The Fed Bails out AIG with $85B!!! What??
Posted by themarketanalyst on September 17, 2008
The Fed bailed out AIG this morning with a $85billion loan. According to the Fed’s press release, the Fed of NY is given authorization to loan up to $85 billion with a 24-month term at an interest of 3-month Libor + 850 basis points (approx. 11.5%). In turn, the Fed is taking a 79% shareholder stake of AIG as collateral.
The good part of this deal are the conditions of the loan. The high interest rate not only protects U.S. tax payers but also serves as an incentive for the company to look for a better solution. It will likely sell assets.
However, the questions that beg to be asked are: Was there no better solution? Do companies have to be nationalized? The move completely goes against our capitalist society. On the other hand, a bailout is better than letting the company fall into bankruptcy (an enormous “ripple effect” on the economy) but taxpayers should not have to pay for bad management and poor risk control. At least the Lehman case proved that the Fed will not bail out every one, AIG was just too important to let fail.
The U.S. stock markets suprisingly closed with gains yesterday despite no rate cut (although futures discounted a rate cut). Only time will tell how U.S. stocks perform today but the fact that the Fed had no choice other than rescue AIG is not a good thing.
