Sep 17 2008
US Fed Rescue AIG
In an act of complete desperation, the US Federal Reserve department announced its decision to step in and come to the rescue of the bleeding insurance giant American International Inc. My personal opinion on this move is that by this step by the US Fed has lost whatever credibility it had earned by taking the hard stance a few days back by denying intervening to bail out Lehman Brothers. Seen as a measure to bring in a sense of calmness and respite after the turbulent days that the global market has witnessed the US Fed will be lending $US 85 billion to AIG to take stock and come out of its financial crisis.
This move has surely put the spotlight on the Federal department pertaining on its selection criteria for companies it plans to bail out. I would like to point out that in recent times the US Fed had intervened and bailed out various big names including the likes of JP Morgan, Freddie Mac and Fannie Mae and the Federal Housing society. By refusing aid to Lehman Brothers it had seemed like they had drawn the line in lieu of the help they could offer but this recent bailout of AIG has washed it all off. With the taxpayers presently on the hook for coughing out more than $US 900 billion it looks as if the present US economical situation seems to point out towards the time where the profits are privatized and the losses socialized. But when viewed in bright light it looks to me as if this act by the Feds was critically important to calm the concerns ruling the global market because if AIG had collapsed the repercussions would have been felt in thousands of countries world over and would have caused complete chaos in the world market of credit default swaps where it holds an important and a strategic position.
This agreement confirms the US government an equity stake of 79.9% of AIG. This 24 month line of credit to AIG comes along with an interest rate which is equivalent to the London inter-bank rate plus 850 additional base points. I would also like to add here that in lieu of the agreement the loan will be collateralized by taking in all the assets of AIG and also those from its primary non-regulated subsidiaries. The loan will facilitate AIG in selling off some of its businesses in an orderly manner without causing major disruptions to the overall economy. The proceeds from this sale will be used by AIG in repaying back the loan to the ES Federal Department.