AIG was allowed to fail. Being force to sell your company (actually 79.9%) in exchange for an $85B 12% convertible preferred is failure. The reason it works for the fed is that they can force a cramdown of the debt. They got all the assets for a loan and can blow off the debt. It is a hell of a deal.
Hi rodguy!
AIG is so big that its failure would paralyze world markets, as I understand it. The financial sectors are so interconnected (insurance/banks/mortgage companies/large manufacturers/pension plans/bokerage firms) that the failure of a very large insurer-investor like AIG can do real damage to a host of institutions. It has a snow ball effect and pretty soon lots of other companies are failing as well.
Things got so tight that credit was almost paralyzed, and without credit the economy simply cannot function. I think that this intervention is the last resort and is the only thing that could be done.
Everyday example on a smaller scale: Remember when Donald Trump got in financial trouble because of losses on some hotels and buildings? He’s still around, isn’t he? The reason is that the banks had loaned him so much money that they needed to make arrangements with him, rather than foreclosing and forcing him into bankruptcy. He got terms from the banks and was able to emerge from his problems without losing his shirt.
Think of AIG as Donald Trump. They have so many connections that they can’t be allowed to fail. I know it doesn’t seem fair, as a small guy on Main Street would simply go out of business, but unfortunately, this is the way of the world. The consequences of not doing anything would have been a lot worse.