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.
Terms of the deal are very similar to the recent bailout of Freddie Mac
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
Why the sudden change of heart? I have a few thoughts. First, while this is certainly a bailout by any measure, let's not get too carried away with what that implies: There's a good chance taxpayers will get paid back every penny they put into this deal, and then some. With the government's warrants on nearly 80% of the company, there's actually a good chance taxpayers will turn a handsome profit on the deal.
The reason is that AIG isn't insolvent, it's illiquid. The difference: Someone with $1,000 in debt and $100 in the bank is insolvent; someone with $1,000 in debt and a farm worth $100,000 that'll take six months to sell is illiquid. With the Fed's credit facility, AIG will now have the liquidity to start selling assets at a non-fire-sale pace, with the proceeds going first and foremost toward paying off the government's loan. Knowing that taxpayers' downside is largely protected surely made Fed Chairman Ben Bernanke and Paulson's decision a little easier.
Second, we need to realize how catastrophic an AIG bankruptcy would have been. Not only is it hundreds of billions of dollars larger than Lehman Brothers
What a week
Let's just hope AIG's bailout marks the final chapter of the recent financial meltdown. Of course, we'll keep you updated throughout the week on these incredible stories. For more on this week's events, check out "The Biggest Financial Story in 50 Years" for a collection of Motley Fool articles surveying these crazy times.
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