Chapter 1017: No One Could Have Predicted It
The Federal Reserve's decision took longer than expected.
As time passed, stock markets around the world continued to slide.
Meanwhile, the U.S. presidential primaries were heating up.
Among the two major parties, the Republican race had quickly turned into John McCain's show. From the very beginning, he maintained a commanding lead, and one by one the other candidates withdrew.
One candidate's complete dominance killed the excitement, and the public gradually lost interest.
The Democratic race was completely different. From the start, Hillary Clinton and Barack Obama traded the lead back and forth, keeping the contest exciting.
Veterans such as Dennis Kucinich and Joe Biden withdrew first, and John Edwards also suspended his campaign early after posting disappointing results in the opening contests.
Hillary had been expected to win overwhelmingly, backed by both the political legacy of being Bill Clinton's wife and the influence she had built for herself over the years. The fact that she was locked in a neck-and-neck battle with Barack Obama, who was practically a newcomer, was humiliating for her.
"As Americans, we must decide whom we trust to lead this nation."
Hillary continued her campaign by presenting herself as the leader America needed.
Then her campaign made a major mistake.
Although she never mentioned it directly, her remarks could easily be interpreted as indirectly raising racial issues.
"You can't choose your family, but you can choose your pastor."
Hillary attacked Jeremiah Wright, Barack Obama's spiritual mentor, over controversial remarks he had made in the past.
Pastor Wright had drawn widespread criticism after making inflammatory statements implying that "God would curse America rather than bless it" while condemning racial discrimination and America's unjust foreign policy.
Obama, however, confronted the issue head-on.
"I have already clearly and unequivocally condemned some of Pastor Wright's remarks that became the subject of controversy. I do not share those views..."
Obama openly criticized Wright's statements while acknowledging that several of them had generated tremendous controversy.
"The issues that have surfaced over the past several weeks reflect the unresolved racial divisions and complexities that still exist in this country..."
He explained that the recent controversies reflected the complicated reality of racial discrimination in America, a problem that was still ongoing.
"I was born to a black man from Kenya and a white woman from Kansas."
By emphasizing his mixed-race background, he explained to voters what that complex identity meant to him.
"But I hold one unwavering belief. That belief is rooted in faith in God and faith in the American people. If we work together, we can overcome the issue of racial discrimination. We must do so if this nation is to continue moving forward."
He argued that all Americans had to work together to overcome racial discrimination, insisting that it was an essential step if America wanted to become a better nation.
"It may not be perfect, but we already know that with each generation and as time passes, we can continue to improve."
With that speech, Obama broke through every controversy surrounding him. For Hillary, it was a devastating mistake.
From that point on, Obama surged ahead and began taking control of the race.
Promoting economic policies that differed from Hillary's, he stressed that he alone could lead America through the economic crisis.
"I respect Wall Street for driving the American economy, but I will never become a president who dances to Wall Street's tune."
That single statement clearly revealed Obama's thinking.
* * *
Watching the primaries unfold, I became convinced Obama would win.
I'd worried that all the variables I'd created might somehow allow Hillary to secure the nomination, but as the race progressed, those concerns completely ✧ NоvеIight ✧ (Original source) disappeared.
His momentum was building even faster than I remembered, and the gap was growing even wider.
"They actually decided to bring race into it."
America wasn't free of racial discrimination.
But it was an absolute taboo—something you simply didn't bring up carelessly.
"If Obama keeps this up, he'll become the Democratic nominee."
I nodded and folded the newspaper.
"Most likely. Once he wins the primary, the general election will be even easier."
The subprime mortgage crisis had already been worsening before the primaries even began.
Lehman's liquidation process was steadily moving forward, and the stock market showed no signs of rebounding.
Countless ordinary investors were suffering massive losses.
Those who had invested in stocks lost money, and so did those who had poured money into MBSs and CDOs. The White House couldn't completely escape responsibility for that.
Just looking at President Bush's approval ratings—which had remained high thanks to victories in the War on Terror—was enough to see it. They were now plummeting.
"The results should be coming soon..."
Rumors were circulating that John McCain was actively pushing for the sale of AIG.
Han Kyungyeong's relentless lobbying had finally paid off.
Late that night, I received a call from Ben Bernanke.
"Charlie, you'll need to visit the Federal Reserve the morning after tomorrow. An internal decision has already been made to approve the sale. We only need to finalize the details."
I cheered inwardly.
"Chairman, thank you for all your hard work. I won't forget what you've done."
"Please make sure AIG returns to stability. The insurance industry's financial health must recover if we're going to overcome this crisis."
"Our first priority will be paying out insurance claims under the CDS contracts."
"We'll discuss the details when we meet."
After hanging up, I called Manager Ma.
"Prepare the jet so we can leave for Washington tomorrow. The sale has been approved."
"Yes, Boss."
After giving Manager Ma his instructions, I called Han Kyungyeong and told him to get ready to fly to Washington with me.
"So AIG is finally becoming ours."
Starting an investment company wasn't difficult.
An insurance company was another matter entirely.
Obtaining licenses and regulatory approval was incredibly difficult, and even after receiving them, attracting customers wasn't easy.
"I'm going to turn it into the greatest insurance company in the world."
"I honestly never thought we'd actually get our hands on it."
"No one could have predicted this. We'll talk in detail once we meet."
"Okay. See you at the airport tomorrow."
Two days later.
Han Kyungyeong and I arrived at the Federal Reserve headquarters once again.
"Let's go up, Hyung."
"Yeah."
We entered the Federal Reserve's conference room.
It seemed no one else had arrived yet.
After a brief wait, Ben Bernanke entered alongside the other Federal Reserve governors one after another.
A heavy tension settled over the room.
"We'll hold one final discussion regarding the approval of the loan related to the AIG acquisition. The decisions made today will become the final terms written into the agreement."
Beginning with Bernanke's remarks, we started negotiating the detailed conditions.
One of the governors spoke first.
"Please explain your repayment plan in detail."
Han Kyungyeong answered.
"We propose a two-year grace period followed by repayment over five years in installments. For the interest rate, we propose the federal funds rate plus two percent."
The governor immediately objected.
"That's far too low. It should be LIBOR plus five percent."
"A five-percent spread is excessive. And LIBOR? Do you even know where LIBOR is right now? It's already above three percent."
At the time, international LIBOR fluctuated between 3.5% and 4%.
Traditionally, however, the Federal Reserve based its lending programs on the federal funds rate, with an additional spread added on top.
"Since when has the Federal Reserve used LIBOR as the basis for its lending programs? You're practically telling us to abandon the acquisition."
"Then perhaps you should."
Han Kyungyeong and the governor immediately clashed.
The two argued fiercely over the interest-rate spread.
Even a difference of 0.1% meant enormous interest payments, so neither side could afford to back down.
I quietly observed the expressions around the table.
Most of those present simply watched.
Timothy Geithner and Governor Elizabeth Duke, however, appeared to be on the same side.
Since they couldn't stop us from acquiring AIG, they were trying to burden us by forcing a higher interest rate.
Bernanke finally stepped in.
"All right. Let's settle on a spread of 3.5%."
"Chairman, that's preferential treatment!"
"That's still too high!"
Both Geithner and Duke protested, while Han Kyungyeong also objected.
Bernanke let out a deep sigh.
"What matters right now is restoring AIG to stability. We don't have time to argue over interest rates."
"There could be accusations of favoritism."
"Accusations of favoritism? Right now there are conspiracy theories claiming the federal government is trying to nationalize AIG."
"We can ignore those conspiracy theories. Time will prove that we made the right decision."
"...Geithner. Let's stop reopening an issue that's already been settled."
Geithner avoided Bernanke's gaze but refused to yield.
"I still believe it should be at least plus four percent."
We couldn't waste any more time arguing over the loan rate.
"Let's make it the federal funds rate plus three percent. In return, once we return to profitability, we'll repay an additional twenty percent of our excess profits."
Bernanke immediately showed interest.
"That's actually a very reasonable proposal."
"Chairman."
Geithner tried to interrupt him, but Bernanke remained firm.
"What we want isn't interest income. What we want is for AIG to recover. Those in favor of Charlie's proposal, please raise your hands."
Everyone except those two raised a hand.
Only Geithner and Duke kept theirs down.
"Then the loan will be issued at the federal funds rate plus two percent, with a two-year grace period followed by repayment over five years. Once AIG returns to profitability, twenty percent of its excess profits will be used for additional repayment."
Once a decision had been made by majority vote, even Chairman Bernanke couldn't change it unilaterally.
Geithner simply glared at me angrily, unable to do anything else.
"Now let's discuss the purchase price."
Han Kyungyeong spoke again.
"We intend to acquire one hundred percent of the shares. Based on the current market capitalization of $5.38 billion, we're prepared to offer a thirty-percent premium."
The amount we actually needed was the cost of purchasing those shares.
The one trillion dollars required for the acquisition was needed to pay off AIG's debts.
Cleaning up AIG's bad assets and liabilities would require $980 billion.
The remaining $20 billion would be used for the stock purchase and operating capital.
"Make the premium fifty percent. We need to minimize shareholder losses."
After thinking briefly about Bernanke's proposal, I nodded.
"Agreed. But you'll need to actively assist with the tender offer."
To exercise compulsory acquisition rights, we needed to secure ninety percent ownership.
The Federal Reserve already held 79.8%.
We still had to obtain another 10.2% through a public tender offer.
"We'll help you acquire the shares held by financial institutions."
"Good. Then we'll acquire all outstanding shares with a fifty-percent premium."
Bernanke shook his head.
"You'll acquire eighty percent immediately. The remaining twenty percent will be held by the government in the form of warrants. Once your company repays the loan in full, you'll be able to exercise those warrants and acquire the remaining shares. The warrants will mature in five years."
It was a mechanism designed to ensure we repaid the loan within five years.
If AIG recovered, the value of those shares would inevitably rise.
Since I intended to repay the loan long before then, I accepted without hesitation.
"That's acceptable. However, the warrant exercise price will remain fixed at thirty dollars per share. And once we've secured all outstanding shares, we'll delist the company."
"Very well. Let's proceed on those terms."
Even after that, numerous additional conditions were negotiated.
If the Federal Reserve requested an audit, we would be required to comply without exception.
We would submit annual management reports.
We also promised not to carry out large-scale layoffs for two years, although if workforce reductions became unavoidable, we would establish an employment transition assistance program.
After three hours of negotiations, the final terms were settled.
"Let's summarize. We'll provide a loan of seven hundred billion dollars with a five-year grace period followed by repayment over ten years. The interest rate will be the federal funds rate plus three percent. You'll acquire eighty percent of AIG, while we retain warrants covering the remaining twenty percent. You'll submit annual management reports and fully cooperate with our audits. There will be no large-scale layoffs for two years. You'll also secure fifty billion dollars in cash through asset sales. Finally, once AIG returns to profitability, twenty percent of excess profits will be used for additional repayment. Does anyone object?"
The conference room fell silent.
Then Governor Duke raised her hand.
"I'd like to add one more condition. If AIG fails to return to profitability within three years, I'd like your contingency plan for that scenario submitted as well."
Han Kyungyeong answered immediately.
"We accept. We'll submit the plan within one month."
Bernanke nodded.
"Then all those in favor of approving the loan under these terms, please raise your hands."
Just as before, everyone except Geithner and Duke raised their hands.
Smiling, Bernanke declared,
"Then I hereby announce that the loan for the acquisition of AIG, along with the sale itself, has been officially approved."