The rescue of AIG:
1) The Federal Reserve (not the federal government) lent AIG $85 billion.
2) AIG pays LIBOR plus 8.5% (The Financial Times described it as: "The Fed’s rescue is on punishing terms: AIG must repay the $85bn loan at a storecard-like 8.5 percentage points over Libor, liquidating perfectly fine assets to do so.")
3) The federal government gets 79.9% of AIG's equity.
4) AIG's CEO steps down (involuntarily.)
5) The Treasury is supplying the Fed with extra funds.
6) Why Do It? Too many banks had bonds insured by AIG that would have had their capital impaired if AIG was downgraded
7) Why the draconian measures? To avoid moral hazard.
Earlier Bank of America bought Merrill Lynch.
Wednesday, September 17, 2008
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2 comments:
It is definitely an issue of moral hazzard. One firm becoming so powerful that risks seem almost eliminated. SO, when those possibilities finally become realty, there is no backup solution or plan other than to simply get bailed out. It's no different than say the International Monetary Fund bailing out country's whose governments and financial firms are making poor decisions. It's almost as if we are allowing wrong-doings, but then again, what is there to do at this stage?
How does the US Government set up an $85 billion credit facility for AIG under loan provisions AND take 79.9 percent ownership of AIG. If AIG can pay back the Government over the 2 year credit facility life, does that mean that the Government returns the 79.9 percent ownership back to the shareholders. Is the 79.9 percent simply collateral or is it an actual immediate transfer of ownership to the US Government. I'm a little confused on the details of this.
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