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AIG Deal and Changes to Naked Short Rules

September 17th, 2008 at 08:18 pm

AIG Deal

Just to be clear about the deal. It's an $85 billion 2 year revolving credit loan at 3 month LIBOR + 850 bps.

The loan is collateralized by all the assets of AIG which is estimated to be be about $1 trillion. Just the air leasing and foriegn life insurance division are estimated to be worth about $94 billion.

The other piece is a 79.9% equity stake in AIG, where the government can veto dividends to common and preferred shareholders.

Now the 3 month LIBOR is around 2.88. Or, the interest on the loan is 11.38%. That ain't cheap money and the government has enough power to liquidate the company and get their money first. But it did this to give AIG time to unravel and not have to put everything on a fire sale.

Source: http://www.federalreserve.gov/newsevents/press/other/20080916a.htm


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Naked Shorts - Technical

The Commission's actions were as follows:

1)Hard T+3 Close-Out Requirement;

Penalties for Violation Include Prohibition of Further Short Sales, Mandatory Pre-Borrow

The Commission adopted, on an interim final basis, a new rule requiring that short sellers and their broker-dealers deliver securities by the close of business on the settlement date (three days after the sale transaction date, or T+3) and imposing penalties for failure to do so.

If a short sale violates this close-out requirement, then any broker-dealer acting on the short seller's behalf will be prohibited from further short sales in the same security unless the shares are not only located but also pre-borrowed. The prohibition on the broker-dealer's activity applies not only to short sales for the particular naked short seller, but to all short sales for any customer.

Although the rule will be effective immediately, the Commission is seeking comment during a period of 30 days on all aspects of the rule. The Commission expects to follow further rulemaking procedures at the expiration of the comment period.

2)Exception for Options Market Makers from Short Selling Close-Out Provisions in Reg SHO Repealed

The Commission approved a final rule to eliminate the options market maker exception from the close-out requirement of Rule 203(b)(3) in Regulation SHO. This rule change also becomes effective at 12:01 a.m. ET on Thursday, Sept. 18, 2008.

As a result, options market makers will be treated in the same way as all other market participants, and required to abide by the hard T+3 closeout requirements that effectively ban naked short selling.
Rule 10b-21 Short Selling Anti-Fraud Rule

The Commission adopted Rule 10b-21, which expressly targets fraudulent short selling transactions. The new rule covers short sellers who deceive broker-dealers or any other market participants. Specifically, the new rule makes clear that those who lie about their intention or ability to deliver securities in time for settlement are violating the law when they fail to deliver. This rule also becomes effective at 12:01 a.m. ET on Thursday.

Source: http://www.sec.gov/rules/other/2008/34-58572.pdf

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