“AIG announced that it has signed a definitive agreement with the Federal Reserve Bank, under which it has secured an $85 billion, two-year line of credit. The terms of the offering are more punitive than we originally expected, with (1) an interest cost of 8.5% plus 3-month LIBOR on the outstanding balance; (2) an initial commitment fee of 2% on the total facility; (3) an 8.5% annual commitment fee on the undrawn amounts; and (4) the issue of convertible preferred stock giving the Federal Reserve effective ownership of 79.9% of the company, convertible into common stock following a special shareholder meeting. This announcement effectively puts to rest the question as to whether other private alternatives would be available to common equity holders.” Better than going under I guess but still pretty costly in my opinion. I had thought about buying some calls but not anymore.
8.5% unused line fee… Ouch
Ouch. Does that mean that if they, uh, find $85B tomorrow that they are paying a minimum of 8.5%*85B*2yrs anyway + 2%*85B?
Dead Man Walking
JoeyDVivre Wrote: ------------------------------------------------------- > Ouch. Does that mean that if they, uh, find $85B > tomorrow that they are paying a minimum of > 8.5%*85B*2yrs anyway + 2%*85B? That’s what I’m wondering too!!! WOW!!!
OK, how is that different from a retail bank (JP Morgan, CitiBank, Bank of America) charging “high” interest rate, late payment fees to a person who has low credit score/high credit risk? Should I be outraged? I want congressional hearing on this discriminatory lending practice of the Fed.
What we’re questioning is that if they DO NOT tap the $85B, will they still be charged 8.5% interest…
ws Wrote: ------------------------------------------------------- > OK, how is that different from a retail bank (JP > Morgan, CitiBank, Bank of America) charging “high” > interest rate, late payment fees to a person who > has low credit score/high credit risk? Should I > be outraged? I want congressional hearing on this > discriminatory lending practice of the Fed. do you pay 8.5% on your credit card lines of credit that you don’t use? I’ll issue you one.
what’s the % return for the Fed? do they pay bonuses based on performance? where do I apply?
Yes typical unused line fee states that on any unused portion the lender is charged x. But x is usually 250 bps give of take. 850 is crazy then you have a 2% success fee on top of that…
AIG will pay the unused line fee regardless whether any money is ever advanced. That is a huge unused line fee. Just had to do that math… 3 month Libor is 3.47625% today + 8.5% = 11.97625% on the outstanding balance $1.7B as an initial commitment 8.5% on the unused portion or $7.225B each year Sounds like a minimum $14.4517B to the Federal Reserve Bank for a two year commitment, Wow… Unused line fee is typical in commercial lending usually strongly encouraged by policy since with anything over a one year line a bank’s treasury dept would have to set aside a certain amount of reserves against the line.
I think minimum is 14.45 + 1.7 = $16.1B right? I dunno about this. I understand that a bank’s treasury department has to set aside reserves and that commercial lending would typically include an unused line fee, but this is the Treasury dept that doesn’t have to abide by such rules and was supposed to be bailing out AIG (I guess). That company is dead either way; I think we should have just gone Chapter 11.
There is a line in the book Lombard Street that really hits home what is going on here: (it goes something like this) “In times of crises money should be lent freely but with a penalty.”
people with distressed credit scores can usually only get CC offers with an annual fee or have to provide some sort of deposit. AIG is like that CC holder. people with avg or good credit scores can usually get CC offers with 0% for 12 months with no annual fee.
AIG should take the credit, hit the casino and go for RED. You never know.
IMO, How much they are charging only matters in Joey’s scenario where they find the $85b tomorrow… Otherwise the cost is pretty much moot… An entity 80% owned by the government is paying the government an exhorbitant rate of interest…money going from one hand to another (since current common equity is worth close to zero anyway…even if they’d have charged a 2% spread over LIBOR)
That’s probably right and there’s an analysis to be done here. However, it seems to me that the gov’t just made itself a 16B + drawn principal creditor as well as an equity holder. That means that if AIG equity is really worth nothing, the gov’t has a pretty decent claim on $16B worth of the liquidation value of AIG that is not about the principal they loaned AIG, but about a usurious rate on an unused credit facility. That doesn’t seem like a proper consequence of a bailout to me.