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September 17, 2008

Why has Fed bailed out AIG?

The Fed announced today a cash injection of $95 billion in exchange for a 2-year bridge loan and a 79.9% equity stake. But why has the Fed saved AIG when only a few days ago, the Fed refrained from offering any kind of guarantees to the troubled Lehman Brothers, failing to prevent the ex-fourth-largest-US- investment-bank’s failure? What do the really mean by the term ‘systemic risk’ and what do they really fear?

Seven months ago, AIG told investors it had ‘excess capital’ of $14.5 to $19.5 billion. AIG’s story would have made sense if they had an ‘excess capital’ and then claimed it evaporated within the seven month period due to the housing market crisis. What doesn’t make sense… is how they suddenly realised that they need $70-$75 billion.

Tell us the truth about the lies Mr Lewis (Chief Risk Officer)… In August 9th, Robert Lewis claimed all of AIG’s subprime mortgage holdings were safe. Of course, he was not alone. The day before his statement, AIG had posted excellent second quarter results, reporting a 34% rise in profits… What they didn’t report – despite analysts expectations to report losses of up to $3.25 billion – was any losses and writedowns on subprime assets. But why should they? Their mortage holdings were safe, intact in their…good books.

The premium AIG has to pay on the Fed loan is rather heftly; 8.5% above LIBOR. The high interest rate might make AIG unviable which leads analysts to believe that the two year loan is not meant to keep the company afloat. So what’s its purpose? According to a Fed statement reported on Bloomberg, the Fed concluded that “a disorderly failure of AIG could add to already significant levels of financial market fragility”.

Put in different words, the systemic risk of allowing AIG to go under was too big to take unlike Lehman Brothers. The truth is that nobody really knows how bad it could have been if they would have allowed AIG to sink, but while the scale of the exposure of specific participants is unknown, chances are that most financial institutions would have to write down more and more billions of assets….

So, basically the Fed has not saved AIG, but rather saw reason to take charge and control its bankruptcy.

3 Responses to “Why has Fed bailed out AIG?”

  1. misanthropope Says:

    that is the most cheering thing i have read during this whole debacle. i am aware of the irony, but i am certainly being sincere. the thought had never really crossed my mind that this was anything other than a blatant nationalization of private losses.

    it sounds so good, in fact, that i feel compelled to go check the rate you quote- meaning no disrespect. take care

  2. Johnny Says:

    I like the way you sum it up, BUT
    The bad money managers created the problem and now our government is going to reward them same bad money managers with 700 billion, if our congress approves this with out firing anyone, then its an act of plain stupidity. This plan is dentin to fail or this is part of the plan they have been working on for many years, to do what I don’t know.
    This is bad for the working US Citizens.

  3. CityBoy Says:

    AIG has already drawn down $61.2bn of its $85bn Fed loan. And imagine it’s only been a couple of weeks since the Fed decided to act as the insurance giant’s savoir!

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