AIG rescue grows more costly, complicated

McClatchy NewspapersNovember 10, 2008 

WASHINGTON — Troubled insurer American International Group won a new lease on life after the Bush administration said Monday that it was almost doubling September's $85 billion taxpayer rescue of AIG and broadening government intervention into the financial sector.

In an unusual 6 a.m. announcement, the Treasury Department said it would use the $700 billion rescue plan that was passed Oct. 3 — originally designed to purchase troubled mortgage assets — to purchase, with taxpayers' money, some $40 billion in senior preferred stock from AIG.

The Treasury and the Federal Reserve also announced that they were revamping the original AIG bailout from September, upping the rescue sum in the insurer to $150 billion and adding a number of restrictions on bonuses and other forms of compensation paid to the company's top executives.

Treasury's point man for what originally was designed as a Wall Street rescue package, Neel Kashkari, said Monday that the program was open to a "broad array of financial institutions." That leaves the door open to the possibility that troubled automakers such as General Motors, Chrysler and Ford might get some bailout money to support their auto-finance arms.

Here are some answers to questions about Monday's complex developments.

Q. The taxpayer is now on the hook for $150 billion at AIG, not the original $85 billion. What exactly is happening?

A. The original emergency loan to AIG during the Fed's dramatic September rescue proved not to be enough, and additional lending already had brought the sum to more than $120 billion. Under the new agreement, the government will lower the value of its $85 billion loan to $60 billion and will take a companion loan worth almost $38 billion and replace it with $52.5 billion in new aid. The $700 billion rescue plan will be tapped for another $40 billion, meaning that taxpayers will buy that much in AIG preferred stock through the government's new Troubled Asset Relief Program.

Q. Wasn't TARP money supposed to go to banks to spark lending?

A. That's certainly how the package was sold to the public. But on Monday, Kashkari said that revamping the federal rescue of AIG "was necessary to maintain the stability of our financial system."

During Monday's White House briefing, spokeswoman Dana Perino said the decision was made for the good of the global financial system.

"AIG is a large, interconnected firm," she said, and "a failure by the firm would cause damage to our financial system, the U.S. economy and the global economy. AIG being clearly within that financial-service sector is what Congress had in mind when it passed the rescue package."

Q. Is this new sum a big deal?

A. When all is said and done, AIG will be receiving at least $150 billion in taxpayer-funded support. That's the largest U.S. government intervention ever into a private firm, at least for now.

Q. What sparked the move?

A. Deeper losses at AIG, once one of the world's premier insurance and financial services companies. AIG on Monday reported third-quarter losses of almost $25 billion, a stunning reversal from its $3 billion profit during the same quarter of 2007. Investors are shunning AIG, and it's been borrowing under one federal program to repay what it owes under another.

Q. Doesn't this amount to throwing good money after bad?

A. Time will tell. The restructured loan buys desperately needed time for AIG, which is trying to sell off parts of its business to raise money to pay off debt and restructure as a smaller company. The revamped rescue also creates a mechanism for determining the value of certain esoteric financial instruments that few investors want to buy today.

"It increases the odds that AIG will survive. Moreover, the ultimate cost to the government will not be substantively greater," said Mark Zandi, chief economist for forecaster Moody's Economy.com in West Chester, Pa. "All in all, a good step for everyone involved."

Q. If the Treasury is rescuing a giant insurer, why can't it help Detroit carmakers such as General Motors or Chrysler?

A. That's an argument that top Democrats are making. They're pressuring Treasury Secretary Henry Paulson to include carmakers, and Kashkari seemed to hint Monday that the finance arms of carmakers would fall into the range of firms that could apply for government money.

Q. How might that happen?

A. Right now, GMAC, the financial arm of GM, owns a bank in Utah. That bank, GMAC Automotive Bank, is an industrial loan corporation. It would have to convert itself to a commercial bank that takes deposits, then seek to be chartered by a state or federal regulator. When that's done, it could create a bank holding company that's regulated by the Federal Reserve — something investment banks Goldman Sachs and Morgan Stanley recently did — and thus it could qualify for federal rescue money.

Q. Would this alone save the carmakers?

A. No, but it could help them survive a brutal next six months or more. GM car sales plunged 45 percent in October, and the company is burning through cash and could face bankruptcy soon. Economists think that anywhere from one in seven to one in 10 U.S. jobs is tied to the automotive sector to some degree.

ON THE WEB

The Federal Reserve's announcement

Kashkari's speech

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