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"The Government" Now Owns 80% Of AIG, The Nation's Largest Insurer

By September 17, 2008

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Update 3:
Initial news reports stated that the government (taxpayers) owned 79.9% of AIG under this scheme. They still do. However, I have some doubters who insist the entity that owns 80% of AIG is not the government but the Fed; if you see a news report saying that the Fed is the owner, not the government, shout, would ya?

Update 2:
It's a round-about-way for the government to "nationalize" businesses. Taxpayers just took on the debt of another financial giant late Tuesday. American International Group (AIG), which unsuccessfully pressed its case over the weekend, is getting an $85 billion infusion from the Fed. In return, taxpayers get a 79.9% stake in the company, the largest insurance company in the country and one of the largest in the world.

Somebody please explain this to me: how can the US government, which is running a current deficit of $438 billion and has a national debt of $9.7 trillion, "guarantee" $85 billion in revolving credit? I know, I know ... we "print more money." But to do that, someone out there has to buy our notes. When are they going to say "enough" ... or the interest rate simply fall too low?

Yes, I know that we didn't really nationalize Bear Stearns and Fannie Mae and Freddie Mac. But AIG? Here's the Merriam-Webster definition: "to invest control or ownership of in the national government." I'd say 80% stake is, umm, at least the possibility of control. Of course, we didn't simply take the assets, we "bought" them. And it looks like we'll sell them, too:

An eventual liquidation of the company is most likely, senior Fed officials said. But with the government loan, the company won't have to go through a tumultuous fire sale...

The government will have veto power over the asset sales and the payment of dividends to shareholders...

The company's management will be replaced, though Fed staffers did not name the new executives. The board will remain.

According to the Wall Street Journal, Treasury Secretary Paulson personally asked for AIG CEO Willumstad to step down.

All in all, AIG sounds pretty "nationalized" to me, but Fed officials deny it's been nationalized, according to Reuters.

Back in March, according to The Economist, a financial pundit addressed the "too big to fail" meme:

BARRY RITHOLTZ, a prominent financial pundit, writes with tongue not entirely in cheek that the first lesson from the government’s bail-out of Bear Stearns in March was to “Go Big”. “Don’t just risk your company, risk the entire world of finance. Modest incompetence is insufficient—if you merely destroy your own company, you won’t get rescued. You have to threaten to bring down the entire global financial system.”

And if you're not counting (but wish you had been), here's the tally, according to Reuters:

  • $29 billion : what the Fed pledged in the Bear Stearns sale to JPMorgan
  • $200 billion : $100 billion each to rescue Fannie Mae and Freddie Mac
  • $300 billion : to pump up the Federal Housing Authority
  • $85 billion : a straight loan to AIG
  • $300+ billion : "various other rescue deals and loans"

But why would an insurance company be falling victim to the subprime mortgage crisis? Their problem is part of the larger liquidity crisis (see Kimberly Amadeo, About.com Guide to the US Economy). But it's also because AIG "has plunged disastrously into the market for derivatives linked to housing and credit," according to the Economist.

The Wall Street Journal explains that insurance policyholders are protected by, erh, regulation. The insurance subsidiaries are "highly regulated units that have assets available to pay claims."

Like McClatchy addressed yesterday, the deregulation that dissolved the walls between banking, finance and insurance -- walls erected after the 1929 stock market crash, during the Great Depression is coming home to roost. Will this financial legacy replace the genial one now associated by many with President Ronald Reagan?

Related: On The Web

Originally posted: 02.26 Eastern
Update 1: 05.16 Eastern - added total taxpayer outlay from Reuters
Update 2: 05:35 Eastern - added AIG insurance division info from WSJ
Update 3: 18.40 Eastern, 17 September - noted news reports say it's the government, not the Fed, that owns AIG


September 17, 2008 at 3:56 am
(1) williambanzai7 says:

“The Markets They Are A-Changin’”
(to the melody by Bob Dylan)

Come gather round ‘bankers’
Wherever you roam
And admit that the waters
Around you have grown
And accept it that soon
You’ll be told to go home
If your job to you
Is worth savin’
Then you better start swimmin’
Or you’ll sink like the DOW
For the markets they are a-changin’.

Come hedgefunds and bear traders
Who prophesize and sell short
And keep your eyes wide
The chance won’t come again
And don’t speak too soon
For the markets still in spin
And there’s no tellin’ who
That it’s namin’
For the markets they are a-changin’.

Come senators, congressmen
Please heed the call
Don’t stand in the doorway
Don’t block up the hall
For he that gets hurt
Will be he who has stalled
There’s financial meltdown outside
And it is ragin’
It’ll soon shake your windows
And rattle your walls
For the markets they are a-changin’.

Come Central Bankers
Throughout the land
And don’t criticize
What you can’t understand
Those derivative books
Are beyond your command
The old road is
Rapidly agin’
Please get out Bernanke and Paulsen
If you must bail them out out
For the markets they are a-changin’.

September 17, 2008 at 5:14 am
(2) uspolitics says:

Well done, William!

September 17, 2008 at 4:11 pm
(3) zenosf says:

So if these companies (AIG, Fannie, Freddie) have been nationalized, that is that the US government now owns and controls them, does that mean profits earned by these companies will reduce our national debt? In other words, will the revenue earned by these companies be revenue for the government?

September 17, 2008 at 6:39 pm
(4) uspolitics says:

Hi, Zenosf — although news reports say that the government owns 80% of AIG, other folks say that the “owner” is the Fed (which is private, sorta).

When the US guaranteed Chrysler’s loans — Chrysler paid a stiff fee which, reportedly, came back to “us” the taxpayers.

I’ve not seen any details on the AIG or FM/FM bailouts — other than the interest being charged is stiff.

September 18, 2008 at 6:14 am
(5) al fry says:

The Bush administration 8 years of republicanism
a perfect storm of 100% (not 99 or 98% 100%)incompetence. Why? because arrogance and ignorance is a very bad combination.Result? that all time patsy the US taxpayer gets to pay for the damage, elite get off with millions and the US brand image (can do, resourceful, democrtaic beacon, etc)is irreparaby damaged (Iraq WMD, Abu Grahib, Guantánamo, Afganistan, Katrina, Wall Street..)

September 19, 2008 at 5:39 am
(6) Alphast says:

And the way things go, you are going to take 4 or 8 extra years of it. Because let’s face it, the McCain-Palin ticket is just like the Bush one, but without Dick’s brains.

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