US Government Federalizes AIG Bailout $85 Billion!

[Bangkoktraveler]

The US Federal Reserve was close to finalizing a deal to rescue teetering insurance giant American International Group from collapse by extending an 85-billion-dollar loan in exchange for a nearly 80-percent stake in the company, US media reported Tuesday.

 

All of AIG 's assets would be pledged to secure the loan, according to the New York Times and CNBC business network, citing people briefed on the negotiations.

 

News of the talks came after Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke went to Capitol Hill late Tuesday to meet with top leaders of Congress, the Times reported.

 

Shares in AIG -- a company with one trillion dollars in assets and tentacles in many markets -- went on a roller-coaster ride on Tuesday, sliding 70 percent at the open, swinging into positive territory and then closing down 21 percent after a 60-percent plunge Monday.

 

New York Governor David Paterson earlier said AIG had one day to raise up to 80 billion dollars to stave off bankruptcy and avoid financial calamity.

 

"I think they have a day ... we're in the moment right now as to whether or not they can put something together. I guess it would be 75 to 80 billion dollars," Paterson told CNBC television.

 

In its first public statement since its shares went into a freefall on bankruptcy fears, AIG said its insurance, retirement and other financial services were operating normally.

 

AIG said its businesses "including its extensive Asian operations, continue to operate normally and remain adequately capitalized and fully capable of meeting their obligations to policyholders."

 

The statement added that AIG "continues to pursue alternatives to increase short-term liquidity in the parent company. Those plans do not include any effort to reduce the capital of any of its subsidiaries or to tap into Asian operations for liquidity."

 

David Kotok, chief investment officer at Cumberland Advisors, said the US central bank must act to avert a collapse at AIG that would be a calamity for markets, which went into shock after the Lehman Brothers' bankruptcy Monday.

 

He said that although AIG is not a primary dealer with access to the Fed, it "is a huge global financial enterprise ... That is why the Fed must act."

 

"This has the appearance of a cascade or a contagion. Failure of Lehman Brothers has created contagion because of counter-party risk that was not contained by the Fed," Kotok added. "Failure of AIG will make this much worse."

 

Liz Ann Sonders, chief strategist at Charles Schwab & Co., said a Fed bailout might set a bad precedent.

 

"Some expect the Fed to offer the same treatment to AIG as it did to Lehman, but others believe the Fed will distinguish between its lending programs and the use of taxpayer funds," she said.

 

"Nonetheless, the Fed's Board of Governors would need to approve the terms of any type of loan. And the bar is going to be set quite high as expanding the discount window to another class of firms brings with it Pandora's Box-type risks, as other companies would undoubtedly look in the Fed's direction for help."

 

In blow after blow late Monday, the three main rating agencies -- Standard & Poor's, Moody's and Fitch -- lowered AIG's credit score in a sign of solvency troubles for AIG.

 

Sonders said that according to AIG regulator filings, the rating cuts are likely to trigger up to 17 billion in collateral calls.

 

Far more than other insurers, AIG has been a big player in a complex parallel market called credit default swaps (CDS), financial instruments in which Wall Street companies take out a form of market insurance against the risks of bond default.

 

These products, often linked to the US real estate market, are at the heart of the current banking crisis and have led to massive write-downs of assets around the world.

 

AIG alone has written off 25 billion dollars amid spiking defaults on US mortgage payments in the United States.

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[cavanami]

Whoopeeeee.

 

The great Fed will print more $$$ to give to the private company AIG...of course the Fed, being a private company, will be charging interest on this money...Hello America...getting another farkin' and don't even get a reach around!!!

Wake up, the ship continues to sink...

[Torneyboy]

And we all will need life jackets .....

[shygye]

Got to keep those CEO bonuses going up up up.

[Bangkoktraveler]

Sounds like a good time to have a parachute sale.

[mongon]

AIG said its businesses "including its extensive Asian operations, continue to operate normally and remain adequately capitalized and fully capable of meeting their obligations to policyholders."

 

The statement added that AIG "continues to pursue alternatives to increase short-term liquidity in the parent company. Those plans do not include any effort to reduce the capital of any of its subsidiaries or to tap into Asian operations for liquidity."

 

Thats interesting. So AIG has assets. It could do a firesale of those businesses, or reduce its capital position in those companies to raise money (might have some asian regulators not happy about that second idea though).

 

But why do something that might upset the Asian markets. The goal is to save the global finance system and there is no reason to cause pain to any of the markets to do that when you can fuck the U.S. taxpayer in the ass instead.

 

But no worries here in the U.S.

 

We've gotten used to anal.

[Neo]

When big numbers like 85 billion come up, I doubt most know what this really means. People should put such figures in terms of how much their household will pay. In this case, each household will have to chip in $1000 for just this one bailout. I doubt many people would put up with the gov knocking on their door asking them to write a $1000 check to bail out AIG. They would more likely chase them away with a shotgun. It's peoples own fault to let the debt get so out of hand like this and do nothing about it. One day they will face the music and it won't be pretty.

 

I say let the free markets work. AIG went under, so what. The creditors lose their investment, so what. That's normal. We saw it all over the place in the dot bomb era as many stocks dropped to the extent investors were left with just a penny on their dollar.

 

[Faustian]

I agree Neo. Completely.

 

This is a worrying trend by the US government. Rescue, but espouse capitalist values...something isn't right about this. AIG should be allowed to sink.

 

Americas taxpayers get shafted again and for what?

[shygye]

Why didn't I get any of the AIG profits when they were making huge profits?

[junglesoup]

This is an absolute disaster. The world will suffer from this. So far, the US has been able to get the rest of the world to monetize the debt, but this is coming to an end. The US has no option basically...they have so many liabilties, that they cant possibly pay. THey have two options (one option)...they can default on their debt, which will cause a collapse of the USD, and will send the demand for USD down, and the cashing in of the USTreasuries by foreigners, which will send bond yields through the roof, and then the phony economy will come crashing down anyway when interest rates shoot up as the currencu collapses...

 

OR they they will try to print money to pay it off. Historically this is the way governments do it. IF they do this, the USD will collapse anyway...bond yields will soar, as the demand for USD drops, and the supply of USD increases as treasurie prices drop...as they get dumped en masse.

 

This is going to cause many more problems in the medium and longterm, and probaby the short term.

 

What will happen now that the FED have expanded their balance sheet to its near limit?

 

What about WaMu, UBS, Wachovia and CITI? CITI have over a trillion USD of level 3 assets hidden of their balance sheet. That should be fun, when they mark those to market.