Tuesday, September 16, 2008

Fed Loans $85 to AIG

Fed Invokes 'Unusual and Exigent' Clause to bailout AIG.  Just days after Treasury secretary said no to bailing out AIG, the fed is providing AIG with $85 billion of "loans". 

It's a dramatic turnabout for the federal government, which has strongly resisted overtures from AIG for an emergency loan or some intervention that would prevent the insurer from falling into bankruptcy. Just last weekend, the government effectively pulled the plug on Lehman Brothers Holdings Inc., allowing the big investment bank to fail instead of giving it financial support.

It seems Lehman did not have ennough toxic stuff to be bailed out. 

The precise details of the government's plans were still being formulated late Tuesday. The primary option being hammered out involved the Fed providing AIG with a short-term "bridge" loan of $85 billion, according to people familiar with the situation. In exchange, the government would receive warrants in AIG representing the right to buy its stock, under certain conditions. That could put the government in a position to potentially control a private insurer, a historic move, particularly considering that AIG isn't directly regulated by the federal government.

Now we know why the fed did not cut the rate.  They had much bigger issues on their mind.  Bailout AIG and then we can use the rate cut next time around.  I was surprised when the fed held especially when the markets were pricing in more than 80% chance of a rate cut. 

Sen. Richard Shelby of Alabama said he didn't receive a "satisfactory" answer from Mr. Paulson in an early conversation about the ultimate scope of government intervention. "I laid out -- where do you stop? Where do you draw the line?"

The automakers are already begging.  So I guess they are next. 


The AIG bailout caps a tumultuous 10 days that have remade the American financial system. In that time, the government has engineered rescues that insert it deep into the housing and insurance industries, while Wall Street has watched two of its last four big independent brokerage firms exit the scene.



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