Wednesday, March 4, 2009


Jim Rogers is a very bright and entertaining fellow. I have read two of his books which I highly recommend. The first one is I read was Investment Biker. The second book I read was Adventure Capitalist: The Ultimate Road Trip. They are great reads, both informative and entertaining. I highly recommend them with a new map of the world from Barnes & Noble. This way you can follow him around the world to new countries you have never heard of before. Most of them end in 'stan'.

Anyway, Jim Rogers made the case on CNBC yesterday that AIG should be allowed to fail rather than it and other failing financial institutions take down the US. I haven't studied the issue, but my visceral thought is that AIG should not be allowed to fail like Lehman. The unplanned bankruptcy resulted in a greater dissipation of value. Many of Lehman's profitable financial contracts (many of them credit default swaps) lost much of their value by giving the counterparties leverage they wouldn't have had if Lehman was allowed to orderly winddown much of its portfolios. And, of course, Lehman's negative positions rendered those counterparties unpaid creditors.

Letting AIG fail at this time will likely result in even greater destruction of value than is occurring. So the question is, 'who is currently getting the benefit of this value?' Interestingly, many of the AIG counterparties who are owed money by AIG are benefiting from the Government's stream of capital infusions. Many of these counterparties are the same financial institutions that are receiving TARP funds at least according to Hank Greenberg the former Chairman of AIG. It all makes for interesting bedfellows and cascading unintended consequences.

If I had to have an answer by noon today, I would suggest splitting AIG into its various core businesses. Some of those businesses are presumable profitable and being tainted by the credit default swap portfolio. I would separate out the CDS portfolio and put in a new team to work it down. And then I would indicate what funds are going where so as to make the issues as transparent as possible.

It does make you wonder why it isn't so transparent.

Cheers, Mike

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