Sep 16, 2008

Fed bailing out AIG

The Federal Reserve's cherry-picking-rescue-plan approach to Wall Street (save Bear Stearns, let Lehman Brothers fail) continues with the Fed agreeing to loan the country's largest insurer, American International Group, $85 billion to save it from bankruptcy. In exchange, the Fed will get an 80 percent stake in the company.

This is an extraordinary turn of events. And a bizarre one - A quasi-public agency has decided to spend billions of dollars to buy a controlling stake in a company that no one in the private sector was willing to buy. There's no way of knowing the repercussions of this; although the Fed clearly decided the known consequences were more alarming than the unknown ones.

Time's Justin Fox tries to explain:
Confused? You're not alone. The best case for the bailout seems to be that nobody has the faintest idea what the consequences for financial markets of AIG's failure would be, but they were afraid that it could lead to total chaos. The biggest fears had to do with the credit default swaps, which AIG appears to have sold in large quantities to practically every financial institution of significance on the planet. RBC Capital Markets analyst Hank Calenti estimated Tuesday that its failure would cost its swap counterparties $180 billion.

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