Finance Globe

U.S. financial and economic topics from several finance writers.
2 minutes reading time (349 words)

Government Gives $85 Billion Loan to AIG

Rescuing private companies with taxpayer money; here we go again. The Federal Reserve announced on Tuesday to give an $85 billion emergency loan to the New York-based insurance company, American International Group, also known as AIG.

The U.S. government gets a 79.9% stake in the company in exchange for the two-year loan, as well as the right to veto dividends on common and preferred stock in the company.

AIG has 116,000 employees in 130 countries around the world, 74 million costumers, and $1 trillion in assets. The large company insures millions of lives, homes, cars, planes, oil rigs, and both small businesses and large corporations, as well as being involved in financial relationships with corporations across the globe.

AIG's the next huge company to fear collapse from exposure to the sub-prime mortgage crisis; it sold insurance to protect customers from defaulting mortgages and other risky debts.

The government tried to convince Goldman Sachs and JP Morgan to offer a line-of-credit to AIG to keep the business going, but both companies refused. So the government stepped in and threw in the cash after no body else would.

The Federal Reserve Board has deemed AIG too big to fall, stating that "a disorderly failure" of the insurance company "could add to already significant levels of market fragility and lead to substantially higher borrowing costs, reduced household wealth, and materially weaker economic performance."

The Fed retains the right to remove senior management and plans to do so, just as when the government seized Fannie Mae and Freddie Mac earlier this month. The loan is meant for AIG to cover their operating expenses and other financial obligations as they come due, and to buy time for them to sell some of their assets to pay back the loan with the least possible disruption to the overall economy.

AIG policy-holders may now breathe a sigh of relief, but AIG stockholders won't. AIG stock was worth about $70 a share a year ago, but is now nearly worthless, at $2.05 a share as of the writing of this article.


Sources:
The Federal Reserve Board
ABCNews
President Bush Attempts to Reassure Americans
Mortgage Crisis Takes More Casualties
 

Comments

No comments made yet. Be the first to submit a comment
Guest
Thursday, 21 November 2019

Captcha Image