Things in Cyprus: kinda bad. There are better places than here to read about it; I particularly recommend Joseph Cotterill here and here, pseudo-Paweł Morski here and here, Mohammed El-Erian here, the FT’s coverage here and here, the Journal’s round-up of analyst reaction here, etc.
The basic story is that Cyprus’s government and banks are both massively overindebted and need a bailout, and the EU and IMF will provide a €10bn bailout, but they demanded that Cyprus chip in some €7bn, which it has decided to do by means of a tax on deposits in Cypriot banks of 6.75% for up to €100,000 and 9.9% above €100,000. (Is that rate on bigger deposits marginal or absolute? No one knows!) Those numbers are being renegotiated and may end up not being approved by Cyprus’s parliament.
Appreciative as it is for the €21 German taxpayers threw it, Commerzbank has had quite enough of living under the government’s thumb. So it’s going to finish paying back those taxpayer loans by conveniently diluting its shares such that the German government can’t tell it what to do anymore. Read more »
Is AIG going to sue the government for bailing it out? Hahaha no of course not, come on, that would be nuts. So what is this?
The board of A.I.G. will meet on Wednesday to consider joining a $25 billion shareholder lawsuit against the government, court records show. The lawsuit does not argue that government help was not needed. It contends that the onerous nature of the rescue — the taking of what became a 92 percent stake in the company, the deal’s high interest rates and the funneling of billions to the insurer’s Wall Street clients — deprived shareholders of tens of billions of dollars and violated the Fifth Amendment, which prohibits the taking of private property for “public use, without just compensation.”
I say unto you that this meeting is not for “consider[ing] joining” that lawsuit, which is one part of former AIG CEO Hank Greenberg’s so-far-not-particularly-successful campaign to get his $25 billion back from the government. (This part, in the Court of Federal Claims, is still going, unlike the part in a New York federal court that was dismissed.) Rather, it is for humoring Hank Greenberg, and the way you humor people who have lots of high-priced lawyers is by giving their high-priced lawyers a chance to talk to other high-priced lawyers for a long time, with PowerPoint. This paragraph in AIG’s court filing is less “we may join the suit” and more “see Hank we are listening to you really carefully and care deeply about what you have to say now, please, go on, this is a safe space”: Read more »
That doesn’t mean such buybacks aren’t market-pleasing, by the way. Much like Buffett’s recent slightly-above-market buyback, GM’s above-market buyback seems to have boosted the stock. Delightfully part of the boost is accounting-related. From the Journal: Read more »
While we’re celebrating successful bailouts I suppose it’s worth looking at this VoxEU post and related paper from two Swiss economists about the Fed’s Term Auction Facility, which provided short-term secured funding to U.S. banks who might otherwise have trouble getting such funding between December 2007 and March 2010. The authors ask the questions that we’ve seenaskedbefore about a variety of bailouts, roughly:
Were the bailed-out banks worse than the non-bailed-out-banks, pre-bailouts?, and
Did they stay worse after the bailouts?
The answer to the first question is always yes, which you could figure out a priori.1 The answer to the second question is usually yes too. As I said about a previous study, “bank bailouts are designed to let banks keep getting up to their old tricks; if you wanted them to stop doing that you’d let them go bankrupt.”
But here it’s no, so, yay! The authors are looking specifically at interactions of TAF funding and liquidity risk; the idea is something like “a lot of banks did too much short-term funding of long-term assets, and when the funding markets blew up they were in trouble, and TAF was designed to save them, and it did, but did they learn any lessons?” And they did:
A while back I built a spreadsheet to do math about AIG, and it took me a long time and led to basically one short post with what I still think was a rather lovely blobby picture, so I’m just going to shamelessly reuse that spreadsheet with slight updates and be all OOH LOOK AN IRR:
So yeah: as the AIG bailout saga comes to its sort-of conclusion, we can sort of conclude that the government made a 5.6% return on its money. Assumptions etc. in the original post; the accounting profit ties out reasonably well, if you squint, with the Treasury’s official math.
Herewith some random observations and questions on AIG:1Read more »
“Dear Colleagues,” Robert Benmosche wrote in a memo to AIG employees today. “We come together as a company to celebrate in good times and we draw together in times of shared crisis. Today warrants a celebration like no other in AIG’s history and places well in the past a crisis none of us will ever forget…Today the US Department of the Treasury has priced an offering of approximately 234.2 million shares of AIG common stock at a price to market of $32.50 per share. Upon the closing of this transaction, expected this Friday, Treasury will have sold the last of its remaining shares of AIG common stock, receiving proceeds of approximately $7.6 billion from the sale. The closing of this transaction will mark the full resolution of America’s financial support of AIG…It is one of the most extraordinary – and what many believed to be the most unlikely– turnarounds in American business history. And you did it…You did this. Every single man and woman at AIG did this remarkable thing. There is a saying in American life, there are no second acts. Well, take a bow, because today marks our second act.” [Dealbook]
Why would you bail out a bank? Theories abound; perhaps you want to keep the capital markets functioning, or prevent contagion to other systemically important financial institutions, or perhaps you just like banks and bankers and would be sad if there were fewer of them or they had less money. Somewhat less likely, you could think to yourself “I want there to be more lending to small businesses, and the best way to go about that would be to buy preferred stock in a bunch of banks.” If that was your goal, and TARP was your bailout, then you failed:
A new report commissioned by the Small Business Administration confirms what a lot of business owners felt in the four years since the financial crisis: The government bailouts for banks did little to relieve the credit crunch for Main Street companies.
In fact, banks that took taxpayer money during the financial crisis of 2008-09 cut their lending to small businesses more than other banks did, according to the paper by Rebel Cole, a DePaul University economist. … TARP banks cut their lending to small businesses by 21 percent in that period, compared to a 14 percent drop at other banks, according to the paper.
Here’s the paper and here is a sad little chart from it: