A closer look at the AIG bailout
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Stacey Vanek-Smith: After bailing out Bear Stearns, Fannie Mae and Freddie Mac, the federal government seemed to be taking a tough love approach to our economic situation. It let Lehman Brothers fail. And when insurance giant American International Group asked for help, Uncle Sam balked. But this week things got really bad for AIG. It’s stock price plunged to less than $5 a share. That’s down about 95 percent for the year. And now the Fed has stepped in with a bailout. It will lend AIG $85 billion with an interest rate of 8.5 percent. In exchange, the government will get an 80 percent stake in AIG.
Mark Zandi is with Moody’s economy.com. Mark, why did the government decide to bail out AIG?
Mark Zandi: I think they determined that AIG was just too big to fail. AIG is a very large insurer with operations all over the world. Its tentacles run deep into the financial system, and if it failed, it threatened to undermine the entire system.
Vanek-Smith: What do you think of the terms of the bailout, because they’re kind of interesting?
Zandi: Well, the government got a good deal. I’m sure AIG shareholders are shell-shocked because of this. But for an $85 billion bridge loan, they got 80 percent of the company, effective control. I think it’s an incredible deal.
Vanek-Smith: Do you think there’s a chance that AIG will be able to pay the government back?
Zandi: I think that’s a long shot given that things are moving so quickly and given their own financial pressures and given the difficulties in the broader economy, you know, I wouldn’t hold out hope for that.
Vanek-Smith: What do you think of the government taking the helm of basically an insurance company? I mean there isn’t the precedent there that there was for Fannie Mae and Freddie Mac.
Zandi: No precedent. I mean this is certainly historic. Of course, this has been a historic 10 days, historic year. I’m sure nobody wanted this. The federal government doesn’t want to be an insurer. It certainly doesn’t want to be running the nation’s mortgage market either. But I think at the end of the day, it’s necessary. This is clearly the worst financial crisis we’ve experienced since the 1929 stock market crash. And there’s really no choice. I do think this is a very positive development near term. I think it’s going to stem the financial crisis. There will be other financial failures, but I think we’re coming closer to the end of this process than the beginning.
Vanek-Smith: What makes you say that you think we’re coming — I’m happy to hear it, by the way — what makes you think we’re coming to the end of this financial crisis.
Zandi: When policy makers act aggressively in a crisis, that historically has signaled the end, or at least the beginning of the end, of that crisis. And I think we can say clearly that the government policy makers are acting very boldly here. And to me, I think that’s a signal that we’re coming to the end of this process.
Vanek-Smith: Mark Zandi is chief economist at Moody’s economy.com. Mark, thanks for talking with us.
Zandi: Yeah, thanks for having me.
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