DebateGate
General Category => 3DHS => Topic started by: hnumpah on September 17, 2008, 12:25:47 PM
-
Government steps in again, bails out AIG with $85B
By JEANNINE AVERSA, IEVA M. AUGSTUMS and STEPHEN BERNARD, AP Business Writers
WASHINGTON - Another day, but not just another bailout. This one's a stunning government takeover.
In the most far-reaching intervention into the private sector ever for the Federal Reserve, the government stepped in Tuesday to rescue American International Group Inc. with an $85 billion injection of taxpayer money. Under the deal, the government will get a 79.9 percent stake in one of the world's largest insurers and the right to remove senior management.
AIG's chief executive, Robert Willumstad, is expected to be replaced by Edward Liddy, the former head of insurer Allstate Corp., according to The Wall Street Journal, citing a person it did not name. Willumstad had been at the helm of AIG since June.
A call to AIG to confirm the executive change was not immediately returned.
It was the second time this month the feds put taxpayer money on the hook to rescue a private financial company, saying its failure would further disrupt markets and threaten the already fragile economy.
AIG said it will repay the money in full with proceeds from the sales of some of its assets. It will be up to the company to decide which assets to sell and the timing. The government does, however, have veto power.
Under the deal, the Federal Reserve will provide a two-year $85 billion emergency loan at an interest rate of about 11.5 percent to AIG, which teetered on the edge of failure because of stresses caused by the collapse of the subprime mortgage market and the credit crunch that ensued. In return, the government will get a 79.9 percent stake in AIG and the right to remove senior management.
AIG shares sank $1.34, or 36 percent, to $2.41 in morning trading Wednesday. They traded as high as $70.13 in the past year.
The government's move was similar to its bailout of Sept. 7 of mortgage giants Fannie Mae and Freddie Mac, where the Treasury Department said it was prepared to put up as much as $100 billion over time in each of the companies if needed to keep them from going broke.
The Fed said it determined that a disorderly failure of AIG could hurt the already delicate financial markets and the economy.
It also could "lead to substantially higher borrowing costs, reduced household wealth and materially weaker economic performance," the Fed said in a statement.
The decision to help AIG marked a reversal for the government from the weekend, when it refused to use taxpayer money to bail out Lehman Brothers Holdings Inc. Lehman, which filed for bankruptcy protection Monday, collapsed under the weight of mounting losses related to its real estate holdings.
The White House said it backed the Fed's decision Tuesday.
"These steps are taken in the interest of promoting stability in financial markets and limiting damage to the broader economy, " White House spokesman Tony Fratto said.
After meeting with Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke in a late-night briefing on Capitol Hill, Congressional leaders said they understood the need for the bailout.
"The administration is approaching an unprecedented step, but unfortunately we are living in unprecedented times. Hearing of these plans, you have to stop to catch your breath. But upon reflection, the alternatives are much worse," said Sen. Charles Schumer, D-N.Y.
In a statement late Tuesday, AIG's board of directors said the loan will protect all AIG policy holders, address concerns of rating agencies and buy the company time to sell off assets.
"We expect that the proceeds of these sales will be sufficient to repay the loan in full and enable AIG's businesses to continue as substantial participants in their respective markets," the statement said. "In return for providing this essential support, American taxpayers will receive a substantial majority ownership interest in AIG."
New York officials said the deal helps stave off a fiscal crisis for the state. AIG is based in New York.
"Policy holders will be protected, jobs will be saved," New York Gov. David Paterson said Tuesday night.
In an interview on ABC's "Good Morning America" program Wednesday, former longtime AIG CEO Maurice "Hank" Greenberg was asked whether critics are being fair who say the situation at AIG and the financial markets generally happened because of greed, bad business practices and corruption.
"No, I think it's an unfair appraisal," said Greenberg, who was replaced as CEO three years ago as part of an accounting probe. "You know, there are many things that contributed to this unfortunate episode. after I left the company, all the risk management procedures that we had in place were obviously dismantled. I can't explain that. There's a new board of directors. One should be asking that board of directors what they did and why."
Greenberg said he has lost "my entire net worth. Literally, my entire net worth.'
"Worked 40 years building the greatest insurance company in history, one that everyone in the world envied who was in this industry. I'll get by, but my heart goes out for the thousands and thousands of employees and their families who shareholders and not only in the united states but worldwide. That is a tragedy," he said.
The Fed's move was part of a concerted push to help calm jittery markets and investors around the world.
On Tuesday, the Fed decided to keep its key interest rate steady at 2 percent, but acknowledged stresses in financial markets have grown and hinted it stood ready to lower rates if needed.
The central bank also pumped $70 billion into the nation's financial system to help ease credit stresses. In emergency sessions over the weekend, the Fed expanded its loan programs to Wall Street firms, part of an ongoing effort to get credit flowing more freely.
The stock market, which Monday posted its largest point loss session since the Sept. 11 attacks, recovered Tuesday after the Fed's decision on interest rates. The Dow Jones industrials rose 141 points after losing 500 points on Monday.
AIG's shares swung violently, though, as rumors of potential deals involving the government or private parties emerged and were dashed. By late Tuesday, its shares had closed down 20 percent ? and another 45 percent after hours.
The problems at AIG stemmed from its insurance of mortgage-backed securities and other risky debt against default. If AIG couldn't make good on its promise to pay back soured debt, investors feared the consequences would pose a greater threat to the U.S. financial system than this week's collapse of the investment bank Lehman Brothers.
The worries were heightened Monday after Moody's Investor Service, Standard and Poor's and Fitch Ratings lowered AIG's credit ratings, forcing AIG to seek more money for collateral against its insurance contracts. Without that money, AIG would have defaulted on its obligations and the buyers of its insurance ? such as banks and other financial companies ? would have found themselves without protection against losses on the debt they hold.
-
More lemon socialism.
-
Wow, this "president" sure hates government involvement till some giant corporation needs to be bailed out for poor business practices that result in billions of dollars in wealth evaporating except for those that headed up that corporation's being driven into the ground.
But, gods know that we should tell a person who has no health care insurance to pull themselves up by their boot straps.
-
Tuesday, Sep. 16, 2008
Why the Government Wouldn't Let AIG Fail
By Justin Fox
After establishing a supposed hard line against bailouts over the weekend with Lehman Brothers, the government abruptly abandoned it Tuesday and announced an $85 billion Federal Reserve loan to insurance giant AIG. The explanation: AIG was deemed too huge (its assets top $1 trillion), too global and too interconnected to fail.
That, and the fact that unlike with Lehman ? where the possibility of failure was openly discussed for months and to a certain extent planned for ? federal officials and market participants don't seem to have really focused on AIG's problems until this week. As with all U.S. insurers, the company is regulated not by the Fed but by a state regulator, in this case New York insurance superintendent Eric Dinallo. Plus, it was awfully hard for outsiders ? and even insiders ? to understand the gravity of the company's problems. "You can read through every financial statement in the world and have absolutely no clue as to the risks they are taking," says Leo Tilman, a former Bear Stearns strategist who now runs the advisory firm L.M. Tilman & Co.
The particular risks that brought the company to the brink of bankruptcy seem to lie not with its core insurance businesses but with its derivatives-trading subsidiary AIG Financial Products. AIG FP, as it's called, merits a mere paragraph in the nine-page description of the company's businesses in its most recent annual report. But it's a huge player in the new and mysterious business of credit-default swaps: derivative securities that allow banks, hedge funds and other financial players to insure against loans gone bad.
AIG generally sells credit-default swaps, thereby promising to insure others against defaults. It's a great business when defaults are low; when they rise it can turn toxic. AIG FP lost more than $10 billion in 2007 and $14.7 billion in the first six months of this year. That, along with losses in other investment portfolios, has cut deeply into the parent company's capital reserves. The credit-default-swap contracts decree that if AIG's credit rating drops below a certain level, it has to fork over $13 billion in collateral to the buyers of the swaps. Monday night, because of the losses at AIG FP and in AIG's investment portfolios, Moody's and S&P cut the company's ratings. After that, the consensus was that the company could survive only another day or two.
The New York Fed asked Goldman Sachs and JPMorgan Chase & Co. to try to arrange a $70 billion private loan for AIG, but that didn't go anywhere. Treasury officials mulled a government conservatorship as with Fannie Mae and Freddie Mac, but it might have required an act of Congress to make that happen. So the Fed devised a deal in which AIG agrees to repay the loan with asset sales and give the government (and thus taxpayers) a 79.9% equity stake in the company.
Confused? You're not alone. The best case for the bailout seems to be that nobody has the faintest idea what the consequences of AIG's failure for financial markets would be, but the fear was that it could lead to total chaos. The biggest fears had to do with the credit-default swaps, which AIG appears to have sold in large quantities to practically every financial institution of significance on the planet. RBC Capital Markets analyst Hank Calenti estimated Tuesday that AIG's failure would cost its swap counterparties $180 billion.
"Its collapse would be as close to an extinction-level event as the financial markets have seen since the Great Depression," wrote money manager Michael Lewitt in Tuesday morning's New York Times. There's also the fact that through its insurance policies AIG touches far more regular Americans (and consumers around the world) than Lehman Brothers did. Plus, AIG's insurance businesses make so much money that they could conceivably pay off the cost of the bailout within a few years.
http://www.time.com/time/printout/0,8816,1841699,00.html (http://www.time.com/time/printout/0,8816,1841699,00.html)
-
I understand the repayment is at 11% intrest.
Is this the back way to socialism ?
-
"Its collapse would be as close to an extinction-level event as the financial markets have seen since the Great Depression," wrote money manager Michael Lewitt in Tuesday morning's New York Times. There's also the fact that through its insurance policies AIG touches far more regular Americans (and consumers around the world) than Lehman Brothers did. Plus, AIG's insurance businesses make so much money that they could conceivably pay off the cost of the bailout within a few years.
Is this the back way to socialism ?
Is this much different than the Chrysler bailout?
And was AIG saved and not Lehmans because more lil people would be hurt if AIG failed?
-
Is this much different than the Chrysler bailout?
It's LOTS more expensive.
--------------------------------------
And was AIG saved and not Lehmans because more lil people would be hurt if AIG failed?
Lehman was small potatoes compared with AIG. I think the income levels of the workers were probably quite similar.
-
Lots and lots of people have lost their houses already. Why would they care now?
-
AIG is an Insurer.
They protect pensions for one thing.
Screw the pensioners?
-
(http://farm4.static.flickr.com/3162/2864507526_419eff408a_o.jpg)
-
I understand the repayment is at 11% intrest.
Is this the back way to socialism ?
========================================
If they have to pay interest to the govt. is that more socialistic than lending them the money at 0%?
This is lemon socialism. If they make money, let them alone. If they fail, make the taxpayers bail them out.
-
uhm
I mught be wrong
but I think it`s more than a loan
I think read somewhere the government is in control of it now.
meaning the ceo`s are really in a bad situation now
note that article did say the govt. has say what they can sell
my question is has previous companies ever did well when the government tookover or bailout
whatever the hell this situation is
-
Chrysler repaid thei bailout ahead of time. Made Lee Iaccoca a household name again.
-
oh yeah
I totallty forgot about that
but that doesn`t mean these guys has the same stuff lee has to carry it off.
-
AIG has a very profitable insurance arm. They will ok. All the fed did was collateralize the loan.
-
uhm
I mught be wrong
but I think it`s more than a loan
I think read somewhere the government is in control of it now.
The loan also gave them an 80% stake in the company. So, the government can set policy until it gets paid back.
-
Chrysler repaid the bailout ahead of time. Made Lee Iaccoca a household name again.
=====================================
Well, it is true that Chrysler paid off the loan ahead of time.
What made Lee Iacocca a household name (not again, he wasn't one before that), was his mug on TV for years, telling us how great the K-cars were, which was only sort of true. They DID have VW engines in the 4 cylinder models. The Mitsubishi 6 was a terrible motor, good for maybe 80K at most, and unfixable because of a major design defect.
What made the K-car sell was the horrible crap that GM was putting out during those Roger Smith years, and the great affinity most Ford products had to combine with the atmosphere. Except the Pinto. That exploded and barbecued all its hapless occupants when hit from behind.
What made Iacocca famous was the same thing that made Victor Kiam famous (Remington razors: liked them so much he bought the company).
-
What made Iacocca famous was the same thing that made Victor Kiam famous (Remington razors: liked them so much he bought the company).
The Mustang made Iacocca famous the first time.
-
Except the Pinto. That exploded and barbecued all its hapless occupants when hit from behind.
I bought a '76 Pinto brand new when I got back from Turkey. Three weeks later some lady rearended me at 30+ mph in Tennessee and drove me up underneath a van. It didn't explode. In '79, same car, I got rearended and driven into another car, then rearended again and rolled end over end, landing right side up, off a ramp. It didn't explode then, either. I walked away from both crashes with no injuries.
-
Glad you did, H. The potential for far worse, sure was present. My brother was in a roll over accident, in our Mom's used Datson B210 (we called it Rodney, for some reason). He was T-boned in an intersection, the car rolling several times, ending up laying on the driver side. My brother, who was driving, walked away with some cuts and bruising. His friend, in the passenger side that was impacted by the other car, was permanently brain damaged, and confined to a wheelchair. Both were wearing their seatbelts
-
Iacocca did come up with the Mustang, and that certainly did make him famous among car fanciers, most of whom overlooked that the Mustang was basically a jazzed up Falcon. The K-car era ads were what brought him household recognition.
You were lucky that your Pintos did not explode. You mush have been hit at an angle that did not rupture the tank and spray fuel all over you. I don;lt think MOST rearended Pintos exploded, but had they installed a $10 deflector, none of them would.
-
The first one hit me square on the rear end. I was at a dead stop behind the van, and she hit me at 30+ mph, never even touched the brakes. Everything that could hold liquid on the car, except the windshield washer, was busted. I had to get out and shut her car off before she blew us all up - the front of her car, engine running, was sitting in gas from my ruptured fuel tank, and I had just filled it up. The second one was also square on, but we were both moving, so the impact wasn't as hard. It was enough to make me lose control and hit another car in the next lane over, then the first car hit me again and knocked me off the ramp. We went end over end and landed upright, and my passenger and I both walked away. I wore seatbelts in both wrecks - have since I got bumped off the track and rolled a stock car over three times 'way back when. My passenger in the second wreck had never worn seatbelts in his life, until that night - he saw me put mine on, and put his on as well. Saved him serious injury, and possibly saved his life.
-
an old friend of mine onetime got sideswiped by a pickup truck.
he told me if his friend were to not wear a seatbelt she would most likely not be alive.
it tore him up (inside)real bad how close that he could of lost her.
ever since he would drive unless everybody has thier seatbelts on .
-
Cars catch fire much less often than in the movies, I recall a Chuck Norris film in which EVERY car he rode in exploded in a huge ball of fire.