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Only days after stepping back and allowing Lehman Brothers Inc. to
topple into bankruptcy, the Federal Reserve Board returned to Wall
Street to save American International Group Inc. with an $85 billion
bridge loan that gives the government a 79.9% majority stake in the
insurance company.
The Federal Reserve was unwilling to bet that already roiling financial
markets could withstand the shock of AIG's bankruptcy, particularly so
soon after Lehman's Chapter 11 filing on Monday.
The plan, which AIG accepted on Tuesday night, tosses out top management, severely dilutes existing shareholders and for the first time gives the Federal government control of a major insurer. The official statement said that: "The Federal Reserve Board on Tuesday, with the full support of the Treasury Department, authorizes the Federal Reserve Bank of New York to lend up to $85 billion to AIG under Section 13(3) of the Federal Reserve Act...The U.S. government will receive a 79.9 percent equity interest in AIG and has the right to veto the payment of dividends to common and preferred shareholders."The loan has a 24-month term, with interest accruing on the outstanding balance at a rate of three-month Libor plus 850 basis points and is collateralized by all the assets of AIG and its primary non-regulated subsidiaries. The government will have AIG sell assets to repay the loan, but with breathing room, the insurance company should be able to avoid letting its businesses go at fire sale prices. The bridge loan was likely AIG's last chance to salvage the situation after talks with private equity firms collapsed over the weekend. AIG's shares have been under tremendous pressure since last week; sliding 21.22% to close at $3.75 on Tuesday. The bleeding continued into after-hours trading, when the stock was down 55% by 5 p.m. The company has lost 70% of its value since its Friday close. - George White See Federal Reserve Board statement See Dealwatch on AIG See Crisis on Wall Street Dealwatch CategoriesComments
From: Cynical Synapse,
Unfortunately, we didn't know then that this was just the beginning. Now, the supposedly solvent insurance side of the business needs a $35 billion loan. And wasn't it the "collapse of the insurance giant" that was used to justify the original bailout? Actually, the US Government—meaning you and me, as taxpayers—bought a 79% share of AIG's troubled financial business. I guess we'll cover that with the $700 billion in bad mortgages we'll buy up. But wait! After a $440,000 junket, supposedly for top independent agents, AIG needs another $35 billion! What kind of shell game is AIG playing?
Posted on:
October 9, 2008 1:53 AM
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The press and media have consistently used the Fed (FR Bank) and the Feds (US Government) interchangeably confusing the real meaning of this deal. It appears that the Federal Reserve Bank has wrought an excellent deal (close to 12% interest) and has the government holding warrants to force a sale of assets to repay the bank. I can't see how it can be said that American taxpayers may benefit. The only one who stands to benefit is a private bank, one which bears the name Federal only because it has a Federal charter.
I don't think this can be called nationalization but rather the privatization of the US Treasury. Does anyone care to comment or further clarify?