So much for the government drawing the line in the sand. An AIG bankruptcy would be “catastrophic,” says the Fed, so out comes the taxpayer wallet again. Release:
The Federal Reserve Board on Tuesday, with the full support of the Treasury Department, authorised the Federal Reserve Bank of New York to lend up to $85 billion to the American International Group…
The Board determined that, in current circumstances, a disorderly failure of AIG could add to already significant levels of financial market fragility and lead to substantially higher borrowing costs, reduced household wealth, and materially weaker economic performance.
In exchange for the bridge, the Fed will own 79.9% of AIG’s stock (the same percentage it owns of Freddie and Fannie). Interestingly, this will not completely wipe out shareholders. And unlike the Fannie/Freddie bailouts, when the Treasury will likely acquire more over time (with new cash infusions), it seems that the Fed’s ownership of AIG will stop at 80%. We’re not sure why AIG’s existing shareholders should entitled to keep 20% of the company, given that they’d have had zero if AIG had been forced to go bankrupt.
The purpose of this liquidity facility is to assist AIG in meeting its obligations as they come due. This loan will facilitate a process under which AIG will sell certain of its businesses in an orderly manner, with the least possible disruption to the overall economy.
The AIG facility has a 24-month term. Interest will accrue on the outstanding balance at a rate of three-month Libor plus 850 basis points. AIG will be permitted to draw up to $85 billion under the facility.
The interests of taxpayers are protected by key terms of the loan. The loan is collateralized by all the assets of AIG, and of its primary non-regulated subsidiaries. These assets include the stock of substantially all of the regulated subsidiaries. The loan is expected to be repaid from the proceeds of the sale of the firm’s assets. The U.S. government will receive a 79.9 per cent equity interest in AIG and has the right to veto the payment of dividends to common and preferred shareholders.
The final decision to help AIG came Tuesday as the federal government concluded it would be “catastrophic” to allow the insurer to fail, according to a person familiar with the matter. Over the weekend, federal officials had tried to get the private sector to pony up some funds. But when that effort failed, Fed Chairman Bernanke, New York Fed President Timothy Geithner and Treasury Secretary Paulson concluded that federal assistance was needed to avert an AIG bankruptcy, which they feared could have disastrous repercussions….
Staff from the Federal Reserve and Treasury worked on the plan through Monday night. President George W. Bush was briefed on the rescue Tuesday afternoon during a meeting of the President’s Working Group on Financial Markets.
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