WHERE ARE THE IDEAS OF THE BEST AND THE BRIGHTEST OF WALL STREET?

An unmentioned solution to the financial crisis is to place the bad assets held by the troubled institutions exactly where they belong: in the hands of the shareholders of those institutions. In effect, instead of the U.S Government buying the bad assets from the troubled banks and firms, as Secretary Paulson suggest, the troubled bank and firms should themselves take the first step to solve their problem.

Let’s take the American International Group (AIG) as an example:

According to Morningstar, the Balance Sheet of AIG as of the latest quarter shows the following figures:

Total Assets $1,049..8 billion;
Total Liabilities $ 971.7 billion; and
Stockholders’ equity $ 78.1 billion.

I.- By giving the shareholders the bad assets in exchange for their equity (common and preferred stocks), AIG would greatly clean up its balance sheet and be more deserving of Government assistance – if needed. This first step can be easily accomplished by simply forming a separate entity (Newco) to hold and manage the bad assets on behalf of its shareholders (the would be ex-shareholders of AIG).

II.- Since the above step would entirely wipe out the equity of AIG, the company can easily re capitalize itself by selling, let’s say, 20% of its assets at an average profit of 15%. Under this suggested scenario the Balance Sheet of AIG would look as follows:

Total Assets: $ 801.6 billion
Total Liabilities: $ 771.7 billion
Shareholders Equity $ 30 0 billion

What did we accomplish?

1.-Thus far the government (the U.S taxpayers) hasn’t put up a dime.
2.- The bad assets of AIG went to where they belong, in the hands of its shareholders.
3.- AIG got $ 78.1 billion of bad assets out of its balance sheet, and hopefully cleaned it.
4.- By selling 20% of its assets (at a not unreasonable profit of 15%) AIG can generate a profit of $30.0 billion , which will turn into equity (this is cash that will serve as working capital) and reduced its debt by 20%, and
5.- The AIG shareholders still own the re structured company.

The above doesn’t solve AIG’s problem but leaves the company in a much better position to seek additional capital or financial assistance from the U.S Government, not to mention that by selling another $100 billion in assets the company could raise its capital by another $ 15 billion while reducing its liabilities by another 13%.

I wonder why is it that the best and the brightest of Wall Street, the captains of capitalism and enemies of government regulations and interference, haven’t develop solutions somewhat similar to the one suggested above for the institutions and companies troubled with bad assets.

I am kidding when I said that I am wondering. Of course I know that these smart guys prefer to allow for the collapse of their firms and go home with the tens of million of dollars that their Golden Parachutes require they be paid.

HZ.





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