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AIG's Second Bailout

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You thought $85 billion was enough to pull AIG (NYSE: AIG  ) out of the mud? Please! The company is now on track to burn through that amount like no one's business, and now it's getting more cash from its new majority investor, the U.S. of A.

AIG will get as much as $37.8 billion from the Treasury, on top of the $85 billion it was granted when it nearly croaked a few weeks ago. That's right, yet another move to keep the insurance behemoth from careening out of control, sending financial markets into more of an abyss than they're already in.

Another bailout? Are you kidding me?
How did AIG blow through the initial bailout money so quickly? It wasn't that anyone underestimated how much cash it would need, but that everyone -- the Treasury included -- underestimated how choked up financial markets would get in the ensuing weeks after the bailout was first put on the table.

The root of the current mess is that global investors are scared out of their minds, and won't touch even the safest-of-safe debt instruments short of Treasury bills. As the market for even investment-grade debt threw in the towel, AIG was left short of the two things a leveraged institution needs: cash and time. As has been the case over the past month, the only bank account big enough to step up to the plate and unclog the plug was Uncle Sam himself, and hence the additional loan needed to cover AIG's shortfall.

What this means for the market
Last week, Warren Buffett warned markets that the $700 billion bailout -- while absolutely necessary -- may not be quite enough to stop the bleeding, hinting that the price tag may indeed need to rise. If AIG's newest woes teach us anything, it's that Buffett's warning might be spot-on. As financial markets keep struggling to tread water, the amount of cash needed to make a meaningful difference just goes up and up.

In AIG's case, that could mean having to sell more of itself down the road in order to repay the Treasury's loan. If other banks relying on the bailout plan -- such as Goldman Sachs (NYSE: GS  ) , Morgan Stanley (NYSE: MS  ) , and Bank of America (NYSE: BAC  ) -- venture down that same path, it could ultimately mean having to pony up more equity to taxpayers. In the long run, that will be detrimental for those holding out for a quick market rebound.

This story just keeps getting better and better.

For related Foolishness:

Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. Bank of America is a Motley Fool Income Investor recommendation. The Fool has a disclosure policy.

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  • Report this Comment On October 10, 2008, at 12:23 AM, redheadmen wrote:

    The treasury is not telling you EXACTLY where the money is being spent. They just say that it is being used in the securities lending business.

    I suspect that most of the money is really being used to buy shares on the open market and cover A.G.I. FAILURE TO DELIVER SHARES. The U.S. Treasury is most likely the 80% owner of the largest collection of share I.O.U.'s used in the NAKED SHORTING SCAMS.

    Shares that do not exist at this time, and did not exist when they were "loaned" to the shorts. They were just numbers on the computer screens that were sold into the markets at ever lower prices, in a trading strategy to drive the share prices to record lows.

    The issue of the NAKED SHORTS must be addressed before retail investors come back into the markets.

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