The Eclectic One

…Because labels are a poor substitute for thinking

AIG gets a loan from taxpayers

Posted by Bill Nance on September 17, 2008

The Fed announced last night that it would loan as much as $85 billion over the next two years to embattled insurer AIG. As a condition of the loan, AIG has been forced to put up all of its assets as collateral and to replace its management team, as well as having to pay as much as 11% interest on the loan to the government. -A pound of flesh if there ever was one.

The insurance giant, the world’s largest, is in big trouble mainly because it insured investment banks against losses. Because most of those bad investments were  mortgage-backed  securities which have plummeted in value, AIG has taken huge losses in recent months.

While the company has over $1 trillion in assets, it suffers from a lack of capitalization because the assets are held by subsidiary companies, who  by law cannot lend money to their parent company.

The move was made because, in short, AIG is simply too big to let fail. Analysts have been saying for days now that the potential fallout from an AIG bankruptcy, which would mean a disposal of many of it’s assets at fire-salle prices in order to cover it’s debts would cause global financial chaos.

AIG has ties to virtually every market in the world. In other words, if AIG goes, the results to the economy, not just in the U.S. but worldwide, could be catastrophic. The deal saves the giant from having to seek bankruptcy protection under Chapter 11 and stems the tide of a sure-fire stock market panic which would result from its collapse.

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One Response to “AIG gets a loan from taxpayers”

  1. Dwight Davis said

    At least this time the government is behaving like a capitalist. Heavy interest and a hefty chunk of equity in exchange for the loan. Probably a good bet. Get your people in power, Sell the bad parts for whatever you can get. Sell some of the good parts to retire some of the debt. Keep a cash cow or two to retire the rest, Pedal what’s left to KKR or some other LBO shark. Get the loans back and make a nice profit.

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