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March 2nd, 2009 (Modified on March 6th, 2009)

U.S. Bails Out AIG, Again

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The U.S. government announced their latest bailout of global insurer AIG this morning. While the $30 billion loan will continue to remain on the shoulders of taxpayers (via the TARP), and the government will add to its equity share in the company, the Treasury and Federal Reserve will do some things differently:

The new deal, the government’s fourth for AIG, represents a nearly complete reversal from the one first laid out in mid-September. Back then, federal officials acted as a demanding lender, forcing the insurer to pay a steep interest rate for what was expected to be a short-term loan. Now the government is relaxing loan terms by wiping out interest in hopes of preserving AIG’s value over a longer period.

[The new deal]…will also cut the insurer’s $60 billion credit line with the Federal Reserve to between $20 billion and $25 billion. 

The saying that is slowing growing into rhetoric, “too big to fail” could again be placed behind one of the reasons for the government’s intervention.  While this new “rhetoric” was offered as an explanation back in September, so was another one. Federal officials explained that AIG was offered a bailout and Goldman Sachs wasn’t, because:

According to the Fed, markets had more time to prepare for Lehman’s down slide, unlike AIG’s which occurred with much less notice. 

This will mark the fourth deal the government has offered AIG, markets have had plenty of time to prepare, and yet they still haven’t been allowed to fail. Yet again, the fall of Goldman Sachs was far more devastating than the Fed and Treasury had anticipated. 

What’s the right move? Does the new administration keep bailing out a failing company that is rooted around the globe, or allow them (and the markets) to suffer the fate of Goldman Sachs?

As it stands now, the government posesses nearly an 80% equity stake in AIG via common shares of stock. With such a vested interest in the company, the Fed and Treasury are likely to make sure their latest investment continues to stay afloat:

And the government isn’t necessarily finished providing support. Government officials are expected to continue assisting AIG as needed in order to help the company shrink and dispose of some of its businesses, according to people familiar with the matter.

The AIG funding eclipses the $50 billion that Citigroup Inc. has received from three Treasury programs, and the $45 billion that Bank of America Corp. has received, although each of those firms might receive additional funding in coming months, if necessary. The two banks also have commitments from the U.S. government to back potential losses down the road, putting hundreds of billions of dollars in public funds on the line. 

This morning CNBC compared Washington’s commitment to AIG similar to that of GM. Regulators have maintained the strategy of pumping billions into a broken system.

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HSH.com's daily blog focuses on the latest developments in the mortgage and housing markets. Our mission is to relate how changes in mortgage rates and housing policy, as well as the latest financial news, impacts consumers, homebuyers and industry insiders alike. Our 30-plus years of experience in the mortgage industry gives us an edge as we break down the latest changes in an ever-changing market.

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Tim Manni

Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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