Tuesday, September 23, 2008

Fed throws out an $85B Life Preserver to AIG

The Federal Reserve provided the largest government bailout of a private company in U.S. financial history. They provided AIG with $85 billion in emergency loans to rescue them from bankruptcy in exchange for almost an 80% claim in AIG. The loan provided was at a very high interest rate and AIG’s entire assets were used as collateral.

Reactions from large newspapers
On its front page, the New York Times calls the government's move "the most radical intervention in private business in the central bank's history," a step taken "to avert a possible financial crisis worldwide." The Washington Post calls the Fed's move "a stunning turnaround," while USA Today says it was a "stunning decision," coming "just days after the Treasury and Fed refused to bail out investment bank Lehman Bros., which filed Monday for the largest bankruptcy ever." The Los Angeles Times calls the move "the largest single financial intervention in the nation's history and a measure of the depths of America's financial crisis."
Does this feel like an indication of the continuing uncertainty in the financial sector? Give us your comments….

Possible implications
It is a little unsettling thinking about how detrimental this could be to corporations around the world. They could get hit with billions of dollars in losses if AIG is allowed to fail.
Keep in mind, that AIG is bigger than Fannie Mae, Freddie Mac, Merrill Lynch, Lehman Brothers or the former Bear Stearns. Analysts have been saying that most of AIG’s businesses are in decent financial shape on their own, but the events of Wall Street are the cause of AIG’s problems. This bailout weakens AIG’s current stockholders a great deal but does not wipe them out completely.

Why the bailout?
The decision to rescue AIG was a remarkable turnaround from what government officials had said just a few days earlier. AIG has extensive ties to the struggling U.S. financial system already, so they needed to come to AIG's rescue in order to help stabilization. The federal government determined that AIG was too big to fail and needed to be rescued. These steps were taken in order to promote stability in financial markets and limit the danger to the broader economy.
Is it possible that without this radical intervention, that it may have averted a possible worldwide financial crisis? What do you think?

Feel free to call or email me at www.michele@wantinsight.com

Michele “MAC” Cole

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