The government bailout of insurance giant AIG with a massive loan was anxiously anticipated by TV analysts yesterday. The Wall Street Journal blogged that the loan's form was meant not to encourage a long line of corporations looking for similar bailouts:
The terms of the Fed's deal made it clear that there was no sweetheart bailout to be found. AIG may be able to survive, but it must repay the $85 billion loan at credit-card-like interest rates (8.5 percentage points over Libor, currently about 11%), liquidation even of performing assets is in the cards and top management is on its way out the door.
The New York Times cut through to the meat and potatoes of the AIG bailout and why the government intervened:
They emerged just after 7:30 p.m. with Mr. Paulson and Mr. Bernanke looking grim, but with top lawmakers initially expressing support for the plan. But the bailout is likely to prove controversial, because it effectively puts taxpayer money at risk while protecting bad investments made by A.I.G. and other institutions it does business with.
If A.I.G. had collapsed -- and been unable to pay all of its insurance claims -- institutional investors around the world would have been instantly forced to reappraise the value of those securities, and that in turn would have reduced their own capital and the value of their own debt. Small investors, including anyone who owned money market funds with A.I.G. securities, could have been hurt, too. And some insurance policy holders were worried, even though they have some protections.
The Journal also offered a Q&A on AIG's downward spiral yesterday, including risks of a failed AIG:
What are the Ripple Effects?
1) AIG's individual insurance subsidiaries appear to have adequate financial reserves and should be able to pay claims from people and businesses who hold policies with it. Even if the company files for bankruptcy protection, it can operate there or the subsidiaries can get sold.
2) The impact on Wall Street could be significant, as many financial institutions in the U.S., Europe and Asia bought credit default swaps from AIG tied to corporate debt and mortgage securities. These firms are counting on AIG to compensate them if the underlying assets default or decline in value. If AIG itself defaults or has trouble meeting its obligations, those market players may have to take write-downs or losses.