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Government steps in again, bails out AIG with $85B

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mwkruse
in ,

Yahoo News: Government steps in again, bails out AIG with $85B

WASHINGTON (AP) — The U.S. government stepped in Tuesday to rescue American International Group Inc., one of the world's largest insurers, with an $85 billion injection of taxpayer money. Under the deal, the government will get a 79.9 percent stake in AIG and the right to remove senior management.

AIG's chief executive, Robert Willumstad, is expected to be replaced by Edward Liddy, the former head of insurer Allstate Corp., according to The Wall Street Journal, citing a person it did not name. Willumstad had been at the helm of AIG since June.

A call to AIG to confirm the executive change was not immediately returned.

It was the second time this month the feds put taxpayer money on the hook to rescue a private financial company, saying its failure would further disrupt markets and threaten the already fragile economy.

AIG said it will repay the money in full with proceeds from the sales of some of its assets.

Under the deal, the Federal Reserve will provide a two-year $85 billion emergency loan to AIG, which teetered on the edge of failure because of stresses caused by the collapse of the subprime mortgage market and the credit crunch that ensued. In return, the government will get a 79.9 percent stake in AIG and the right to remove senior management.

The move was similar to government's seizure on Sept. 7 of mortgage giants Fannie Mae and Freddie Mac, where the Treasury Department said it was prepared to put up as much as $100 billion over time in each of the companies if needed to keep them from going broke.

The Fed said it determined that a disorderly failure of AIG could hurt the already delicate financial markets and the economy.

It also could "lead to substantially higher borrowing costs, reduced household wealth and materially weaker economic performance," the Fed said in a statement. …

$85B? Now that is what I would call a bail out.

Comments

2 responses to “Government steps in again, bails out AIG with $85B”

  1. phil_style Avatar
    phil_style

    I’d love to know from which direction the “bail out” momentum came. Some of the press are reporting this as the banking bosses goign “cap-in-hand” to government asking for a bail out. Others say that governments have stepped in of their own accord in the best interests of innocent parties (employees, small investors) that would be devastaed by the demise of these firms. Michael do you have any guesses about which scenario is more likely? Or is it a combination of the two?

    Reply
  2. Michael W. Kruse Avatar
    Michael W. Kruse

    That question is above my pay grade. 🙂
    I suspect there was a convergence of interests here. If A.I.G. couldn’t come up with the additional collateral on loans triggered by a decrease in their credit rating, then they would collapse. The government knew that if A.I.G. went under it would have severe consequences for not only the U.S. economy but the world economy. Both had strong incentives do the deal.
    Also, unlike Lehman, which was an investment banking firm, A.I.G is a conglomerate with a variety of services, some of them quite healthy and lucrative. The government, if they choose, can now sell off the lucrative components in order to pay back the government loans.
    It is all too early to tell how this all plays out. There is more to transpire this week I expect. By next week I expect we will know better where things stand.

    Reply

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