Wednesday, September 17, 2008

Fed provides $85 billion bailout for AIG

Here there be dragons - or, poof! There goes your retirement...

Digsby Blogs: "With time running out after A.I.G. failed to get a bank loan to avoid bankruptcy, Treasury Secretary Henry M. Paulson Jr. and the Fed chairman, Ben S. Bernanke, convened a meeting with House and Senate leaders on Capitol Hill about 6:30 p.m. Tuesday to explain the rescue plan. They emerged just after 7:30 p.m. with Mr. Paulson and Mr. Bernanke looking grim, but with top lawmakers initially expressing support for the plan. But the bailout is likely to prove controversial, because it effectively puts taxpayer money at risk while protecting bad investments made by A.I.G. and other institutions it does business with."

Wall Street Journal Real Time Economics Blogs: "In lending up to $85 billion at a hefty interest rate –- LIBOR plus 8.5 percentage points –- to insurer AIG, the Federal Reserve once again relied on its rarely used legal authority under Section 13(3) of the Federal Reserve Act to lend to “any individual, partnership or corporation” in “unusual and exigent circumstance” provided the borrower “is unable to secure adequate credit accommodations from other banking institutions.”

Until its loan to then-ailing investment bank Bear Stearns in March, the Fed hadn’t used that lending authority since the Great Depression, lending exclusively to commercial banks and other deposit-taking institutions. The relied on a different section of the Federal Reserve Act to offer loans – which weren’t actually made – to government-sponsored mortgage giants Fannie Mae and Freddie Mac.

Where did that extraordinary clause come from? The Minneapolis Fed’s “Region” magazine offers a thumbnail history (”
The History of a Powerful Paragraph”) at and points to a longer version of the story that it published in 2002:“This isn’t simply a story about extraordinary measures taken long ago that have no meaning for today. Rather, it’s a story about the long-standing debate about the nature and purpose of Federal Reserve banks,” it says."

Money Central: "American International Group (AIG, news, msgs) was perilously close to bankruptcy over the past few days, but the government is once again stepping in.

This time the Fed is getting something in return: The Fed will give AIG an $85 billion bridge loan in exchange for warrants to purchase stock equating to roughly 80% of the company."

Wall Street Journal: "The U.S. announced an emergency rescue of AIG with an $85 billion bridge loan, signaling the intensity of concerns about the danger a collapse could pose to the financial system."

MSN Money: Poof! There go American's Dreams: "As one major financial institution after another succumbs to crushing losses this year, it is mourning in America for the hopes of average working people who believed in the myth of stock ownership as a sure path to a better life now and a safe retirement later.
It may sound like a gross exaggeration to say that the dreams of Main Street are dying on Wall Street this week, but it is a fair interpretation of recent events. For the capital that is required to fund businesses, schools, streets, farms, vacations, homes and cars is quite literally evaporating like dew at the start of a summer day with the untimely death of every bank, brokerage and insurance company."

Huge wave of Panic Hits Financial Market: "A spectacular loss of confidence in the safety of financial assets is creating an unprecedented event that strategists are calling "a huge wave of panic."

Three-month U.S. T-bills are yielding 0.0304%, down from 1.50% on Monday as investors flock to the safest short-term assets.

Leitao called the yield in T-bills "absolutely absurd". It means a $1,000,000 investment will pay $1,000,076 at maturity - far below the rate of inflation."

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