Tuesday, September 16, 2008

Fed to Rescue AIG with $85 BILLION

Well, this is very interesting. What amounts to the Government of the United States of America (that is, all U.S. taxpayers) is purchasing an $85 billion stake in AIG, the world's largest insurer, in hopes of rescuing it from going into bankruptcy. Hey - where are my shares??? Story exerpted from The New York Times September 16, 2008 Fed’s $85 Billion Loan Rescues Insurer U.S. to Get a Stake in the Troubled Giant A.I.G. By EDMUND L. ANDREWS, MICHAEL J. de la MERCED and MARY WILLIAMS WALSH WASHINGTON — Fearing a financial crisis worldwide, the Federal Reserve reversed course on Tuesday and agreed to an $85 billion bailout that would give the government control of the troubled insurance giant American International Group. The decision, only two weeks after the Treasury took over the federally chartered mortgage finance companies Fannie Mae and Freddie Mac, is the most radical intervention in private business in the central bank’s history. With time running out after A.I.G. failed to get a bank loan to avoid bankruptcy, Treasury Secretary Henry M. Paulson Jr. and the Fed chairman Ben S. Bernanke convened a meeting with House and Senate leaders on Capitol Hill about 6:30 p.m. Tuesday to explain the rescue plan. They emerged just after 7:30 p.m. with Mr. Paulson and Mr. Bernanke looking grim, but with top lawmakers generally expressing support for the plan. But the bailout is likely to prove controversial, because it effectively puts taxpayer money at risk while protecting bad investments made by A.I.G. and other institutions it does business with. What frightened Fed and Treasury officials was not simply the prospect of another giant corporate bankruptcy, but A.I.G.’s role as an enormous provider of financial insurance to investors who bought complex debt securities. That effectively required A.I.G. to cover losses suffered by the buyers in the event the securities defaulted. It meant A.I.G. was potentially on the hook for billions of dollars worth of risky securities that were once considered safe. If A.I.G. had collapsed — and been unable to pay all of its insurance claims — institutional investors around the world would have been instantly forced to reappraise the value of those securities, which in turn would have reduced their own capital and the value of their own debt. “It would have been a chain reaction,” said Uwe Reinhardt, a professor of economics at Princeton University. “The spillover effects could have been incredible.” Financial markets, which on Monday had plunged over worries about A.I.G.’s possible collapse, reacted with relief to the news of the bailout. In anticipation of a deal, stocks rose about 1 percent in the United States on Tuesday and were up about 2 percent in early trading in Asian markets Wednesday morning. [HERE'S THE RUB - WHO LEAKED THE NEWS OF A POSSIBLE BAILOUT AND WHEN??? Reading this report tonight at the New York Times was the first I heard about it, long long after markets closed to trading by regular small fry like me.]

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