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Thread: Embattled AIG puts headquarters on sales block

  1. #10
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    Default Re: Embattled AIG puts headquarters on sales block

    Congress poised to tax the hell out of AIG and other bonus recipients.

    http://news.yahoo.com/s/ap/20090319/...co/aig_outrage

    This is an example of the tax code being used as a tool of public policy. Remember this when you hear someone talking about a flat tax (which in theory would take the tool off the table).

  2. #11
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    Default Re: Embattled AIG puts headquarters on sales block

    Quote Originally Posted by RYou View Post
    AIG has not gone Chapter 11 because that would put a choak hold on their assets and ability to pay off Default Credit obligations. If that were to happen, the holders on those swaps would have to suck up the loss. There are too many big banks that would likely domino adding more Chapter 11 nad veirtually kill any attempt to restore the economy.

    As things appear now, the feds own AIG, will continue to fund future cash needs for default credit obligations and at some point in time, when AIG sells or closes all of the assets, the feds are going to holding a mammoth amount of bad debt.

    Keep in mind, most of this problem eminated form the federal instrumentalities, Fanny Mae and Freddy Mac. I sense the fed are owning up to their screw ups and by channeling the payments through AIG limits the admin is covering the bad losses of those dealing with the FMs. Without AIG as the channel, the Feds would be dolling out the cash here there and everywhere. Additionally, I doubt they could deal with the European Banks in the same, but the AIG channel allows them to take care of every bank that is in the middle of the problem.
    Ryou,

    I'm not as up on all of the financial stuff as you seem to be, so please take my questions as genuine.

    Isn't there already a choke hold on their assets?

    I'm thinking that their assets, such as these buildings, actually have already been devalued to the point of being virtually worthless. No one is going to want to, or be able to buy these buildings in the current economy and real estate market. Whoever buys them will have the chore of trying to find tenants for them, which again, is a nearly impossible task. Not to mention that most of those who would have normally been potential buyers can't get the credit needed to fund the purchase. Those who may be able to buy are simply going to wait because they know that a better deal is only a few months or years away because AIG is such a motivated seller. So, basically they're trying to sell something that no one wants or needs.

    Wouldn't chapter 11 allow more transparency and a more orderly selling of the assets? And probably save the tax payers more in the long run?

  3. #12
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    Default Re: Embattled AIG puts headquarters on sales block

    I'm thinking that their assets, such as these buildings, actually have already been devalued to the point of being virtually worthless.

    Incorrect, all of the AIG assets, buildings, aircraft leasing, insurance companies in particular remain having significant value. They may not be as valuable as they once were ( what is?), but they remain to have value. Value is determined by what a willing buyer is willing to pay. Because the extraordinary high values were talking here, banks and other investors are having a hard time justifying the loan values that will be needed. That's one thing Obama and the Treasury are trying to do, free up loan cash, but it won't happen until value projections start stabiizing. The aircraft leasing company once had a market value of over $50 billion. As their customers seek to save cash, they are not leasing anything new if they are not canceling the leases.

    Also, the insurance companies are very profitable, but the cash profits are ceded up to the parent to payoff the loans the fed has anted up. We probably won't see another insurer by an AIG commercial insraunce company because they would rather take the business on a marketing basis rather than pay extra above the premium for the revenue. Addiotnally, AIG underwriting does not carry a very good reputation among other insurers because of the way they do business. Another would rahter not buy those employee either. More likey you'll see a venture capital group but the AIG insurers.

    As the economy returns, so too will the market value of the AIG companies.

    No one is going to want to, or be able to buy these buildings in the current economy and real estate market. Whoever buys them will have the chore of trying to find tenants for them, which again, is a nearly impossible task. Not to mention that most of those who would have normally been potential buyers can't get the credit needed to fund the purchase.

    The AIG buildings are steps away from Wall St. That is primo NYC real estate. The value of commercial property in NYC is starting to take it a hit. Values held their own long after the residential property values started to decline outside of NYC. Keep in mind the AIG companies and others that lease space within are locked into leases with the AIG property management subsidiary. Those tenants including the AIG companies that reside in and lease space won't get kicked out. Those buildings are at near capapcity so there is a wealth of guaranteed reantla income to support a purchase. Because we are talking about buildings that may have a retail value of $40-50 Billion, it's hard to find buyers right now.

    Those who may be able to buy are simply going to wait because they know that a better deal is only a few months or years away because AIG is such a motivated seller. So, basically they're trying to sell something that no one wants or needs.

    It's not so much a matter that know wants them, it's the fact loan cash is locked up for those that can't document liquidity and proven collateral value.

    Wouldn't chapter 11 allow more transparency and a more orderly selling of the assets? And probably save the tax payers more in the long run?

    Ordinarily yea, but not now. Chapter 11 basically allows AIG to stop paying all it dose business with. It teis up a great of liquidity. It would cause a fire sale well below even depressed values. The lower you value the assets, the lower the return the fed get on the loans they made. As far As I can tell, the break up value of AIG was about $150 billion back in Julky. If everything was dumped today, it would be far less which means the feds will take an automtic loss on the loans.

    Obama is now talking about the fed buying all of the bad loan assets from the banks - $1 TRILLION. Guess what, AIG owns the rights to those bad loans through the credit default swaps. If the fed soen't take them on direct, they'll have to keep ceding cash to AIG to pay off the trasnactions. Either way the fed loses the cash because there is no way AIG can afford to pay off the fed loans if the get any larger. By taking over the bank bad debt they are now trying to save face for the first $180 Billion.
    On the plus side, if the fed decides to take on all of the bad debt from the banks now, not wait for them to invoke the default credit loss and seek repayment from AIG, it will free the up the balance sheets for all of the other banks and it should enable them to get back to teh business of making the market for loans---home loans, car loans big and small businsess loans. which they are not doiing right now. Everyone hopes that will spur the reversal of the economy.


    "Isn't there already a choke hold on their assets? "

    So, to answer your question, yes - The Federal Treasury owns 80% of AIG. AIG can't sell doodley squat without fed approval. The fed knows if okayts a fire sale price, the difference in price right now is taxpayer cash that can never be recovered. There is a choke on the AIG assets by lenders, because they feel loans in the economy pose greater uncertainty and they can't afford any more bad loses. Basically, they've reverted back to normal loan practices that predated the loan fisco of the recent past. Sure they make a loan at a fire sale price but the feds won't sell at a fire sale price.
    Last edited by RYou; 03-24-2009 at 09:25 PM.
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  4. #13

    Default Re: Embattled AIG puts headquarters on sales block

    RYou,

    What's your perception of the future of the American commercial real estate sector in the next 2-3 years? I've read that the Nation's #2 mall owner, General Growth , has fallen behind on payments and will be losing several major malls (they own over 200). The article also states that they have fallen behind on 1.2 billion in loans... a lot of real estate.

    Commercial real estate is certainly more difficult to refill than residential is, but also much less likely to fail. News seems to be coming in that commercial real estate is beginning to collapse now that consumer spending has plateaued well below where it was in the past couple years.

    So, do you think commercial real estate collapses like the residential real estate has?
    Last edited by Schlottke; 03-24-2009 at 09:19 PM.

  5. #14
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    Default Re: Embattled AIG puts headquarters on sales block

    Quote Originally Posted by Schlottke View Post
    RYou,

    What's your perception of the future of the American commercial real estate sector in the next 2-3 years? I've read that the Nation's #2 mall owner, General Growth , has fallen behind on payments and will be losing several major malls (they own over 200). The article also states that they have fallen behind on 1.2 billion in loans... a lot of real estate.

    Commercial real estate is certainly more difficult to refill than residential is, but also much less likely to fail. News seems to be coming in that commercial real estate is beginning to collapse now that consumer spending has plateaued well below where it was in the past couple years.

    So, do you think commercial real estate collapses like the residential real estate has?
    You have to separate mall operators from other commerical real estate. When mall operators General Growth lease space they charge rent per square foot PLUS a percentage of the gross sales from the store. Mall opertors have been hurt far more than other commercials because of the downturn in retail sales. A 20% drop in mall sales represents a 20% loss in rental revenue. Conversely, commercial office buildings and warehouses are leased only a value per square foot.

    Mall operators are shrewd financiers. I'm sure General Growth like all of the others kept increasing the lines of credit they had based on the increase in retail sales over the 2002-2007 years. They'd either use the increase in loans to buy/build more malls, or just cashout some big dividends for teh investors. Now that sales have turned down, they're over extended on the credit.

    Unless a tenant goes out of business entirely, they are obligated to fulfill the lease agreement. They can't walk away and not pay. Commercials that have large national firms won't be hurt because of tat obligation to pay. Generally, when a firm decide to downsize and close an office, they'll try to sublet it with approval of the building owner/manager. Either way there stuck paying. If the building has a lot of small firms that are suffciently harmed by the economy, then that space is in jeopardy.

    Most commerical leases are written on a 10 year lease. So the timing is factor too. A firm that is downsizing and in the 9th year of the lease is apt to close up shop as it gets closer to lease expiration. In down economic times, owners will offer to reduce the monthly rent to retain the lease versus losing the lease all together. We coming off some boom times in the mid '00s when there was lots of expansion, so buildings with good quality tenats should fair this foul weather well.

    Strip mall real estate is in jeoprdy. As far as I can see, they been hard by the downturn. They don't have high margins nor high volumes. They're the ones getting squeezed right now. This month 2 restaurants in the little strip in town closed up shop because of sloe business. The owners couldn't make a wage so they just closed the doors and walked away and the building owner is stuck with space for which he receives no rent.

    In the building where I work I can gage the economy by my ability to get a parking space at 9:30. For the past 6 months it hasn't been a problem finding a space in the front. A year ago, I was driving around to the back of the building to find a space. But all of the tenants remain there, just fewer workers. We have about 25% open space now compared to 18 months ago. We had all of our regional and national folks situated in one section of the building, 3 people are left in a 8000 sqft area, yet we continue to pay the rent and occupy the space. Why I don't know, 'cept for the fact we're stuck with 7 more years on the lease.
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  6. #15
    Olympic Champ therick's Avatar
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    Default Re: Embattled AIG puts headquarters on sales block

    Thanks Ryou for taking the time to answer my questions.

  7. #16

    Default Re: Embattled AIG puts headquarters on sales block

    Thanks RYou, good info.

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