Acting to avert a possible financial crisis worldwide, the U.S. Federal Reserve Board reversed course Tuesday and agreed to an $85 billion bailout that would give the U.S. government an ownership stake in the troubled insurance giant American International Group.
The decision, announced by the Fed only two weeks after the Treasury Department took over the quasi-government mortgage finance companies Fannie Mae and Freddie Mac, is the most radical intervention in private business in the central bank’s history.
With time running out after AIG failed to get a bank loan to avoid bankruptcy, Treasury Secterary Henry Paulson Jr. and the Fed chairman, Ben Bernanke convened a meeting with House and Senate leaders on Capitol Hill at about 6:30 p.m. Tuesday to explain the rescue plan.
They emerged just after 7:30 p.m. with Paulson and Bernanke looking grim but top lawmakers generally 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 AIG and other institutions does business with.
What frightened Fed and Treasury officials was not simply the prospect of another giant corporate bankruptcy, but AIG’s its role as an enormous provider of financial insurance, which effectively requires it cover losses suffered by other institutions in the instance of defaults of securities that they have purchased. That means AIG is potentially on the hook for securities that were once considered safe.
This is a bankruptcy for AIG in name only, with the Fed as receiver. That is also an astounding interest rate on the loan, considering the size of the loan.
Another example of the U. S. moving toward socialism as the government takes over. What EVER did they manage effectively and without outrageous expense to the taxpayer??
Pity the poor employees at Lehman Brothers….guess they weren’t valuable enough to rescue.
Well, this isn’t the government, it is the Federal Reserve Bank, which, while federally chartered, is owned by its member banks. Also, they aren’t managing it, but they definitely have the final say so over the CEO, whoever that will be (likely the old CEO from Allstate.)
The Fed is the lender of last resort. Presumably, they raised $85B by using cash on hand and liquidating their USG bonds in order to make the loan. Or, they just leveraged it on top of their assets and added a bunch of new dollars to the economy. Whichever, I don’t know.
Now that the lender of last resort is the proud owner of a bankrupt company and a bunch of fancy engraved birdcage liner, who will shore up the bottom line of the lender of last resort? The answer is, when they need more money they’ll just print it.
#1 I didn’t see the interest rate on the $85B, what was it?