The federal government announced on Monday an overhaul of its bailout of the insurance giant American International Group, saying it would purchase $40 billion of the company’s stock, after signs that the initial bailout was putting too much strain on the company.
In a joint statement, the Federal Reserve and the Treasury said the move was necessary “to keep the company strong and facilitate its ability to complete its restructuring process successfully.” The new measures, they said, would help the company and promote market stability while protecting the interests of the federal government and taxpayers.
A.I.G. reported a loss on Monday of $24.47 billion, or $9.05 a share, in the third quarter, after a profit of $3.09 billion, or $1.19 a share, a year ago. The results included pretax losses of $18.31 billion from the declining value of A.I.G.’s investments.
Neel T. Kashkari, the assistant secretary of the Treasury who heads the Office of Financial Stability, said in a speech Monday morning that the new A.I.G. plan “was necessary to maintain the stability of our financial system.”
A.I.G. shares were 17 percent higher in late Monday morning trading. In the revised bailout, the Treasury Department will use the Troubled Asset Relief Program, the $700 billion financial system rescue plan, to buy $40 billion of newly issued A.I.G. preferred shares.
The government created an $85 billion emergency credit line in September to keep A.I.G. from toppling and added $38 billion more in early October when it became clear that the original amount was not enough. As part of the revision, the Federal Reserve said it would reduce that credit line to $60 billion.
When the reorganized deal is complete, taxpayers will have invested and lent a total of $150 billion to A.I.G., the most the government has ever directed to a single private enterprise. It is a stark reversal of the government’s assurance that its earlier moves had stemmed the bleeding at A.I.G. But Fed officials said the $40 billion investment would allow them to reduce their exposure to $112 billion from $152 billion, and improve the condition of the collateral for its loan. The revised deal will probably intensify the debate in Washington over why some companies should be saved while others are left to wither.
I'm getting the feeling that the American taxpayer is buying a huge boondoggle of a lemon under this AIG bailout deal. The federal government will spend $30 billion to help AIG "buy up a type of security called collateralized debt obligations that the company had agreed to insure against default. The securities are now held by institutional investors. As their insurer, A.I.G has been forced to put up large amounts of cash as collateral as the global economy has soured and the securities seemed increasingly likely to default." It appears to me that the federal government is not bailing out AIG, but rather these "institutional investors," who are holding these securities and demanding payment from AIG. In other words, our taxpayer money is going into the bank accounts of these "institutional investors." I would like to know who these "institutional investors" really are--Wall Street banks? Hedge funds? Big name investors? We have already spent $150 billion to keep AIG afloat, and it will probably require even more billions of taxpayer money to continue propping up AIG. Is it really worth it?
This deal is really starting to stink badly.
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