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AIG vs. Lehman – did I speak too soon?

Posted by markharrison on September 18, 2008

Only two days ago, I wrote about the failure of Lehman Brothers, and was relatively positive about the way it was handled.

Yesterday, while I was out, the US Government announced a rescue package for AIG (the Mega-insurer who at the beginning of the year was the world’s 18th largest company, not bank, but company!)

I’m still not entirely comfortable with government bailouts, but compared to, say, the way the UK government handled Northern Rock, this wasn’t bad, and there are some differences between NR, AIG and Lehman.

  1. Lehman Brothers’ collapse didn’t shake the markets that much. OK, there was a tremor, but to a large extent the credit markets (if not the stock markets) had been expecting to to fail, and credit swaps were sort of already pricing in that information. By comparison, AIG is/was expected to survive.
  2. NR was a big deal for the UK – the largest securitisation base of any UK mortgage lender, but compared to the likes of HBOS (which, is also in trouble, to be fair – see the post I’m about to make!), it’s relatively small. AIG is enormous. AIG is like Bagpuss – when Bagpuss goes to sleep, all his friends go to sleep, and the failure of AIG of AIG really would hurt the world economy.
  3. AIG seems, at the moment, too big for anyone but a national government to prop up. It’s not like Lehman, Bear Stearns, or even HBOS – there is no raider coming in to buy it up for 10% of what it used to be worth.
  4. The “bailout” of AIG might actually be a good deal for the US taxpayer – OK, the Fed is taking on a big risk in making the loan – $85bn – but it’s getting 80% of the company in return. Unlike when the UK Government made a loan to NR, and, well, got a thank you letter from the shareholders.

It’s a pig though – on Saturday I’m meant to be giving a speech about the Credit Crunch, and what it means to UK investors, but the world is changing on a daily basis this week, and I’ve had to re-write some slides more than once 🙂


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