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?
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?
- Gross National Debt as a Percent of GDP, by President
- Banking Crisis Deepens
- What Caused The Great Depression?
- The Sub-Prime Mortgage Crisis
- On Wall St., a problem of denial, International Herald Tribune
- Bankers House of Cards, audio interview with Steve Keen, Associate Professor of Economics and Finance at the University of Western Sydney, and Satyajit Das, author, Traders, Guns & Money: Knowns and unknowns in the dazzling world of derivatives
- Fed’s AIG Deal: Here There Be Dragons - WSJ
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