Lehman Brothers provides a miniature example of what may be at stake with AIG. While Lehman had underwritten $150 billion in underlying debt, says Becher, the company had almost $400 billion worth of exposure to CDS. Investors are still waiting to find out how much they will receive from those hard-to-value assets, and any disclosures about the AIG valuation process could help kick-start the rest of the market, and also provide a tally of the winners and losers so far.
"The government is in a bind here -- if you value it too high, then the taxpayer loses, and if you value it too low, then some of these institutions can go under," says Becher. "But because of the size and exposure of AIG, and the people who had legitimate insurance with them ... sooner or later, [the government would] have to deal with it somehow. They let Lehman go and chaos ensued."
Another issue on the table is that AIG and government officials have created a human-resources Catch-22. The firm plans to dole out $165 million in bonuses to keep the employees who created the very derivative products that ultimately destroyed AIG as a private, independent entity. The firm says it is contractually obligated to pay those bonuses, and that the employees have critical knowledge about valuing and winding down its toxic assets.
"Maybe [regulators] should have asserted more control at the start, back in the fall," says David Steuber, co-chair of the insurance-recovery practice at Howrey LLP. "But now they've made some of these people indispensable, and those people are going to need to be compensated at or about the market rate."
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