Confidence Game

This article is from the archive of The New York Sun before the launch of its new website in 2022. The Sun has neither altered nor updated such articles but will seek to correct any errors, mis-categorizations or other problems introduced during transfer.

The New York Sun

President Bush yesterday put the government takeover of AIG and Fannie Mae in the category of actions that “improve investor confidence.” Count us — and more than a few AIG and Fannie Mae shareholders — as skeptical. One measure will be whether AIG shareholders vote to approve the deal at an upcoming, yet to be scheduled meeting. At least they, unlike Fannie Mae shareholders, are being given the courtesy of a vote before about 80% of their company is taken by the federal government.

Not that there aren’t some similarities between the cases of the two companies being Paulsonized. In both cases, regulators offered shifting stories, first denying that they planned to intervene, then plunging in. If the point had been to inspire confidence in the market, the mere tender of a federal intervention offer to shareholders would have had the same effect as an actual takeover. The boards or shareholder representatives could have had time to weigh some other options — for example, a rights offering, under which current shareholders could have participated along side the federal government, on the same terms. Or they could have negotiated with the Treasury secretary, Henry Paulson, for the right to get at least some of their company returned to them if they paid back the loan with interest.

In the AIG case, a board made a decision in a matter of hours to transfer about $25 billion in value — based on present uncertain market values — from the shareholders to the federal government. Was there a “fairness opinion” of the sort usually required in such a deal? We called the company yesterday afternoon to find out and were told we were the first to have asked. It’s possible shareholders might have even fared better in a bankruptcy than in the federal deal. They will have a chance to vote on the matter, a fact that has not been widely appreciated in the press coverage or even on Wall Street.

The argument gets made, “to hell with the shareholders — they made a lot of money over the years but allowed their managements to mismanage these companies into the ground.” Well, we wouldn’t want to generalize too much about this series of takeovers, but in both the cases of AIG and Fannie, the set of shareholders whose property was taken by the government is not necessarily the same set that owned it in the past. And in any case, since when is the fact that a company made a lot of money in the past a valid excuse for the government to take it over when it falls upon hard times?

There have been plenty of warnings about how these deals may expose the taxpayers to risk, but it looks to us like the taxpayers got terms that would be envied by any leveraged buyout operator with the capital to do them. Only someone using — or abusing — government power could have gotten such terms. But if a “good deal” for the taxpayers comes at the expense of the shareholders — and, in Fannie’s case, even without a chance to let the shareholders vote for themselves on whether it is a good deal for them — the broader goal of improving investor confidence may yet prove elusive. At least in the AIG case the shareholders will have a chance to decide for themselves whether they want to give 80% of their company to the government. The longer the vote, which has yet to be scheduled, is delayed, the more the market may improve to the point where AIG doesn’t need the federal help, and can disapprove the deal without being forced into bankruptcy. It may be the second most-interesting election for this fall.

The New York Sun

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