Why AIG is getting more bailout money
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Since the original loan package was announced back in mid-September, AIG’s gotten another $40 billion package from Treasury and the Fed.
So far the cost of the whole thing has almost doubled.
Marketplace’s Steve Henn’s been following the story for us.
Steve Henn: Hey, how are you?
Ryssdal: I’m good. So, we’ll get to the whys of this thing in a minute, but let’s talk dollar amounts. What’s this new bailout going to look like?
Henn: Well, the biggest change is that the federal government is going to take some of the financial bailout bill money, the TARP [Troubled Asset Relief Program] money, $40 billion, and buy an equity stake in AIG. That will let the company borrow less money from the Feds. And the other big piece of this is that the Feds have decided to cut the interest rate charges to AIG by at least 5 percentage points, which is really important to them. It will improve their cash flow and some within the company were saying that the interest payments on the original bailout package were so tough, that they were pushing the company toward insolvency.
Ryssdal: All right, that’s the dollar amount. Get me to the why. Why are we at this point again where we have to bailout AIG?
Henn: Well, there are really two reasons. The first is that the interest rate that AIG was paying, as I said, was high. So high that many within the company were arguing that they simply couldn’t afford to pay it. The second reason is that, you know, the original AIG bailout deal was hastily arranged to provide the company with the immediate capital it needed to avoid defaulting on billions of dollars in credit default swaps. And those are basically insurance contracts it sold to investors. Where AIG was insuring, you know, to make investors whole if their investments and things like collateralized debt obligations on residential mortgages went bad. The problem with the first bailout was, while it gave AIG the cash it needed in that moment, it didn’t really provide the company with a path to unwind some of these contracts. And so, AIG is still on the hook for billions of dollars in insurance contracts on investments that really look shaky.
Ryssdal: So how is this new package, then, going to help that problem?
Henn: So, AIG got into trouble in insuring the value of billions of dollars in investments that went bad. And the new plan to save the company is for the federal government to help it buy up investments that AIG was insuring and place them in a new company. The theory is, at least, that AIG will be able to cancel these insurance contracts, if they own the investments they were actually insuring.
Ryssdal: And what are people saying about whether or not this is going to work, Steve?
Henn: Well, there’s a lot of question about that. I mean, one of the obvious questions is if someone’s insuring to make you whole, if your investment goes bad, why would you sell it to them at a discount? Which is one of the aspects of this deal. AIG and the government are going to pay about $0.50 on the dollar for the investments they’re trying to buy. You know the answer to that is that if you’re insured by a company that might go bankrupt, maybe $0.50 on the dollar looks pretty good.
Ryssdal: And the bailout continues. Marketplace’s Steve Henn in Washington, thanks, Steve.
Henn: Thank you.
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