Fed to give AIG $85 billion loan and take 80% stake[Done Deal]

IHT ^ | 17 Sep 2008 | Michael J. De La Merced and Eric Dash Published:

[BGHater]

In an extraordinary turn, the Federal Reserve agreed Tuesday night to take a nearly 80 percent stake in the troubled giant insurance company, the American International Group, in exchange for an $85 billion loan.

The Federal Reserve and Goldman Sachs and JPMorgan Chase had been trying to arrange a $75 billion loan for the company to stave off the financial crisis caused by complex debt securities and credit default swaps. The Federal Reserve stepped in after it became clear Tuesday afternoon that the banking consortium would not be able to complete the deal.

Without the help, AIG was expected to be forced to file for bankruptcy protection.

The need for the loans became necessary after the major credit ratings agencies downgraded AIG late Monday, a move that likely to have forced the company to turn over billions of dollars in collateral to its derivatives trading partners worsening its financial health.

Until this week, it would have been unthinkable for the Federal Reserve to bail out an insurance company, and AIG's request for help from the Fed of just a few days ago was rebuffed.

[Freedom_Is_Not_Free]

No, the $85 billion loan doesn’t prop up AIGs stock. The $85 billion goes right out the door to pay off the massive losses from MBS deriviatives. Wait until we hear they need another $85 billion and then another. Who knows how large the derivatives losses will grow? That is the problem — no transparency and no knowing who has how much of the toxic paper. AIG may not survive this even with Fed help.

[ThePythonicCow]

Wow!

[Freedom_Is_Not_Free]

Or their losses from derivatives could grow and grow and...

[Freedom_Is_Not_Free]

I’ve heard that BAC and Wells Fargo are two of the healthier banks with little exposure to mortgate losses. I’m looking for WaMu to go next and Citi to be on the bubble.

[BGHater]

Dummy, I meant Asia. Asia likes the Bailout.

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[Tublecane]

“If AIG fails then yes the taxpayers will be on the hook. If AIG succeeds as I expect them to, then the taxpayers get their 80B back plus interest plus an 80% equity stake in AIG. On the other hand we don’t know the details.”

Some taxpayers will get money back, just as executives and people with large shares will be saved from ruin. However, the fed ought to have the best interest of the public at large in mind. Inflating the currency to save an insolvent company probably won’t the majority of Americans in the long run. The bailout will only encourage AIG and others to continue making bad investments.

When we say we live in a capitalist society, we largely mean that we live in a profit-and-loss society. Individuals invest money in capital, and according to how the investments pan out, they make a profit or take a loss. The loss half of the equation is just as important as the profit half, in the sense that losses force people to stop investing in failing ventures. Ventures run by the government, like public education, are notorious for throwing good money after bad. If the treasury and the fed keep pumping money into failing businesses, eventually the financial market will be as free as the educational market.

[SteveAustin]

The media is so enamored with the AIG story tonight, they are glossing over this one (see link), which could be just as big as it relates to the average American and their confidence in the system. AIG to most guys on main street doesn’t mean much.

This breaking NYT story will hit everyone:

http://www.nytimes.com/2008/09/17/business/17fund.html?ref=business

[1stMarylandRegiment]

The Federal Reserve, through the Resolution Trust Company (created by Congress to clear the 1990 savings and loan crisis) has purchased a 79.9% equity stake in AIG.

The RTC will sell down AIG assets such as International Lease Finance, the insurance company "Manufacturers' Life", etc. until the $85BBN loan is repaid, leaving whatever is left for the current shareholders.

You can bet the government will sell the good stuff and the shareholders will get the junk. This is not a nationalization.

BTW, the RTC actually made a $100 million profit on the $720 billion of S&L assets it took over in the 90's.

[Freedom_Is_Not_Free]

I hate these bailouts too, but we have a Depression to avoid.

We are not losing the game today. The game was lost long ago. There is a momentum to these things. When Greenscam decided to leave rates at 1% so all the players could gorge fat on the easy money until they were regurgitating at the vomit troughs for the next feast of easy money, these bailouts were baked into the cake. All we are seeing now is the end result of the idiotic decisions made almost a decade ago.

I heard the talking heads on CNBC whining that “AIG is not insolvent, it is just illiquid.”

HELLO????? We are in a LIQUIDITY CRISIS.

They said, “AIG has assets to sell”. Right. Tell that to the judge when your mortgage is foreclosed on your $10 million house that is worth $9 million today. OK, sure. Your house is worth $9 million, and if you sold it, you could afford to pay your mortgage. But unfortunately, you can’t sell it and pay off your mortgage in time to stave off foreclosure. That is AIG.”

And Freepers like Travis McGee have been absolutely screaming that this was coming after the collapse of the long-running overextended credit bubble.

Nothing to do now but throw more money in the fire and hope we can dump so much money on the fire that we suffocated it under the stack. The alternative now is a nice toasty Depression. I hope and pray it doesn’t end that way.

But... The financial sector is rapidly melting down before our eyes. How many major private companies have to be bailed out from their horrific derivatives losses before the Fed says, “sorry, we’re broke too, you are on your own, good luck.”

Helloooooooo hobos. Welcome to the Depression.

[Tublecane]

“The Fed has nearly $480 billion in Treasury securities.

‘Do they realize that the Fed conjures it out of thin air?’

They could. They don’t have to.”

This is what I’ve always wondered: what does the Fed use to buy its securities? Does it use the gold it confiscated from the public way back when? If so, wouldn’t suddenly reintroducing the equivalent of some portion of that gold back into the economy through AIG lead to inflation anyway?

[Freedom_Is_Not_Free]

This is a severe hit to the mind of Joe Sixpack. “But banks aren’t supposed to lose money. I mean, not deposits, right???”

When people start to realize they may not get back all of their “100% safe” money out of their money market accounts, this could create a bank panic and a run.

Very scary stuff. It is a small loss. 3% is nothing. But it is the type of loss that causes panic and bank runs. Joe Sixpack is going to need a lot of reprogramming not to pull his money out of the bank and put it home in the mattress.

I agree, this is a very distressing development and I’ve been waiting for a long time for one of the money market funds to fail to return principal. This must be watched closely. If people pull their money out of banks, we collapse. End game. End of story. Good-bye economy. Hello Great Depression II.

[Tublecane]

“I hate these bailouts too, but we have a Depression to avoid.”

Why do you want to avoid a depression? Everyone knows that all the bad stuff happens during the boom; depressions fix the economy.

[Tublecane]

“Hello Great Depression II.”

Maybe we’ll get it right this time and use the depression as a means of reinstalling the free market.

But we won’t. If we have another massive bank run and industrial collapse, the socialists will blame capitalism instead of themselves.

[durasell]

Why do you want to avoid a depression? Everyone knows that all the bad stuff happens during the boom; depressions fix the economy.

---

Okay, that’s it. You are no longer allowed to watch re-runs of the Waltons.

[too_cool_for_skool]

This is essentially a bankruptcy, except the Federal Reserve controls the proceedings and liquidation instead of a BK judge. The big questions that remain are:

Where do the bondholders stand? Are they before or after the Fed in getting paid back?
&
As AIG’s portfolio is liquidated, isn’t this going to finally put prices on many illiquid derivatives that are being marked-to-model on everyone’s books? If the market price turns out to be significantly lower than modeled prices, except to see a succeeding round of write downs and failures.

[durasell]

This is bad.

I’ll tell you one of the stranger things I saw: Walked by Lehman headquarters in Times Square and tourists were taking pictures of folks walking out with cardboard boxes of personal possessions.

[ThePythonicCow]

What is the significance of this?

The powers that be are getting their wish.

When J.P. Morgan, on behalf of the Rothschilds, took advantage of a weak government, back in 1913, to create the Federal Reserve, the big banks got control of our money.

From that point forward, instead of the government printing or minting money on its own (such as the Civil War greenback), rather the United States government can only get money or credit, beyond taxes, by borrowing it from the consortium of big banks known as the Federal Reserve.

The main purpose and use of the Federal Income Tax is to pay the interest on this debt.

We, America, owe our soul to the company store, this bank consortium.

Since 1913, we have gone through a few major cycles of boom and bust. During the booms, we ramp up our debt. Governments, corporations and individuals go into debt more, since it is readily available and life is good. During the busts, prices are driven down (major companies sell for pennies on the dollar) and more control is handed over to the central banks. Well, actually, they got that control when we increased our debt; the bankruptcies and foreclosures of the hard times just make manifest what was already implicit, that we no longer own this land nor the fruits of our labor nor the wealth of the savings of ourselves or our ancestors.

The Treasury, by the 1913 law, can only make more money by borrowing it from the Federal Reserve. So regardless of the details of how this AIG deal goes down, the central banks, such as JPMorganChase, and the most powerful people behind them, gain increasing control over our economy, our government (most Democrats and many Republicans in Congress are bought and paid for), our federal bureaucracy, our mainstream media, our most prestigious universities, and the largest grant foundations.

This is another bust, and the big cats are raking in more, increasing their grip.

This time, unlike perhaps the 1930's, they are trying to do it without a terrible deflation inflicting great stress on the common people. Severe depressions make us peons harder to control. They are trying, and so far succeeding, in keeping us peons feeling mostly OK with things, while at the same time driving major corporations (insurance, real estate, finance, automobile, transportation, ...) into bankruptcy, so that they can pick up the pieces, dirt cheap.

A few token fat cats in more publicly visible roles may end up behind bars, if our public cry for revenge needs satiating. But the most powerful have little fear of that happening to them personally.

Eventually, they will destroy the dollar doing this. Inflation will rise dramatically, in perhaps the one to five year time span. There is no alternative, short of a major nuclear war or the second American Revolution.

[Petronski]

The $85,000,000 came with strings attached: 2 year loan, LIBOR + 8.5% interest rate (~10%), management fired, federal government gets 80% control. Loan is to be paid off by liquidating the company.

THANK YOU for posting that.

Let me take a few HTML liberties with your quote to clarify this for those readers misunderstanding what happened:The $85,000,000 came with strings attached: 2 year loan, LIBOR + 8.5% interest rate (~10%), management fired, federal government gets 80% control. Loan is to be paid off by liquidating the company.

[Toddsterpatriot]

This is what I’ve always wondered: what does the Fed use to buy its securities?

Newly created money.

Does it use the gold it confiscated from the public way back when?

No.

[Petronski]

The $85 billion goes right out the door to pay off the massive losses from MBS deriviatives. Wait until we hear they need another $85 billion and then another.

Uh....no.