AIG Bailout Revised to $150 Billion

The Federal Reserve's $85 billion bail-out of insurance giant AIG has been revised. The Treasury Department will purchase $40 billion in preferred shares as part of its Capital Repurchase Plan. The Federal Reserve will purchase $52.5 billion in mortgage-backed securities. The funds will allow AIG to retire many credit default swaps, freeing it up to lend more.

Under the prior $85 billion loan, the government received 79.9% of AIG's equity already. It also gets to replace management (which it already has) and has veto power over all important decisions, including asset sales and payment of dividends.

The plan was to break up AIG and sell off the pieces to repay the loan. However, the stock market plunge in October made that impossible, as potential buyers needed any excess cash for their own balance sheets. (Source: AP, Government Provides Record Aid Package to AIG, November 11, 2008)

What It Means to You

The world has changed since the September 18 AIG bailout, which occurred one day after U.S. Treasury Secretary Henry Paulson said no to further Wall Street bailouts, allowing Lehman Brothers to go bankrupt. It came one week after the government took over Fannie Mae and Freddie Mac and six months after the Fed bailed out Bear Stearns. At that time we all thought an $85 billion bailout was mind-boggling. That was before the $700 billion bank bailout, and other measures taken by Federal Reserve Chairman Ben Bernanke to bolster the economy. Expect more bailouts and stimulus packages until this economy stabilizes.

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