The Epicurean Dealmaker notes that the stock market "game" is irrevocably rigged against the individual investor, and the best thing anyone can do is realise that is so:

I believe [Leo E. Strine Jr, vice chancellor of the Delaware Court of Chancery]'s analysis should conclusively disabuse participants in the current debate over financial regulatory reform of two related notions....The second is the canard that all public shareholders are alike, and they all share the same interests and motivations.

Realizing that the second of these is false, and that Fidelity Investments and SAC Capital do not have the same investment timeframe and objectives as Aunt Millie or even the Ohio Teachers Pension Fund, would have a highly salutary effect on the beliefs and behavior of truly long-term shareholders.

If nothing else, getting Aunt Millie to realize she is the only one in the shark tank without a safety cage should do her a world of good. [emphasis mine]

Read the whole thing, as well as Mr. Strine's piece in the NYT's DealBook that inspired it, for a glimpse of the soft, white underbelly of corporate governance and management.

rdan

Seeking Alpha's Matthew Goldstein notes that the OCC is continuing the last decade of regulatory non-action.

The OCC, in its quarterly derivatives report, routinely notes that the Big Four “have the resources needed to be able to operate this business in a safe and sound manner.”

In other words, the biggest banks are best suited to handle all these derivatives contracts because they’ve been doing it for so long.

But it’s this regulatory logic that has helped enshrine the too-big-to-fail doctrine. A handful of financial institutions are deemed more indispensable than others because they are too interconnected to fail. It’s the large concentration of derivative contracts at a troubled bank like Citigroup that made a big bailout necessary.

So it’s particularly disturbing to find that the total dollar value of outstanding derivatives at Citi rose by $2.3 trillion, to $31.9 trillion in the second quarter. By contrast, the notional value of derivatives transactions at JPMorgan Chase — the leader in this category — fell by $1.2 trillion, to $79.9 trillion.

It’s hard to fathom how a bank that has yet to prove it can stand on its own two feet without huge amounts of federal support should be adding to its potential derivatives exposure.

The OCC report is here with accompanying charts. Notice John [Bloody Effing] Dugan still heads the agency. [edited, links added -- klh]

by divorced one like Bush

So I've been thinking: What, since the passage of Medicare has the federal government implemented that actually reduced the risk of living for the US citizen?

No, tax cuts do not count. They do not reduce risk. We have reduced risk for business all over the place. NAFTA, CAFTA, exemption of HMO's from anti-trust, removal of banking regulation, reduction of oversight, allowing payment in the form of stock options, all of these promoted ever larger and thus less competition and thus less risk. All of them allowed a bigger piece of the income pie, thus reduced risk by increasing income. Tax reductions do not increase income, just decrease expense and ultimately reduce services that people relied on to reduce the risk of living in the US. We protected Harley Davidson, we financially backed bad business results. We reduced the 5 mph bumper to 2.5 for the auto industry. None of this has reduced the risk of living, and have actually increased the risk of living in the US.

Katrina? Lead paint in Asian products, contaminated food. Cut's in education, medical, civil services, infrastructure failure. Privatization may have reduced some costs, deregulation may have decreased some costs (the supposed Walmart benefit), but all of it shifted cost to the individual removing it from the collective. It has resulted in a greater risk of financial ruin in an environment that has decreased the share of income to the 99%. Not having a corresponding rise in income with a rise in productivity only served to increase risk to US.

I want to know of a piece of legislation that actually removed or significantly reduced the risk of living life in the US such that the US citizen was that much closer to succeeding in their pursuit of happiness. I'm not interested in some little piece for a sector of the citizenry. I want to know if anyone can name a piece of legislation such as Social Security, 40 hr work week, Civil Rights, Medicare that has passed since Medicare that actually reduce risk for US such that We the People felt that much more secure in our individual lives in that fear has been reduced.

Credit crunch, followed by asset deflation.

See also Robert's series of essays in December/January.

With today's (well, yesterday's) five closings, the total of failings of U.S. banks since March of last year to 69.

Of those, slightly more than 20% (14) are from the state of Georgia. Excepting the much larger California, there have been more failings in Georgia than in any two other states combined.

Also as a matter of record, the 69 failings since last March constitute more than 70% of the 97 failings since October of 2000. So, in round numbers, 15% of the time accounts for 70% of the failings.

Bubbles beget bubbles. Anyone find anything more to it than that?

Ken Houghton notes the plural in the title, which was written not by me rather by the FRB Atlanta, which sponsored a conference of that name, hosted by David Altig of Macroblog fame (and now an SVP at the Atlanta Fed).

Here is the page for presentation links.

Ken Houghton finds someone who is more pessimistic than I am.

Via Bankimplode.com News, I see that Martin D. Weiss, Ph.D., has come up with a list of Large Banks Likely to Fail:

Seven institutions — JPMorgan Chase & Co., Citigroup, Wells Fargo & Co., Goldman Sachs Group, GMAC LLC, SunTrust Banks, Inc., and Fifth Third Bancorp — are at risk of failure and may have to cut back lending dramatically to stay alive.

Rusty disagrees with me on Fifth Third, which he sees on a daily basis a lot more than I ever did.

I still expect JPMC and Goldman Sachs to survive, and am still trying to figure out why they are on this list while Bank of America and Morgan Stanley "are borderline, meaning they could be at risk of failure with worsening economic or financial conditions and will also have to cut back on lending."

But the whole thing is worth reading, so long as you don't have any sharp objects nearby, or are paid in Swiss Francs.

The next time someone tells you that "the banks need help," just refer them to Barry Ritholtz:

Talk about burying the lead: The Times also noted — in the very last paragraphs — how the big incompetent banks and their very pricey bailouts are screwing these small healthy banks:

"Isn’t that the American way?" [Donald E. Goetz, the president of DeMotte State Bank] says, folding his arms. "Whoever is left standing, whoever was prudent, is always the one who has to pick up the pieces."

The Geithner Put: making American banking worse, little by little and piece by piece.

Which means, Brad, that the total cost of the bailout will be higher than it would be if we just pulled some plugs now.

What do you mean "we're broke"?

The first encouraging sign in a long time from the Fed and the Treasury is in the link above. After it became common knowledge that the "stress tests" were only going to be window dressing, the question on everyone's mind became only "How much more is it going to cost the American taxpayer to keep subsidizing the guys who got us into this?" (Brad DeLong's mileage varies, though I note that Mark Thoma may be coming around, after his initial assumption that his money would be Used for Good and the System would be Fixed—a venial sin at the most.)

The fact that Geithner/Summers and PBandit/Lewis are "haggling over the price" means there is still some reality reaching over the seawall that is the Obama Treasury Department.

Speculation below the fold



Or maybe this is the reality going deeper. Wells Fargo, which got Suckered by Charlotte with WalkAllOverYa? Or a Major Regional, say, SunTrust?

The last time I raised the spectre of SunTrust, Sammy questioned me and someone named Jessica suggested (in no uncertain terms: "SunTrust is one of the leading banks in the industry and is in NO NEED of bail out money. The FDIC Corp has trusted in SunTrust enough to reach out and ask for some help bailing out the smaller banks that are on the FDIC Watch List.") that I must be mistaken.

At the time (29 Oct 2008), SunTrust had received $3.5 Billion, "more than BoNY/Mellon. More than BB&T or Fifth Third or Zions Bancorp." They took another $1.4 Billion at year-end, so they're up to $4.9 Billion, more that $1 Billion more than Capital One, which is one of the banks that is always spoken of as being endangered.

It doesn't appear to have helped. SunTrust has been downgraded twice by S&P this year.

As for that help they've been giving the FDIC? Dr. Black notes that an 11th bank in Georgia has gone under since March of last year. No other state—not even California—is in double-digits yet.

So I won't be surprised if SunTrust needs "additional capital."

Another possible contender from the regionals? PNC Financial Services, which came out of nowhere to borrow $7.6 Billion at the end of last year. And, unlike SunTrust, there haven't been any bank failures in the Greater Pittsburgh area (which surprises me more than it probably does Rusty).*

Going back to what Hank Paulson said, "these things are never over until you have a couple of institutions go that surprise everyone." No bank on the Endangered Species list so far has been a Surprise in that sense; the delay of the "stress test" announcement until next Thursday, May 7th, may well mean that we will see one of those surprises getting capital.

It doesn't make it good, right, or sensible, but it does at least hint at the possibility that things might, eventually, start getting better.

*In fact, today's in upstate New Jersey is the first on the East Coast since at least January of 2008.

Dear Brad,

Do you want to reconsider the title of this post in the context of this article?

An examination of Mr. Geithner’s five years as president of the New York Fed, an era of unbridled and ultimately disastrous risk-taking by the financial industry, shows that he forged unusually close relationships with executives of Wall Street’s giant financial institutions.

His actions, as a regulator and later a bailout king, often aligned with the industry’s interests and desires, according to interviews with financiers, regulators and analysts and a review of Federal Reserve records.

To take a phrase more prominent in our middle-school days, he would qualify as an "unindicted co-conspirator."

I'm just going to "Go Thoma" on him, since I can't find anything to cut:

Barack Obama tells us we should not investigate American intelligence agents or their overlings who are responsible for torturing hundreds of suspects in their custody. We have to forget about the past, he says, to concentrate our attention on the future. That might be a convincing argument if Obama were going all out for an ambitious program to remake our economy and our relationship to the rest of the world. But the future is on hold because the number one job today is bailing out the financial system, so we can preserve the money moguls who juiced our economy in the past.

Ken Houghton's Loyal Reader directed my attention to this WSJ blog entry, commenting on, and attempting to provide cover for, the management and actions of The Old Firm.

I'm sympathetic to the general argument—Ace Greenberg's naming of Jimmy Cayne to succeed him was incredibly bad judgment that had real consequences, but not malice aforethought—but the WSJ's attempt to defend upper management rather goes off the rails.*

Let's look at some of the analytical parts of the article:

Investment banks were certainly imprudent in leveraging themselves 33 to 1; but they also announced it publicly in their quarterly statements.

"Certainly imprudent" is having unprotected sex with someone who clearly has open genital and/or oral herpes sores. 33x is larger even than the Cox-allowed 30x leverage (which was imprudent in the first place). "Thirty times leverage; it's not just imprudent, it's the law."

UPDATE: My Loyal Reader e-mails:

Cohan writes that only at the end of a quarter was Bear around 40:1 and most of the rest of the time it was at 50 or 55:1....JPMorgan Chase at the time of the takeover calculated that out of $300 billion Bear Stearns counted as assets, $220 billion could be considered "toxic".

So even Moore's 33:1 is known to be optimistic. And having more than 73% of your "assets" rated as "toxic" isn't prudent management: it's doubling-down while hitting on 17.

We all know that the Prudent Investor definition has been redefined beyond reality, but it's difficult to believe anyone would consider BSC's practices to compile with reasonable Standards and Practices.

Shareholders, in turn, never complained as long as the banks were making money in 2006 and 2007. It was only when the music stopped and the economy turned bad that shareholders started to blame the banks for shifty dealings.

And it was only when Madoff admitted there were no more assets that "shareholders" complained. Are we supposed to take some affirmative defense from this, or is Heidi Moore just clueless? (You can chose "and" if you want.)

Meanwhile, regulators are said to still be curious about what caused the “bear raids” that took down Bear Stearns and Lehman and threatened Morgan Stanley and Goldman Sachs.

They're welcome to be curious, but the minute Alan Schwartz went on CNBC and said, "We think we're solvent" is the minute anyone with any brains and capital went massively short Bear. And they were late to the party, since anyone in the market with any brains and knowledge of MBS ramifications—think the guy at Solly who called Michael Lewis and said "Buy potatoes" as Chernobyl was happening—knew exactly who was going to be Most Likely to Pay Off if you bought (again, common knowledge) some proverbially-undervalued far OOTM put options.



In fairness, Cohan appears to believe this is a smoking gun. But we've heard those rumours since before the bankruptcy, and Bear Stearns is not Iceland. If Cohan's correct in his assertion on Stewart's show that the people who bought all those OOTM put options were hedge funds that had previously used BSC for their Clearing Agent, then they voted with their feet in the face of reality.

And the rest of the market isn't dumb. They could see who was buying, and what their previous relationship with Bear had been. And they would see Alan Schwartz and realise this is not the man who is going to make it between the Scylla and Charybdis. And they would take that—along with things such as Goldman's immediate affirmation when the rumours starting about Lehmann and Bear that Lehmann would continue to be a respected competitor and trading partner—and be able to add.

As the Beatles said, "One and one and one is three/Got to go short Bear cause he's so hard to see."

But the WSJ wants you to think that going even beyond Christopher "I never saw a regulation I planned to enforce" Cox's SEC-permitted leverage ratios is not a violation of the law, and that hedge funds who see incompetence and near-bankruptcy do not act on that information.

The coolest thing about the Stewart/Cohan interview was when Cohan said "creative destruction" and Stewart immediately came back with Schumpeter by name. Maybe this is why Heidi Moore's piece opens by calling Stewart "our nation’s foremost financial commentator." (Take that, Paul Krugman!) But the attempts to argue that The Old Firm was substantively different from a Ponzi scheme are going to need a better case made than she does.

Capitalism deserves a better defense.


*They specifically miss connecting the dots on where there was clear fraud committed by management—and I suspect Cohan did as well, since no one who talks about the book seems to mention it. UPDATE: I'm now told he did deal with it, but sloughed it off. So expect Yves or Barry or Felix (blogroll update candidate, btw) or Paul (maybe even Mish, who has the mindset for the job)—someone who pays a lot more day-to-day attention to the market than I can right now—to jump on this one in the near future.

rdan

Well, there you go. And all that fuss for naught. (bolding is mine)



Time CNN declares:

Investors find it disconcerting to see the stocks in the huge financial institutions that are at the foundation of the global capital system trading up and down 25% a day, and, in some cases trading in the pennies. Banks became the visible and ugly wound that reminded Wall St. each day that it had torn down what it spent decades building, which was a money-making machine driven by leverage and the cleverest synthetic financial instruments the world has ever seen.


Wells Fargo’s big profits, and what that means for the financial system

But, the great banking crisis of 2008 is over. It began last September 15 when Lehman Brothers filed for bankruptcy and bottomed when Citigroup (C) traded below $1 last month. Most analysts believe that mortgage-backed securities which included packages of subprime home loans failed when mortgage default rates went up and housing prices raced down. That is only partially true. Banks made a tremendous series of ill-advised loans to private equity firms, hedge funds, commercial real estate holders, and the average man with a credit card balance which he cannot pay. (See pictures of the top 10 scared traders.)

When people look back on the near-collapse of the banking system they may say that the Congress and Henry Paulson threw enough money into the path of the oncoming failure of the credit system to slow it down so that the government could properly go through the process of guaranteeing parts of the balance sheets of firms including Citigroup (C) and Bank of America (BAC). The initial TARP may also have provided time for the new Administration to put together its widely hailed bank "stress test" program meant to determine which of the big financial institutions have dysentery and which do not. Finally, the hundreds of billions of dollars that went into the largest banks late last year allowed Secretary Geithner to produce his public/private partnership to buy toxic assets off of bank balance sheets.

All of those plans, no matter how well-intentioned they may seem, are unnecessary now. Wells Fargo (WFC) indicated that it made about $3 billion in the first quarter of the year and declared its buyout of the deeply troubled Wachovia to be a success. Wells Fargo (WFC) said that the low cost of money from the government combined with a surging demand for mortgages was all the medicine that it required.

Banks stocks reacted to the news, which took the markets completely by surprise, by driving up Wells Fargo's stock by 32%. Bank of America (BAC) shares jumped 35%.

Oddly absent from the discussion of how well Wells Fargo did is why the government was in the midst of testing bank balance sheets at all. The experts at the Treasury had been thrown off the scent and consequently had missed the fact that there was not need to test what is already working well. The same holds true for the Geithner plan to take toxic assets off bank balance sheets. It is academic now. What banks are earning from the difference between the cost of capital and the income from lending is now great enough for the banking system to be self-sustaining again.

UPDATE: Via Paul Krugman, don't look behind the curtain of Wells Fargo's "profits," unless you want to see what a finance wizard really looks like. --klh

This is why we don't believe the bailout will work the way you think it will (i.e., to increase lending):

Recently, securities rated AAA have changed hands for roughly 30 cents on the dollar, and most of the buyers have been hedge funds acting opportunistically on a bet that prices will rise over time. However, sources said Citi and BofA have trumped those bids.

Instead of using the bailout monies to lend, or even make their balance sheets more creditworthy, the firms have been doubling-down on the assumption that they will be fellated by Timmeh and Larry. (At least Bill Gross and PIMCO (h/t Robert) did it when there was still a chance of sane monetary policy.)

I take back part of what I said earlier: this isn't comparable to hitting on 17 because you're drunk; it's hitting on 19 because you're desperate and insane. As Barry R. closes:

If anything, this argues against bailouts and in favor of nationalization, firing management, wiping out S/Hs, zeroing out debt, haircutting bond holders, etc.

Some economists may need to spend less time reviewing brilliant analysis from Barry Eichengreen (link is to PDF) and more reviewing Friedman and Savage (link is to PDF) in the context of principal-agent problems.

Following up on Robert's post (he started later and finished earlier):

Dr. Black:

[T]he idea that all this came about simply because the banksters decided a bit of extra risk was good is an idea only a macro finance person could sanely entertain.

All right, I represent that remark in more ways than one. So let's Tell the Truth, Shame the Devil, and make the case for Financial Intermediation—all while agreeing with him that Geithner's statement is absurd.

(For my next trick, I'll spin plates on poles and juggle cutlery while riding a unicycle. You might want to stay clear of the area for a while)

So let's talk about weather derivatives, the driving habits of government employees, and Miss Spider's Sunny Patch below the break.



It was 1993, I think, when Richard Sandor gave the closing presentation at the ISDA Conference in Washington, D.C. Sandor was enthusiastic; there was finally enough weather trend data that you could model damage expectations for an area and reasonably estimate, for instance, the likely exposure of an insurance company to hurricane or tornado damage.

We may not be able to do anything about the weather, but we can do something about managing the risk associated with it.

Sandor's argument was, in short, That's what we do. We manage risk.

Contrast that with the story of GEICO, the current crown jewel of Berkshire Hathaway. GEICO started as an insurance company dedicated to Government Employees. It started that way for a reason, and the reason has everything to do with risk. Because GEICO management looked at the data and realised what anyone who thinks about it for a second will already know: government employees are safer drivers than the rest of the population.

They are safer drivers because they are more risk-averse. They take a job with, as a rule, lower pay than they could get in the public market, but better security. They prefer stability. Short version: they are risk averse.

Therefore, they are safer drivers than the general populace (who don't want to be stuck behind them when they are time-dependent).

SO when Brad DeLong says:

I think the private-sector players in financial markets right now are highly risk averse--hence assets are undervalued from the perspective of a society or a government that is less risk averse.

my immediate response is at best Inigo Montoya ("I do not think those words mean what you think they do") and at worst a version of Nelson Algren's amendment of Thackeray ("That's Not the Way to Bet").

Because risk management means managing risk, not just taking chances. Hitting on 17 in blackjack isn't the way to get rich. Paying $50 for something that is worth $35 to you isn't the way of getting rich.

And, worse, it isn't the way to get capitalism working again.

Because sooner or later, the professionals have to take over again.

The kids were watching Miss Spider's Sunny Patch this weekend, an episode where the young Dragonfly flies for the first time, accompanying a bunch of "Daredevil" dragonflies. They fly for a while and then the whole place gets covered in fog. The daredevils find a place to sit and wait. The youngster keeps chiding them: "C'mon, I thought you guys were Daredevils."

The Daredevils explain, roughly, that they don't fly without knowing where they are going.

Unlike, apparently, the U.S. Treasury.

Robert already dealt with the basic illiquidity of the market. So let's talk about Price Discovery, but this is getting long even for me, so...

CONTINUED ON NEXT ROCK

UPDATE: Dr. Black twists the knife.

The Geithner Plan FAQ is worth reading; it's a classic example of treating an incomplete market as if it were the entire market. And note that "skin in the game" is limited to a part of the local pool.

Unfortunately, while Treasury plays in the wading pool, hedge funds have The Whole Wide World in which to romp. Yves (h/t Mark Thoma) has a commenter who explains:

Say I am SAC Capital. I get to be one of the bidders on bank assets covered by the program

Citi holds $100mm of face-value securities, carried at $80mm.

The market bid on these securities is $30mm. Say with perfect foresight the value of all cash flows is $50mm.

I bid Citi $75mm. I put up $2.25mm or 3%, Treasury funds the rest.

I then buy $10mm in CDS directly from Citi [or another participant (BOA, GS, etc)] on the bonds for a premium of $1mm.

In the fullness of time, we get the final outcome, the bonds are worth $50mm

SAC loses $2.25mm of principal, but gets $9mm net in CDS proceeds, so recovers $6.75mm on a $2.25mm investment. Profit is $4.5mm

Citi writes down $5mm from the initial sale of the securities, and a $9mm CDS loss. Total loss, $14mm (against a potential $30mm loss without the program)

U.S. Treasury loses $22.75mm.

I would have thought by now that economists would know what happens when you create bubbles in a market. That doesn't change just because you use the U.S. Treasury as a Fluffer.

George Will, guest-posting chez Berube:

But hope is not a financial plan, and rewards come only to those who work for them. It is time for the Democrats to grow up, learn the lessons of adulthood, and begin dismantling a tax system which creates so many disincentives to wealth creation. Justice demands that bonuses must be paid, yes. But true justice demands that bonuses be tax-free.

The WSJ editorial page on "the real AIG outrage," a piece that appears to have been written by Hank Greenberg's publicist:

AIG can argue that it needs to pay top dollar to survive in an ultra-competitive business, or it can argue that it offers services not otherwise available in the market, but not both.

For those wanting a slightly shorter version of the post below, here's 11:15 of video dealing with how the Bad Banks got that way:

In this corner, as previously mentioned, Yves Smith goes for the slam dunk:

Let's see, the credit default swaps market, due to some netting, is now somewhere north of $30 trillion (as opposed to its earlier "north of $60 trillion" level). Investment banks were believed to have hedged most of their exposure via offsetting contracts, but AIG wrote naked protection. And as jAIG itself is at risk of getting downgraded again, the collateral posting requirements keep rising.

Some analysts (including Chris Whalen of Institutional Risk Analytics) have offered theories as to how the government could void a lot of CDS (some have argued for getting rid of them altogether, others argue for eliminating them in cases where the protection buyer does not hold the underlying bond/exposure). Before you say, "they can't do that", recall the effective confiscation of gold in the Great Depression. rationing, wage and price controls, the suspension of habeus corpus. There is a good deal that the Feds could do if they chose to, trust me. But it's easier to bill the poor chump taxpayer than take on the financiers, even after they done so much damage.

And in the other corner, I am joined by Felix Salmon, who rejects the slam:

The scandal here is not the size of the losses from the global financial meltdown -- those are losses which sooner or later, in one form or another, would have had to be borne by the government anyway.

The problem, as obliquely noted by me ("So there is a viable, separable business that is making pennies [US$0.01] while the rest of the firm loses Benjamins [US$100.00]") and explicitly declared by Yves is summarized well by Felix, in a statement to which I suspect all three of us would agree:

Rather, the scandal is that AIG could have earned billions of dollars by selling insurance against a meltdown, even as it was wholly incapable of paying out on those policies. I wouldn't be surprised to learn that Hank Greenberg was still a billionaire, even as the policies his company wrote have cost the average American household some $1,600. It's time for his wealth to be confiscated: it might be only a drop in the bucket compared to AIG's total losses, but it would feel very right.

As I suggested yesterday of the successor-AIG, "So long as that board doesn't include Hank Greenberg, I'll be cautiously optimistic."

The problem is that's probably not the way to bet. More on that later; for now, keep watching Joe Nocera deliver the goods and summarize the issue:

Yet the government feels it has no choice: because of A.I.G.’s dubious business practices...it pretty much has the world’s financial system by the throat....

A bailout of A.I.G. is really a bailout of its trading partners — which essentially constitutes the entire Western banking system. [edits mine*]

By the way, Joe, Yves, citing an early Bloomberg report, named some names:

Goldman Sachs Group Inc., Societe Generale SA, Deutsche Bank AG and Merrill Lynch & Co. are among the largest banks that bought swaps from AIG, according to a person familiar with the situation. The insurer handed over about $18.7 billion to financial firms in the three weeks after the September bailout, said the person, who declined to be named because the information hasn’t been made public.

*Which improves the NYT editing, since the fact of the "housing bubble" has nothing to do with AIG's mis- and malfeasances.

Dr. Black (you know the site) links to AIG Strike Three. And unlike the Citi debacle previously discussed (relatively) positively and rather negatively here, this one makes some form of sense.

The difference comes down to the meaning of an accounting concept: ongoing concern.

More below the break (yes, this might get wonkish. It's me, after all.)

The Big C and AIG are both large entities with several pieces. Some of those pieces are successful; some of them are AIG Financial Products. Some of them—Citibank branches and office space, for instance—fall somewhere in between.

What we do know is that it is currently not possible to slice and dice The Big C so that something would be left that would be an "ongoing concern." Those assets that are part of the company are dwarfed by the liabilities, and run across business lines. It's not as if you could just magically, say, sell Smith Barney, spinoff any remaining insurance business, and ritually execute Vikram Pandit and produce a working company from the remains. At best, it's a Good Start. There's a reason I refer to the company as The Big C: it's in the lymph nodes, the brain, the lungs, and the brain. You probably couldn't even survive with "just" the Retail and Private Banking operations.

Any auditor who releases The Big C's next 10-Q and describes the firm as a(n) "(on)going concern"**—with the attendant implication that there is a functional business model there and that the firm can create the future unencumbered* cash flows to remain viable—should be barred from the accounting profession.

AIG is different. Think Enron: there are pieces of the business that are still viable (now, the insurance and re-insurance pieces; then, the power plants and transmission facilities), but they are dwarfed by the losses at AIGFP. So there is a viable, separable business that is making pennies while the rest of the firm loses Benjamins.

The difference is that there is a possible end in sight. AIG-Prime could go back to doing the things AIG knew how to do, and stay away from the things that made Hank Greenberg rich and pauperized U.S. taxpayers.***

So, if we were to assume that a leaner, less mean AIG will come out of this, can we look at the plan changes and say they point toward a goal?

Unlike The Big C, the answer is clearly "yes."

Under the deal, the interest rate on AIG's credit line from the government would be cut to match the three-month London Interbank Offered Rate (Libor), now about 1.26 percent, a source with direct knowledge of the matter said.

This is perfectly reasonable for the moment: AIG is a financial institution, the reconceived version will be a financial institution of respectable size and strength, and the current version has the strong support of the U.S. government, which can borrow well inside LIBOR. While I suspect the final company will end up looking more like State Farm than Morgan Stanley, it's not out of the question that it could borrow at LIBOR, which is approximately a AA rating level anyway—a perfectly reasonable assumption for the reconstitution of a formerly-AAA company with some carryover liabilities.

The additional equity commitment would give AIG the ability to issue preferred stock to the government later, the sources said.

This would presumably be the reverse of the deal with The Big C: "equity" for debt. Again, a sign that regulators expect there to be a survivor/successor firm of the current mess.

The most interesting quote in the piece is:

[Robert Haines, senior insurance analyst at CreditSights] said. "The counterparties on most of the book are (European) banks that would be hammered if the U.S. walked away."

Note that Mr. Haines does not speak of AIG as an independent entity. Note also that, in supporting the AIGFP fiasco/deals, the U.S. can reduce the overall size of the bailout needed while ensuring that domestic entities retain full access to capital markets. It doesn't make anyone happy, but the option is worth keeping open.

Then we get to the meat of the deal:

AIG will also give the U.S. Federal Reserve a preferred interest in its American Life Insurance Co (Alico), which generates more than half of its revenue from Japan, and Hong Kong-based life insurance group American International Assurance Co (AIA) in return for reducing its debt, they said.

The U.S. doesn't really want to own either of these, but they have a promise to be valuable assets.

The government likely will get a 5 percent cumulative dividend on its ownership stake in Alico and AIA, said one source. AIG had been trying to sell Alico and part of AIA in a bid to raise money to pay back the government.

Sales of these assets are still a possibility, with some bids already received, said one person. [italics mine]

Think very carefully about the italicized part above. Markets clear—but they don't always flow well. Combining the two, it appears that the government is effectively giving AIG a bridge loan on those two entities. In the worst case, it will become a "pier loan" (h/t CR), but that's not the way to bet, especially if others follow the Chinese model of buying international assets while they are cheaper.

The rest of the moves look as if the outlines of the new company are already falling into place:

AIG may also securitize some U.S. life insurance policies and give them to the government to further reduce its debt, the source said.

The company may securitize up to $10 billion under that plan, one of the sources said.

The debt-to-equity swap would help AIG repay much of the roughly $38 billion it has drawn from its government credit line, the source said.

Translation: we know this business, and can do it well and continue it.

Last year, AIG said it planned to sell all assets except its U.S. property and casualty business, foreign general insurance and an ownership interest in some foreign life operations, to pay back the government.

While the company has announced some sales, it has found it difficult to find buyers and get a good price for assets amid the financial crisis.

Translation, again: if the market ever comes back, this is what we plan to look like. And we will again be a "going concern."

In short, unlike The Big C, there is a plan, there are moves afoot to move closer to the end game, and targets by which they plan to keep the viable parts of the business going. For instance,

The company now plans to spin off up to 20 percent of the property-casualty business in an initial public offering, said a person with direct knowledge of the plans.

The business would be renamed to differentiate it from AIG, and have its own board of directors.

So long as that board doesn't include Hank Greenberg, I'll be cautiously optimistic. The other piece of spinoff is more problematic:

To aid the auction of at least one major asset, the government could help potential buyers of aircraft lessor International Lease Finance Corp with financing, the sources said.

ILFC has some debt coming due in 2009 and, if needed, AIG could use its new equity commitment to help potential buyers with that, one of the sources said.

This is a piece that probably still needs to exist for non-business reasons, at which point we might be able to argue that there could be a Public Good in government support of its sale. Under any condition, it doesn't fit into the trimmed-down model of AIG-Prime that appears to be envisioned.

None of this means there won't be another round—asset sales are very dependent on buyers—or that they should be paying non-contractual bonuses this month (which they are). The company still needs to reach its full restructuring, and this is not exactly a prime time to be a seller in the marketplace. But at least this restructuring/new bailout has a clear Endgame in sight.

*I use "unencumbered" in place of the usual "free" for the sake of clarity.
**It appears that "Ongoing concern" is used in the U.K., "going concern" in the U.S. I won't pretend to know which will be the standard as accounting standards are weakened standardized.
***This is, of course, another case where I will point to the results and ask how anyone can take "we'll get 2/3s of the money back" seriously. But that dead horse has been soundly beaten for the moment, so I'll leave the tanning of the hide to Yves (She likes the new deal a lot less than I do) and Paul (who hasn't discussed it yet, since he's still rewriting 2 Henry VI and checking out The Great Solvent North) and the rest.