AIG, Letting Houses Burn, Food Stamps and Soda, Tunnels

I have a few different topics for today.

First, revisiting AIG again - reader Mloss616 pointed me toward Jonathan Weil's Bloomberg article on a possible reason the Government didn't want to exceed 95% ownership in AIG, emphasis mine:

"Under AIG’s plan to repay the government, the Treasury would swap its current holdings, now valued at $49.1 billion, for a 92.1 percent stake in AIG’s common stock. Once the exchange is completed, the Treasury then would sell its shares on the open market, a process that could take years to complete. 

Just how much demand materializes for those shares will depend partly on whether investors believe they can trust AIG’s numbers. For many of them, an important question will be this: What are the items on AIG’s balance sheet actually worth? 

The government might not want the public to know the answer. Showing AIG’s assets and liabilities at fair value conceivably could scare some investors away, reducing the Treasury’s chances of recouping its money. As for taxpayers, divulging such information could reveal if the government paid more for its stake than it’s worth. 

Determining AIG’s Worth 

The rules for push-down accounting, which the Securities and Exchange Commission’s staff laid out in a 2001 memo, hinge on rigid numerical tests for determining if a company has become “substantially wholly owned” by another entity. The method is prohibited with less than 80 percent ownership, permitted if ownership is 80 percent or more but less than 95 percent, and required (with some exceptions) at 95 percent or more. 

The process works like this. When a transaction or series of deals results in a company becoming substantially owned by another entity, the new owner allocates its purchase price among the assets and liabilities it acquired, using their newly assigned fair values. Those values then are pushed down to the acquired company, which can cause either positive or negative adjustments to the items on its balance sheet."

NY Times Dealbook has a similar article from Steven Davidoff:

"There was also a secondary accounting issue with A.I.G. itself. If a party acquires an interest exceeding 90 percent of A.I.G., under Generally Accepted Accounting Principles, this could be deemed a “change in control” for the company. If so, the principles would require that all of A.I.G.’s assets and liabilities be revalued. This revaluation is mandatory when a shareholder surpasses the 95 percent level. Such a revaluation would be a spectacular undertaking and could throw the valuation of A.I.G. into significant doubt at a time when the Treasury is desiring to sell. Thus, this restructuring was set up to avoid touching off this accounting rule."

I find this troubling, obviously, as it seems that one goal is to obscure the valuation of the big tangled web of crap that is AIG's balance sheet.

In other news that is sure to draw ire from some readers, I'm positively in favor of the fire department who responded to the scene of a fire an watched the house burn.  There are several facts we need to know here: 1) this is an area where fire department fees are paid for by subscription - it costs $75 a year to have the fire department protect your home.  2) the fire department said that they would have entered the house if lives were in danger. 3) they also said that if the fire spread from a "subscribed" house to one that was not subscribed then they would have put out the fire.  4) they were on hand to protect the neighboring house that had paid the $75 protection fee.

Now, insurance doesn't work if you are allowed to buy it only when you need it.  That's the simplest reason I support the FD's actions here.  However, I do think they could reasonably allow some sort of "out of network" penalty rate, as a commenter elsewhere described it.  If 1% of the homes in a given area burn each year, that equates to roughly $7500 ($75 fee divided by 1%) as a breakeven cost per burning home.  The FD should have been happy to put out the fire for $10k, but the logistics of that transaction while the house is burning are not trivial either!

To the people who say "they were there - they should have put it out," I point out this simple truth:  services cost money.  This town elects to pay for the service as a subscriber fee instead of a tax rate (I heard on the radio today that lots of municipalities down South are like this).  If no one pays the subscription fee, there's no fire department.  If the fire department puts out everyone's fire regardless of their payment, there's no reason to pay the subscription fee.   See how that works?  Seriously - if people want to debate me on this in the comments, you better bring your "A" game - you can't buy insurance after you crash your car, after you get sick, or after your house burns down.  Period.  Otherwise it doesn't work.  (note:  try not to deviate into a discussion calling the subscription based fire protection plans stupid.  They may be stupid, but that's another topic.  The point is, this town has one, and it has to be enforced.) 

I'm also very much in favor of NY's push to ban the purchase of soda with food stamps.  (There's an accompanying op-ed as well)

"Mayor Michael R. Bloomberg sought federal permission on Wednesday to bar New York City’s 1.7 million recipients of food stamps from using them to buy soda or other sugared drinks.

The request, made to the United States Department of Agriculture, which finances and sets the rules for the food-stamp program, is part of an aggressive anti-obesity push by the mayor that has also included advertisements, stricter rules on food sold in schools and an unsuccessful attempt to have the state impose a tax on the sugared drinks. "

Again, if you're going to tell me that Mayor Bloomberg is out of line here, you better bring a damn good argument with you.  When the government provides benefits for people, the government has a right to dictate how those benefits are used.  If misuse of the benefits will  result in consequences that necessitate more benefits in other areas (ie, treating obesity and diabetes!), then it's an even easier decision.  It is absolutely positively reasonable for the government to say that you cannot use your benefits to buy things that lead to major health problems, like sugary sodas.  Someone on the NY Times website asked "why not ban Velveeta cheese and other unhealthy stuff too?"  That would also be legit - but perhaps harder to get done logistically and politically.  You can't buy alcohol and cigarettes with food stamps, and I support Bloomberg's push to prevent other unhealthy purchases which lead to further deterioration of health and then larger health care costs.  As the Op-ed argues:

"And substantial health care costs arise from this trend: obesity-related illnesses cost New York State residents nearly $8 billion a year in medical costs, or $770 per household. All of us pay the price through higher taxes. 

Every year, tens of millions of federal dollars are spent on sweetened beverages in New York City through the food stamp program — far more than is spent on obesity prevention. This amounts to an enormous subsidy to the sweetened beverage industry."

The Times article quotes some senior advisers who are worried about the "stigma" associated with such bans.  That's nonsense - food stamps are a legit method to help ensure that people don't go hungry in our country.  I'd be in favor of much more socialized support if it also came with stricter limitations.  People should be able to buy all the rice, grains, fruits, etc that they need to feed their families - but not all of the chocolate cake, candy bars, soda, Big Macs, etc. 

Oh - and speaking of how services cost money - there's some brew-ha-ha over NJ Governor Chris Christie's decision to scrap the new Hudson River Tunnel.   Paul Krugman called Christie an Idiot for thinking about scrapping the project and passing up Federal funds (hey - it's Other People's Money! of course Krugman loves it!), and the NY Times article has hundreds of comments ridiculing Christie as a "typical Republican." The problem is that Krugman lives in an economic lab and Christie lives in the real world.

Could NJ use a nice new tunnel to NYC?  Of course they could.  Do you think Gov Christie knows this?  I'm willing to bet a lot of money that he knows that a tunnel would make life easier for many of his constituents.  But he also thinks that his state can't afford it.  Remember kids, stuff costs money - so you can't complain about Christie's decision to scrap the project unless you're out there lobbying for higher taxes and volunteering to pay for it.  Last time I checked, I didn't see a lot of people who wanted to pay higher taxes.  Everyone wants OTHER people to pay higher taxes, but no one wants to pay higher taxes themselves...  As my friend Yanga put it - "Do you want teachers? or Tunnels?  Everything has to be paid for.  And so it goes.

anyway...

-KD