Michael Gracie

From the comments section at Calculated Risk comes this summary regarding the Fed’s expansion of lending to AIG:

Wait.. it goes like this…

1. AIG makes bad investments
2. Company execs make millions
3. Stock gets wiped out
4. Company gets wiped out
5. Billions lost
6. Company and execs get 85 billion bailout
7. Execs and sales force go on $400,000 weekend retreat
8. Congress cries OUTRAGE!
9. We give them another 38 billion.

That about covers it.

Bloomberg sayeth:

The U.S. Securities and Exchange Commission stiffened rules against manipulative short-selling after a market rout pushed American International Group Inc. to the brink of collapse and triggered Lehman Brothers Holdings Inc.’s bankruptcy.

The SEC adopted two regulations today forcing traders and brokers to close out short sales on all stocks, amid concern investors are driving down prices by flooding markets with sell orders. A third rule makes it a securities fraud when sellers deceive brokers about delivering borrowed shares to buyers.

“These several actions today make it crystal clear that the SEC has zero tolerance for abusive” short-selling, SEC Chairman Christopher Cox said in a statement on the rules that take effect tomorrow.

Short-selling now caused Lehman’s and AIG’s collapses? Shame on Bloomberg. Mr. Cox might also have noted that the shares of other firms were often used as bonuses, and they just couldn’t have bankers’ comp under water (as said bankers noted at last week’s meeting).

UPDATE: CEOs of investment banks talking their book (emphasis mine)…

Seeking to avoid the kind fate that led Lehman and Bear Stearns to collapse, John J. Mack, Morgan Stanley’s chief executive, made an unsuccessful effort on Tuesday evening to persuade Citigroup’s chief executive, Vikram S. Pandit, to enter into a combination, according to people briefed on the talks.

“We need a merger partner or we’re not going to make it,” Mr. Mack told Mr. Pandit, according to two people briefed on the talks. Mr. Pandit, a former senior investment banker at Morgan Stanley, said Citigroup was not interested.

When you’re making statements like that, short sellers or no short sellers, your stock is headed for the tank.

UPDATE 2: Hmm…

Editors’ Note [NYT]

An earlier version of this article cited two sources who were said to have been briefed on a conversation in which John J. Mack, chief executive of Morgan Stanley, had told Vikrim S. Pandit, Citigroup’s chief executive, that “we need a merger partner or we’re not going to make it.” On Thursday, Morgan Stanley vigorously denied that Mr. Mack had made the comment, as did Citigroup, which had declined to comment on Wednesday.

The Times’s two sources have since clarified their comments, saying that because they were not present during the discussions, they could not confirm that Mr. Mack had in fact made the statement. The Times should have asked Morgan Stanley for comment and should not have used the quotation without doing more to verify the sources’ version of events.

Maybe the SEC should be regulating the media as well as the market.

All things considered, it sounds more like an equity investment:

In an extraordinary turn, the Federal Reserve agreed Tuesday night to take a nearly 80 percent stake in the troubled giant insurance company, the American International Group, in exchange for an $85 billion loan.

I suspect Hank Greenberg is very unhappy, although with roughly $450 billion in credit default swaps in play, I doubt many care how he feels.

UPDATE: Word from the Fed:

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 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 firm’s 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.

Now it sounds much more like what they were trying to do to Lehman last weekend - separate the good from the bad, and hold out a carrot for whomever wanted to invest in the bad. Only this time, the horse is the taxpaying public. Proceeds coming from the liquid assets are used to pay back the loan, and a few lucky buyers get some prizes. Then the government is left with an equity position in a business that likely still holds a toxic level of risk for which little premium will be forthcoming.

At least it gets everyone’s mind off AIG for a few weeks.

Who’s next?

After a chaotic weekend, Lehman filed for bankruptcy and Merrill sold itself to Bank of America. The Dow Jones Industrial Average plunged 504 points on the news (and roughly 20% of that loss occurred in the last hour or so of trading). It will forever be referred to here as “Brown Monday”. And the news is still coming.

Today we find…

• Russia’s market sold off 17% overnight and trading had to be halted - BRICs are doing nothing but crumbling;
• The US Treasury seriously considering conservatorship for AIG - no doubt the idea of losing both the massive credit risk hedges AND a good portion of the P&C market is playing a role here;

and…

• Wilbur Ross says get ready for 1,000 banks to fail - kind of scary even if he is half right.

Adieu.

UPDATE: Almost forgot…folks are wondering whether Blackberry subscriptions will take a hit now that Wall Street has been bludgeoned. Maybe those Blackberry addicts will go back to loving their spouses?

Troubled insurer AIG doesn’t need more problems, but now it has them. One of the company’s offices was burglarized. The take? A computer with 930,000 personal data records.

According to the report, none of the data has been put to use.

Yet.