Archive for Wednesday, September 17, 2008

Government bails out AIG

September 17, 2008


Asian markets partly recover

Asian stock markets partly recovered today after the U.S. government announced a $85 billion plan to bail out troubled insurance giant American International Group Inc.

Wall Street's rise overnight also lifted sentiment after Tuesday's huge sell-off in Asia. Japan's Nikkei 225 average rose 1.6 percent to 11,788 by midday after sinking nearly 5 percent the day before to its lowest close in more than three years.

Investors sent the region's stocks spiraling downward Tuesday, reacting with alarm to the upheaval on Wall Street that saw investment bank Lehman Brothers Holdings Inc. file for bankruptcy and Merrill Lynch & Co. sell itself to Bank of America Corp.

— For the second time this month, the U.S. government put taxpayer money on the hook to rescue a private financial company, saying the failure of the huge insurer American International Group Inc. would further disrupt markets and threaten the already fragile economy.

The Federal Reserve said Tuesday it would provide up to $85 billion in an emergency, two-year loan to rescue AIG, which teetered on the edge of failure because of stresses caused by the collapse of the subprime mortgage market and the credit crunch that ensued. In return, the government will get a 79.9 percent stake in AIG and the right to remove senior management.

The move was similar to government's seizure on Sept. 7 of mortgage giants Fannie Mae and Freddie Mac, where the Treasury Department said it was prepared to put up as much as $100 billion over time in each of the companies if needed to keep them from going broke.

Both moves were bound to raise questions about the use of taxpayer money to bail out private firms.

The Fed said it determined that a disorderly failure of AIG could hurt the already delicate financial markets and the economy. Although little known off Wall Street, AIG does business with almost every financial institution in the world and insures $88 billion worth of assets including mortgages and corporate loans.

Its failure could also "lead to substantially higher borrowing costs, reduced household wealth and materially weaker economic performance," the Fed said in a statement.

The decision to help AIG marked a reversal from the government's move over the weekend, when it refused to use taxpayer money to bail out Lehman Brothers Holdings Inc. Lehman, which filed for bankruptcy protection Monday, collapsed under the weight of mounting losses related to its real estate holdings.

The White House said it backed the Fed's decision Tuesday.

"These steps are taken in the interest of promoting stability in financial markets and limiting damage to the broader economy," White House spokesman Tony Fratto said.

After meeting with Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke in a late-night briefing on Capitol Hill, Congressional leaders said they understood the need for the bailout.

"The administration is approaching an unprecedented step, but unfortunately we are living in unprecedented times." said Sen. Charles Schumer, D-N.Y. "Hearing of these plans, you have to stop to catch your breath. But upon reflection, the alternatives are much worse."

New York officials said the deal helps stave off a fiscal crisis for the state.

"Policy holders will be protected, jobs will be saved," New York Gov. David Paterson said Tuesday night.

The Fed's move was part of a concerted push to help calm jittery markets and investors around the world.

On Tuesday, the Fed decided to keep its key interest rate steady at 2 percent, but acknowledged stresses in financial markets have grown and hinted it stood ready to lower rates if needed.

The central bank also pumped $70 billion into the nation's financial system to help ease credit stresses. In emergency sessions over the weekend, the Fed expanded its loan programs to Wall Street firms, part of an ongoing effort to get credit flowing more freely.

The stock market, which Monday had its worst session since the Sept. 11 attacks, recovered Tuesday after the Fed's decision on interest rates. The Dow Jones industrials rose 141 points after losing 500 points on Monday.

New York-based AIG operates an insurance and financial services businesses ranging from property, casualty, auto and life insurance to annuity and investment services. Those traditional insurance operations are considered healthy and the National Association of Insurance Commissioners said "they are solvent and have the capability to pay claims."


Daytrader23 9 years, 9 months ago

Delaying the inevitable, it's like a forest fire that cleans out the old growth so the new growth can thrive. We a trying our best to keep the old growth alive when we should let them burn.

bondmen 9 years, 9 months ago

Financial engineers who sold off risk in their portfolios via CDS (credit default swaps) transactions didn't really sell the risk off after all. US taxpayers, always the last men and women standing, bailed out investors who were told their dealings with the big insurance company were "guaranteed". Well that word has lost its real meaning if these companies can be so poorly managed as to need US taxpayers to bail them out!The Federal Reserve has destroyed its asset holdings by lending out its US Government securities in exchange for real estate paper rapidly diminishing in value. When will the US taxpayer be forced to bail out the Federal Reserve System I wonder? There are many more shoes yet to fall in the financial industry implosion.

jmadison 9 years, 9 months ago

Fire up the printing presses! The US Government is going to have to print more dollar bills to cover all the bad debts the taxpayers have just assumed. The political class is deeply beholding to Wall Street, and the common citizen has just paid the price. Invest in real estate in the Hamptons, because it will never fall in value.

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