16 September 2008

Feds Considering Loan Package for AIG

If they can make it a short term bridge loan with tough, even draconian, conditions it might be a reasonable solution. The current top management should get tossed out, and tight time limits and a forced unwinding of certain positions should be stipulated.

Its hard to render a strong opinion without better access to the data, unless you're just tossing off ideological viewpoints. How much of the problem is true insolvency versus a short term liquidity squeeze? What are the costs of a failure, and how much of a loan for how long is required?

Why can't AIG reach terms with the banks? Are we seeing brinksmanship at play? Are the lines of liquidity to the markets being manipulated by the Wall Street banks? They are in a position of privilege and obligation in this process by using the special facilities.

The Fed is the lender of last resort. AIG is not a bank, but this is part and parcel of the muddying of the waters we have seen with the erosions in the aftermath of the repeal of Glass-Steagall.

The impact of an AIG bankruptcy on the banking system would be profound. We cannot have this both ways with regard to the definition of the risks banks can take, and with whom they can mingle their interests.

We need to restore some sanity and a better defined charter to the banking system or get used to this sort of non-traditional action and crises.

AIG reportedly may get loans from Fed
By Alistair Barr
3:02 p.m. EDT Sept. 16, 2008

SAN FRANCISCO (MarketWatch) -- The Federal Reserve is considering extending a loan package to American International Group Bloomberg News reported on Tuesday, citing an unidentified person familiar with the negotiations.

AIG has been hammered by derivatives exposure to the housing bust and mortgage meltdown. Ratings downgrades have left it struggling to raise capital in private markets.

Without government support, the giant insurer may have to file for bankruptcy. With roughly $1 trillion in assets and a huge derivatives business, some analysts worry such a collapse may trigger the demise of other financial institutions.

AIG shares fell 12% during afternoon trading. They were down more than 50% earlier.