FINANCIAL MARKETS: FED STEPS IN TO SAVE AIG FROM GOING UNDER
September 17, 2008
(NEW YORK, NY) -- In yet another stunning and historic development in America’s financial system crisis the Federal Reserve stepped in Tuesday night to save American International Group (AIG) from bankruptcy in what has been described as the most radical intervention in the central bank's history.
AIG: Too big to fail decides the Fed
The Fed said it would give the company a two-year $85 billion loan in exchange for an almost 80 percent stake for the American taxpayer in the insurer. The move marks a 180-degree shift for the government, which said just two days ago that it would not be in the bailout business.
Critics of the AIG loan say the government is putting taxpayer money at risk to protect a company that made its own bad bets on the sub-prime mortgage market and thus should be forced, like Lehman Brothers, to suffer the consequences of those decisions.
Backers of the loan plan claim the government had little choice in the matter because AIG is simply “too big to fail” as it insures a vast array of securities for financial institutions both in America and abroad and if it had failed the fallout out would have catastrophic consequences for confidence in the financial markets.
On the CNBC cable news channel this morning former Treasury Secretary John Snow said, “the decision makers must have faced real concerns about a catastrophic collapse. But where do we stop, what is the framework? We have a broken financial system. There is a huge danger here that we're going to react with an over-reach.”
New York State Insurance Department Superintendent Eric Dinallo was involved with the AIG negotiations last weekend and later said on CNBC, “I have never seen anything like this, we are in a paradigm shift in the economy. We came in on Friday to begin the evaluation of the company's situation. The governor then authorized the state to front the company $20 billion for what we thought would be a relatively small shortfall" but by late Monday, Dinallo said, it became clear that $20 Billion dollars would not cover AIG's debts. He said he expected that the $85 billion would be enough and the government wouldn't need to add to that credit line.
The federal government had been trying to avoid the impression it would continue to help save private companies from failing. That's one of the reasons it allowed Lehman Brothers to fail over the weekend. AIG was a different matter, however. AIG, said some Wall Street money managers was simply “too big” to be allowed to fail because it had sold huge quantities of financial insurance instruments called “credit-default swaps” to financial institutions around the world.
Government officials were concerned that institutional investors who had purchased these instruments and had used AIG to insure their investments would have been obliged to massively revalue their holdings which could in turn have created fear and even panic in markets around the world. Small investors or individuals insured by AIG would also have been vulnerable.
In a statement issued late Tuesday, AIG's board of directors said they expected to repay the loan in full by selling company assets.
Last night's announcement was the second time this month that the federal government decided to use taxpayer money to rescue a private financial company.
On September 3rd, the Treasury took control of mortgage giants Fannie Mae and Freddie Mac saying it would put up as much as $100 Billion dollars in each to keep them in the black. In exchange, the government now holds a controlling interest in both companies.
The Fed also pumped $70 Billion dollars into the nation's financial system Tuesday to prevent any other credit crunches. The stock market, which on Monday posted its largest point loss session since the September 11, 2001 attacks, recovered somewhat on Tuesday after the Fed's decision on interest rates. The Dow Jones industrials rose 141 points after losing 500 points on Monday.