I'm just speculating here but this is an important question. Why didn't AIG go to the local bank and get a business loan? This seems like a silly question but bear with me, it's an important one.
AIG is no dummy, they knew that this big of a loan from the Feds would make the headlines and desttroy the value of their common stock. So they did go to the local bank for a loan and they probably checked out all available sources of capital and there wasn't a single lender or group of lenders that were willing to give them the sizeable loan that they wanted.
Now these are banks that are in the business of lending, they either did not think that AIG was a good risk or they simply did not have the funds.
Actually, I believe that the money was available because there are banking consortiums that have adequate funds, but for some reason they thought that AIG wasn't a good risk. These are institutions that are in the business of lending and unlike the Federal government. The Treasury and the Federal banks are not primarily lending institutions but they are regulatory agencies who try to keep our economy on an even keel.
So basically the professionals passed on the loans and the Feds stepped in as the lender of last resort. In other words the Feds are relative amateurs in the lending business, but AIG was forced to go to them. Also, since the Feds are relative amateurs in this area of lending, I'm not sure they knew what they were doing.
Right now AIG and Greenberg feel that they paid too much for the loans but they really had no choice.
In this dance between the Feds and AIG I get the feeling it is the blind leading the blind. So I do not have much confidence that either the Feds or AIG have any idea of what they are doing.
That is a good question and the answer is credit freeze. Banks don't trust other banks credit worthiness because rating agencies fell asleep when the economy was chuckling along. When bank stop lending to each other and instead chose to hoard cash that's what got AIG and other businesses (not only insurance or banks) in cash crunch. M&A stop and while pending M&A backed out because they could not get a loan.
Big knights with shinning armour came and help, Big Ben and Hank.
But you have to remember that the Feds probably didn't want to do the deal either because it's an election year and the proble with the investment banks were already in the headlines. However, they were acting as regulators and realized that they had no choice but to step in. But they really weren't thinking of making a profit here, they were concerned about the stability of the U.S. markets.
So basically, they didn't think that AIG was that good of a risk, but they took the gamble to stabilize the economy. The consortium of banks didn't have that obligation so they didn't make that loan.
AIG needed 85+ Billion, who could lend anyone that much, especially in this economic environment?
As for the Feds knowing what they were doing, don't forget that Paulson was formerly the CEO of Goldman Sachs. I presume many of those involved int he AIG deal had solid backgrounds in the private sector. Further, the Feds sure wrote a very onerous deal!