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The Fall of AIG

Morgan Housel
September 17, 2008

Boy, who would have ever thought the last-minute bailout of Bear Stearns back in March would end up being one of the more minor financial interventions we'd see this year?

In just the past 11 days, the government was forced to take over or seal the fate of:

  • The two largest mortgage companies in the world.
  • The fourth-largest independent investment bank in America.
  • One of the largest insurance companies in the world.

AIG (NYSE: AIG  ) -- facing an inevitable collapse without a huge cash injection -- finally got the gift it needed late Tuesday night after the Federal Reserve agreed to provide an $85 billion credit facility that'll prevent what would have been by far the largest bankruptcy in history, sending the markets into unimaginable panic.

Terms of the deal are very similar to the recent bailout of Freddie Mac (NYSE: FRE  ) and Fannie Mae (NYSE: FNM  ) -- I'm willing to bet they just used the same paperwork. In return for the loan, the government will get warrants to purchase 79.9% of the company's common stock, diluting existing investors into oblivion. CEO Robert Willumstad will be replaced by former Allstate (NYSE: ALL  ) CEO Edward Liddy.

Geesh … another bailout?
Shocked? You should be. Until late Tuesday afternoon, Treasury Secretary Hank Paulson was adamant that he had no intention of using taxpayer money to bail out the struggling insurance company. The original plan was to facilitate a credit line through Goldman Sachs (NYSE: GS  ) and JPMorgan Chase (NYSE: JPM