by Debra C.
Member since:
April 19, 2007

The Fed Loans $85B to AIG

September 16, 2008 10:09 PM EDT
views: 54 | comments: 37

 

The US Federal Reserve announced, according to several news outlets, that it is providing an $85 billion loan to rescue embattled insurance giant AIG.

 

While the downfall of an insurer this size would be a serious blow in the financial markets, I remember the collapse of a number of large insurers in the 1980's ... and the government provided no help of this nature.

Does anyone know why the Fed is stepping in on this one?
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Comments: 37

Bob B. Sep 16, 2008, 10:24pm EDT
Probably because the fall of a conglomerate the size if AIG could possibly bring ramifications not heard of since the Great Depression. AIG's assets are more than a trillion dollars. It's simply too big to allow to fail.
Debra C. Sep 16, 2008, 10:36pm EDT
Bob -- I'm not sure, but what were the assets of Mutual Benefit when it collapsed in the late 80's? The real estate portfolio alone was staggering.
Bob B. Sep 16, 2008, 10:40pm EDT
I'm not sure either Debra. I'll try to find out and get a comparison in today's value.
Bob B. Sep 16, 2008, 10:48pm EDT
From what I can find, Mutual benefit was worth roughly $13 billion.
Debra C. Sep 16, 2008, 10:58pm EDT
Looking at part of the figures for that time period --

FDIC figures I've seen for the period from about 1980 to 1994 show more than 1,600 U.S. banks – about 9 percent – failing, involving assets worth about $200 billion at that time.

The larger S&L (savings and loan) debacle felled more than 1,000 institutions with assets of over $500 billion. The cleanup for this cost more than $150 billion, the lion's share paid by taxpayers.
Debra C. Sep 16, 2008, 11:05pm EDT
I'm seeing numbers that suggest AIG, as of a month ago or so is worth somewhere between $12.5B and $25B with an additional $50B possible in its leasing division.

I also appears that ManuLife might make a play for the annuity division, though I haven't seen a current asset value there.
Debra C. Sep 16, 2008, 11:06pm EDT
I just wonder what specific pull AIG has so that the government is willing to float a loan rather than just brokering a sale.
Bob B. Sep 16, 2008, 11:10pm EDT
That's 1000 institutions worth $500 billion compared to one, AIG, worth twice that much. I'm curious as to how global the institutions from 1980 to 1994 were. AIG could not only cripple our financial markets, but foreign markets as well.

My concern with this $85 billion loan, will AIG pay it back. Should the company get back on its feet, it's conceivable the profits it makes could pay off the loan in as little as eight years. But will AIG be forced to pay the loan back and is there any interest being charged? Also, what happens to the shareholders equity now that the taxpayer has become AIG's largest shareholder?
Bob B. Sep 16, 2008, 11:11pm EDT
The government tried to get a couple of other financial institutions to float a loan to AIG and they declined. That, in itself, should tell us how risky this is.
Debra C. Sep 16, 2008, 11:25pm EDT
I agree on the number of institutions. AIG has a diverse portfolio of assets, however. I'm curious why the Fed floated a loan rather than brokering a sale ... or perhaps the loan is contingent on the sale of a percen tof the company and we just don't have that information yet.

The government is loaning this paper to cover paper here. Even with equity terms, I don't see how this is a good deal for the taxpayer.
Bob B. Sep 16, 2008, 11:26pm EDT
I don't believe it's a good deal either. It's a Catch-22 situation.
Debra C. Sep 16, 2008, 11:27pm EDT
One of my biggest concerns is that others in the insurance industry will ask for bailouts as well.

(In the 80's there was a lot of cross-ownership in the banks, etc that failed. That was why I lumped them together.)
Bob B. Sep 16, 2008, 11:35pm EDT
I understand exactly what you're saying Debra. There are a lot of other institutions in trouble now. I hope the government doesn't bail them out. To me, a bailout is a temporary fix. If others sectors of the economy don't rebound, the financial institutions won't either.
Bob B. Sep 16, 2008, 11:43pm EDT
Thanks for the great conversation Debra, I really enjoyed it. I'm off to bed. Have a great night.
Debra C. Sep 17, 2008, 12:00am EDT
You too, Bob. Have a good night!
Ron (in complete sheeple overload) W. Sep 17, 2008, 12:16am EDT
When things are great, and they have us bent over the bench and are making a killing, the market should be allowed to work itself out, but when the evil idiots break their toy, the taxpayer has to save them. Market, Shmarket. Idiots and thieves
Brian .. Sep 17, 2008, 4:51am EDT
good question
and one that I had wondered about myself.
Pamela K. Sep 17, 2008, 7:42am EDT
Debra - I read that Mutual Benefit had assets of about $8.8 billion while it owed $9.9 billion to individual policyholders and others.
William Dotani Sep 17, 2008, 1:52pm EDT
We're printing money out of thin air. It's a bad omen for the value of our dollar.
Alison H. Sep 17, 2008, 3:06pm EDT
Good article and commentary
Debra C. Sep 17, 2008, 5:16pm EDT
Ron -- I smell an article for Gather Cynics coming on!

Actually, you have a point.
Debra C. Sep 17, 2008, 5:19pm EDT
Pamela -- I worked in the insurance (benefits area) until about 3 years before MB crashed. The numbers you cite, the more I think about it, are right for the valuation at the time of the crash, but they were citing values much higher in the years prior.

I remember when my father retired just before the crash, they tried to sell him MB annuities -- I told him to buy from another company because I was concerned about the amount of their portfolio in commercial real estate, which I thought was going to start having problems. I had no clue how bad it would be though -- they were one of the top-rated firms.
Debra C. Sep 17, 2008, 5:20pm EDT
William -- I hope the ink on the dollars doesn't evaporate into thin air, too.
Debra C. Sep 17, 2008, 5:21pm EDT
Alison -- Its due to the wise commentors.
Debra C. Sep 17, 2008, 5:31pm EDT
And with the Dow plunging 445 points today, on the day after the bailout, it appears the investment market is unsure of the wisdom here, too.
Debra C. Sep 17, 2008, 7:54pm EDT
From NYTimes Dealbook (online publication -- 09/17/2008) --

"...A.I.G. sought to reassure its policy holders Tuesday, stating in a press release that its life insurance, general insurance and retirement services businesses are "fully capable of meeting their obligations."

The Times' Floyd Norris, writing on his blog, said A.I.G. has effectively been "nationalized," even if that is not the official version of the story. ... "
Ron (in complete sheeple overload) W. Sep 18, 2008, 6:30pm EDT
Actually, AIG may not bite us quite as much as the FM twins, Bear Sterns, etc, as they still had valuable assets, unlike the rest. Their problem was a a problem with cash flow, and that is entirely different than the rest, who had no value left on their ribs. Still, this whole thing was caused by Bush policy and the deregulation from Phil Gramm's banking bill.
Debra C. Sep 18, 2008, 7:24pm EDT
I am going to agree with you that there is potential for AIG because of the assets, Ron, though if the greedy who still have money are looking to grab it up at firesale pricing, it could still be problematic. FM, et al, only have the paper on which their dreams were written ... some will work out and some will not.

It is time for more regulation and economic management IMHO. I only hope the faith is not misplaced putting all of this in the arms of the Fed. It seems their mandate was price stability, etc. and liquidity of banks, not mortgage messes and insurance.
Debra C. Sep 19, 2008, 11:42am EDT
I was heartened to see that the loan carries an interest rate of about 11%.
William Dotani Sep 25, 2008, 5:44am EDT
I just can't believe Bush and others let things get so bad. There are a lot of retirees scared. Bush is a disgrace.
Since the loan is only for two years, I can't see anything good coming out of this. Loan? And when they don't pay it back? Ron's right - idiots and thieves.
Debra C. Sep 25, 2008, 12:37pm EDT
Well, I suppose if the right assets are sold off, and the right ones retained, this could be paid off in two years, Marilyn. M&As generally only make this kind of money in a strong market though -- which we don't have.

Of course, there could be an international suitor ...
Mary G. Sep 27, 2008, 3:48pm EDT
I think the taxpayers are going to feel the pain for a long time.
Stacey *Mamasaid* D. Sep 29, 2008, 8:54am EDT
This is the cost of this buyout to each of us http://www.gather.com/viewArticle.jsp?memberId=73520&articleId=281474977459141&nav=MyGather
Frankly, it seems to be another opportunity for Bush to pad the pockets of his rich buddies before he leaves office.
Sarah (I want points) Oct 15, 2008, 1:36pm EDT
Because they are afraid....
Debra C. Oct 15, 2008, 10:21pm EDT
Sadly, I think you may be right, Sarah.

Unfortunately, the AIG officials then took $440,000 to pay for a retreat for themselves (complete with massage and salon services). Then, after Congress called them on it, Scty Paulsen gave them more money.

Our heirs many generations along will be dealing with this and the rest of the economic inanity.

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