Monday, December 28, 2009, 4:26PM ET - U.S. Markets Closed.
- Home
- Tech Industries
- Topics
- Reporters
- Subscribe
$85B AIG Bailout: Fed Stands Pat on Rates But Isn't Standing Still
Posted Sep 16, 2008 06:44pm EDT by Aaron Task in Investing, Recession, BankingUpdated from 6:44 p.m. EDT
The Federal Reserve left rates unchanged at its policy meeting Tuesday, but don't confuse that with a lack of action on its part. The Fed has taken extraordinary actions in recent day to respond to the crisis on Wall Street, including:
- Expanding its lending facilities for financial firms and removing restrictions on what collateral it will accept, including investment grade debt, equities and "old lawn furniture," as Fusion IQ's Barry Ritholtz quips in the accompanying video.
- Injecting $140 billion of temporary reserves into the banking system so far this week, the most since after 9/11, Bloomberg reports.
- Facilitating the Bank of America-Merrill Lynch transaction, as discussed here.
Up Next: A rescue package for AIG, which was widely rumored Tuesday and made official this evening.
Update: AIG will get an $85 billion loan from the federal government in exchange for an 80% percent stake in the company, CNBC reported Tuesday evening. The loan will avoid a bankruptcy filing that could potentially destabilize financial markets but will severely dilute existing shareholders.
The Fed made it official at 9:00 p.m. EDT, extending a "liquidity facility" to AIG for up to $85 billion with a 24-month term. "The loan is expected to be repaid from the proceeds of the sale of the firm’s assets," the Fed said in a statement. "The U.S. government will receive a 79.9% equity interest in AIG and has the right to veto the payment of dividends to common and preferred shareholders."
"The Board determined that, in current circumstances, a disorderly failure of AIG could add to already significant levels of financial market fragility and lead to substantially higher borrowing costs, reduced household wealth and materially weaker economic performance," the Fed said. "The purpose of this liquidity facility is to assist AIG in meeting its obligations as they come due. This loan will facilitate a process under which AIG will sell certain of its businesses in an orderly manner, with the least possible disruption to the overall economy."
Earlier:Tuesday afternoon, Bloomberg reported the Fed was reversing its prior stance and is now likely to support a $75 billion loan for AIG, the giant insurer believed to be on the verge of bankruptcy.
In a subsequent report, Bloomberg said the government is considering a conservatorship for AIG, similar to what occurred with Fannie and Freddie, and AIG shares tumbled after-hours. But CNBC reports the government has "no legal authority" to take AIG under its wing, so the final outcome remains very much in doubt at this time.
AIG, meanwhile "continues to pursue alternatives to increase short-term liquidity in the parent company," according to a statement from the firm. "The companies continue to operate in the normal course to meet obligations to policyholders."
AIG is a "monster company" whose failure would have "enormous consequences," Ritholtz says. Because of AIG's insurance of complex derivative contracts owned by nearly every Wall Street firm, an AIG bankruptcy would make the unraveling of Lehman or Bear Stearns look like child's play, he says, suggesting that's why the Feds won't (and can't) let it happen. (To wit, Morgan Stanley pre-released its third-quarter results two days early in part due to concerns about its exposure to AIG.)
Random musing: Why couldn't AIG be allowed to tap the $70 billion liquidity fund put together by a consortium of banks in response to Lehman's bankruptcy? Sure, AIG didn't contribute to the fund. But assuming the banks involved, including JPMorgan, Bank of American and Citigroup, would suffer if AIG fails, isn't it in their best interest to grant the insurer access to the funds?
While the AIG situation remains fluid and incredibly delicate, the stock market rebounded from its early post-Fed dip to end solidly higher Tuesday. Many attributed the bounce to hopes for an AIG bailout, but Ritholtz says the rebound was foretold by the charts.
97 Comments
Market Folly - Tuesday September 16, 2008 07:09PM EDT
@atask you need to convince barry to get on twitter next time he drops by! nice work as always
mark - Tuesday September 16, 2008 07:16PM EDT
Hey, couln't we find at least two hundred crooked billionaires around the world covered by AIG to lend a billion each for a year?
Len S - Tuesday September 16, 2008 07:28PM EDT
If regulation were ever a good thing it would have been in AIG's case. To let a single company get so large to the point that it's failure would bring down the US financial system is disaster waiting to happen. Where was the oversight for the past year on AIG? It was just downgraded late last Friday. No one was home on this one. Something needs to change. Don't touch the tax payers money!!!
Yahoo! Finance User - Tuesday September 16, 2008 07:34PM EDT
unfortunately the fed has to do this ( so sort of "loan" ) to prevent the financial markets from collapse . That being said , they need to engineer this loan in such a way that it takes its "pound of flesh " . I would suggest for starters it strip the officers and BOD of all bonus's ,stock options and reduce there wage compensation to $1.00 annually .
Tom - Tuesday September 16, 2008 07:37PM EDT
Fire Mr.Cox, Stop the short sales.If not it"s 1929 not to far off!
Yahoo! Finance User - Tuesday September 16, 2008 07:44PM EDT
what is the price of AIG after closing?
John - Tuesday September 16, 2008 07:55PM EDT
This should never happen in our country. Why should my tax money bail out a company "whose directors were asleep at the wheel" when the government wont be certain to bail out my small business if I were on the verge of bankruptcy. Let them fail, it will open the marketplace for other carriers to take some of the lionshare of the industry that AIG has held for years. All for free trade. Too bad AIG.
Yahoo! Finance User - Tuesday September 16, 2008 08:15PM EDT
I agree with WItt. While Obama may not be a true communist, he should move us in that direction and teach all these well off people a lesson and make everyone know how it feels to be poor and homeless.
HughS - Tuesday September 16, 2008 08:23PM EDT
aig is one of the largest and strongest companies in the world! just because they are having a cash-flow problem, doesn't make them insolvent. there are lot of jobs here, insurance policies, and people who would lose everything if this company went down. the country could really be in a turmoil! time for an administration that has some kind of a clue as to the middle american.
SCOTT - Tuesday September 16, 2008 08:27PM EDT
You know the government is going to keep the insurance companies alive on our tax dollars. how many billions did they lose with the hurricane..ike. i look for more to go belly up so they won't have to pay out, but you can bet your last dollar the ceo"s will get their salary and bonus options.
Yahoo! Finance User - Tuesday September 16, 2008 08:39PM EDT
Well, well. All this Republican nonsense of the last 25 years has come straight to the American People to rescue. How can there be any question about these policies. Who is going to bail the American people out ot this trillion dollar liabilities that have been built up as the American people have went shopping and learned how to play with every electronic devise? I mean are we the American sophiscated or what! To even consider another four years of the party currently in power... you are joking? Right?
lakshika - Tuesday September 16, 2008 08:48PM EDT
wat the hell is going on with this market!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! How risky and unpredictable is this!!!!!!
Yahoo! Finance User - Tuesday September 16, 2008 09:39PM EDT
For crying out loud, another bailout?!?! This is madness!
James - Tuesday September 16, 2008 09:51PM EDT
Typical Republican Economics: Don't let government interfere with free markets, unless of course, the 'free markets' need to be bailed out by the lower and middle class taxpayers. Republicans are running our country into the ground. GO OBAMA!!!!!!!!!!!!!!
MAO TSE TUNG - Tuesday September 16, 2008 09:52PM EDT
AIG, just another welfare basket case. LET THEM CROOK!!!!!! Survival of the fittest.
Yahoo! Finance User - Tuesday September 16, 2008 09:52PM EDT
AIG, just another welfare basket case. LET THEM CROOK!!!!!! Survival of the fittest.
Alice - Tuesday September 16, 2008 09:57PM EDT
Typical Republican philosophy privatise profits and socialize debt. Claim victories and not assume responsibility for defeats.
MAO TSE TUNG - Tuesday September 16, 2008 10:01PM EDT
Spanish Inquistion, Napoleon's defeat, global warming, global cooling Jesus's crucifixion, extinction of the dinosaurs, Pearl Harbor, AIDS, Kennedy's assasination, Mongol invasions, etc. IT'S ALL GEORGE W. BUSH'S AND THE REPUBLICAN PARTY'S FAULT.
Want to post a comment? Sign in now to begin.
Recent Posts
Most Recommended
Copyright/IP Policy - Terms of Service - Privacy Policy - Help
Quotes delayed, except where indicated otherwise. Delay times are 15 mins for NASDAQ, NYSE and Amex. See also delay times for other exchanges.
Quotes and other information supplied by independent providers identified on the Yahoo! Finance partner page. Quotes are updated automatically, but will be turned off after 25 minutes of inactivity. Quotes are delayed at least 15 minutes for NASDAQ, NYSE and Amex. See also delay times for other exchanges. Real-Time continuous streaming quotes are available through our premium service. You may turn streaming quotes on or off. Fundamental company data provided by Capital IQ. Financials data provided by Edgar Online. Historical chart data and daily updates provided by Commodity Systems, Inc. (CSI). International historical chart data, daily updates, fund summary, fund performance, dividend data and Morningstar Index data provided by Morningstar, Inc. Analyst estimates data provided by Thomson Financial Network. All data provided by Thomson Financial Network is based solely upon research information provided by third party analysts. Yahoo! has not reviewed, and in no way endorses the validity of such data. Yahoo! and ThomsonFN shall not be liable for any actions taken in reliance thereon. All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.
Whit Chambers - Tuesday September 16, 2008 07:03PM EDT
Vote Communist. Vote Obama!