AIG’s
The government’s false start
The original package fizzled because of increasing margin calls from AIG’s counterparties (which include Goldman Sachs
The original terms of the government’s loan were punitive -- 8.5% over the interbank rate for funds that AIG drew down, 8.5% for funds available under the facility but not used. It soon became clear that AIG would have a very tough time meeting those hefty interest payments. The interest rate is now set to drop to 3% over the interbank rate. See how AIG’s original bailout compares to large postwar financial bailouts in the table below:
|
Bailout |
Package Details |
Result |
|---|---|---|
|
2008: Fannie Mae, Freddie Mac |
Treasury purchases $1 billion in newly issued preferred shares, paying a 10% dividend, and receives warrants to acquire 79.9% of outstanding common shares at essentially no cost. |
Ongoing |
|
1984: Continental Illinois Bank (seventh largest bank in the U.S. at the time) |
FDIC purchases $1 billion in newly issued preferred shares to re-capitalize bank, as well as $3.5 billion in distressed loans at adjusted book value, $2 billion of which had been reduced by two-thirds from its carrying cost. $720 million of the preferred shares issued were convertible into 80% of the common stock, giving the FDIC effective control over Continental Illinois. |
Original shareholders were wiped out after five years. The bank was re-privatized gradually in public share sales. Acquired by BankAmerica in 1994 (now Bank of America Estimated cost to the taxpayer: $1.1 billion -- 3.25% of the bank’s assets. |
|
1974: Franklin National Bank (20th largest bank in the U.S. at the time) |
Borrowed extensively from Fed discount window at below-market rates (ultimately as much as half of the bank’s funding!). |
Franklin National never returned to profitability and was eventually sold to a bank with an FDIC guarantee against losses. The FDIC experienced a “moderate” loss. |
AIG and beyond
AIG is an example of one of the risks inherent in a government bailout: becoming bogged down in a money quicksand pit. Just as in its natural counterpart, flailing about to solve a financial crisis will only add to the predicament. Thankfully, version two of AIG’s bailout looks more deliberate than the first -- it gives the insurer more time to sell assets, which should ultimately translate into better prices. Since we taxpayers effectively own 80% of the insurer, we like better prices.
All the same, it’s a warning that the government should only extend its bailout to non-banks such as CIT Group
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