分类:
2008-11-14 23:17:18
A
lifeline for AIG
Sep 17th 2008 |
From Economist.com
AMERICAN
finance has a new, if reluctant, kingpin: the government. In a dramatic move on
the evening of Tuesday September 16th the Federal Reserve agreed to provide
American International Group with a loan of $85 billion to help it stave off
bankruptcy. In return, either the Fed or Treasury will take effective control
of the company, which until recently was an icon of private-sector capitalism.
In the space of nine days, the government has found itself having to take
charge of both the country’s largest insurer and its two giant mortgage
agencies, Fannie Mae and Freddie Mac. The move comes two days after Lehman
Brothers, a big investment bank, filed for bankruptcy after being denied
federal help, and Merrill Lynch, another Wall Street giant, fled into the arms
of Bank of America for fear of being swept away by the hurricane battering global
financial markets.
As well as
writing general-insurance policies all over the world, AIG plunged disastrously
into the market for derivatives linked to housing and credit. Its exposure to
the murky credit-default swaps market alone is a notional $441 billion,
enormous by anyone’s standards. As the market value of these derivatives fell,
the firm found itself strapped for capital, and was forced last weekend to
approach the Fed, cap in hand. The central bank initially demurred, instead
nudging JPMorgan Chase and Goldman Sachs to try to help AIG raise the money
from private sources, such as other banks, private-equity firms and
sovereign-wealth funds. Those efforts failed, however, and AIG’s predicament
worsened on Monday when the big rating agencies downgraded its debt, forcing it
to post more than $13 billion of extra collateral with trading partners. At
that point officials performed a U-turn and began negotiating an emergency
rescue.
They may
have had no choice. Markets did not completely fall apart after Lehman’s
bankruptcy, as some had feared, but they were highly agitated. The rate that
big banks charge each other for short-term money jumped to three times the
level in June, and the cost of protecting against their default broke records.
Officials worried that the collapse of AIG, with its $1 trillion balance sheet
and operations in 130 countries, could send the financial system into a
tailspin. Its CDS counterparties, mostly banks, would have had to write down
their positions, straining their capital ratios at the worst possible moment.
The AIG
bailout shows how hard it is for
Its deep
reach into consumer finance also played a part in the decision to intervene.
Had AIG gone bust, its millions of customers would have been left wondering if
their car and home insurance policies were still valid, at a time when
consumers are already twitchy about the safety of their bank deposits.
Underlining the risk that the credit crisis poses to small investors, a
money-market fund “broke the buck” on Tuesday—that is, its net asset value fell
below $1—the first time this has happened since 1994.
The
government has, at least, demanded a lot for stepping in. It will receive
warrants entitling it to a 79.9% stake in AIG. The two-year loan, secured
against AIG’s insurance businesses, carries an interest rate of LIBOR plus 850
basis points (hundredths of a percentage point). The government will install
new management and will have veto power over all important decisions, including
asset sales and payment of dividends.
AIG will
raise money to repay the loan by selling assets. The expectation is that the
group will be broken up and sold, bit by bit. This would mark an extraordinary
end for a company that as recently as last year enjoyed a market capitalisation
of more than $170 billion. The company insists that it is illiquid, not
insolvent, but the size of the loan suggests that its problems go beyond a
short-term cash crunch.
The question
that hangs over the rescue—apart from whether taxpayers will get their money
back—is whether the government can continue to deal with tottering financial
companies in an ad hoc manner. Pressure is likely to grow for the creation of a
more formal mechanism for handling the sick, akin to the Resolution Trust
Corporation that took on bad assets from the savings and loan crisis of the
1980s. That, at least, would make the hospitalisation process more transparent.
After the historic events of the past fortnight, who would bet that AIG will be
the last lumbering giant to need resuscitation?
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