on Tuesday, with the full support of the Treasury Department, authorized the Federal Reserve Bank of New York to lend up to $85 billion to the American International Group (AIG) under Section 13(3) of the Federal Reserve Act. The secured loan has terms and conditions designed to protect the interests of the U.S. government and taxpayers. The Board determined that, in current circumstances, a disorderly failure of AIG could add to already significant levels of financial market fragility and lead to substantially higher borrowing costs, reduced household wealth and materially weaker economic performance. The purpose of this liquidity facility is to assist AIG in meeting its obligations as they come due. This loan will facilitate a process under which AIG will sell certain of its businesses in an orderly manner, with the least possible disruption to the overall economy. The AIG facility has a 24-month term. Interest will accrue on the outstanding balance at a rate of three-month Libor plus 850 basis points. AIG will be permitted to draw up to $85 billion under the facility. The interests of taxpayers are protected by key terms of the loan. The loan is collateralized by all the assets of AIG, and of its primary non-regulated subsidiaries. These assets include the stock of substantially all of the regulated subsidiaries. The loan is expected to be repaid from the proceeds of the sale of the firmâs assets. The U.S. government will receive a 79.9 percent equity interest in AIG and has the right to veto the payment of dividends to common and preferred shareholders. http://www.federalreserve.gov/newsevents/press/other/20080916a.htm AIG
the tax payer is protected ? the gov. is watching out for the common person. i knew i could trust the gov. bgp
I just think the gov is in the wrong sector. They should be taking over defensive stocks in a market like this. Maybe some technology. But they aren't diversifying. Too heavily weighted in the financial sector. Maybe they'll get lucky, and some consumer non durable will get into trouble and they can bail them out.