Monday, November 10, 2008

Bailout just keeps getting bigger and bigger

The government bailout continues to grow with seemingly no end in sight. First AIG gets both more money and more lenient terms.

A.I.G. Rescue Grows to Billion - Mergers, Acquisitions, Venture Capital, Hedge Funds -- DealBook - New York Times:
"The Bush administration revised its rescue of the American International Group, raising the total amount to $150 billion, amid signs that the interest on its current credit line of more than $100 billion was putting too much strain on the ailing insurer.

The Treasury Department and the Federal Reserve said early Monday that they are abandoning the initial bailout plan and invest another $40 billion in the company. The government created an $85 billion emergency credit line in September to keep A.I.G. from toppling and added $38 billion more in early October when it became clear that the original amount was not enough."
It was a few week's ago when the shortfall became apparent and the question remains where does this all stop? And while it is easy to throw around numbers that start with a B, let's put this in perspective, that is approximately $500 for every US resident.

In addition to the more money, AIG was also granted more lenient terms. From the Treasury's press statement:
"The existing FRBNY credit facility will be revised to reflect, among other things, the following: (a) the total commitment following the issuance of the perpetual preferred shares will be $60 billion; (b) the interest rate will be reduced to LIBOR plus 3.0% per annum from the current rate of LIBOR plus 8.5% per annum; (c) the fee on undrawn commitments will be reduced to 0.75% from the current fee of 8.5%; and (d) the term of the loan will be extended from two to five years."
The extension is designed to "give AIG time to complete its planned asset sales in an orderly manner. Proceeds from these asset sales will be used to repay the credit facility." So we all have a vested interest in the sale going well, but any guesses what happens in the meantime? More investment?

Oh and lest you think we have seen the end of this (once the precedent is started it is very hard to stop), the WSJ reports that the new administration has signaled its intent to help the US auto industry. So get in line!

BTW the NY Times also gave a fast look around at what others were saying on this front. One look-in:
"Joe Weisenthal, writing on the Clusterstock blog, suggested that the “whole thing is being spun to make it sound like something other than just throwing more money onto the fire.”"

1 comment:

Jason said...

The AIG bailout means nothing to the Fed. The Fed is transparent in that it is subject to the oversight of
Congress. Is twice a year not fast enough? The intent of Congress in shaping the Federal Reserve Act was to keep politics out of monetary policy. Legislation requires that the Federal Reserve reports annually on its activities to the Speaker of the House of Representatives.