RENEE MONTAGNE, host:

Good morning, this is Morning Edition from NPR News. I'm Renee Montagne.

STEVE INSKEEP, host:

And I'm Steve Inskeep. Just a few days ago, the U.S. government was sending a signal. It would not bail out everybody on Wall Street. And Lehman Brothers went into bankruptcy as a result. Last night, the crisis forced the government to send a different signal with a different firm. It provided 85 billion dollars in credit to the giant insurance company AIG. The government also effectively took control of that company. To find out why and what comes next, we turn to David Wessel. He is economics editor of The Wall Street Journal and a person without whose regular explanations we probably would have lost it long ago. David, good morning once again.

Mr. DAVID WESSEL (Economics Editor, The Wall Street Journal): Good morning, Steve.

INSKEEP: And he's with us live. What exactly happened last night?

Mr. WESSEL: Well, apparently yesterday afternoon Treasury Secretary Hank Paulson and Fed Chairman Ben Bernanke and New York Fed President Tim Geithner decided that all their efforts to find a private rescuer for AIG, the big insurance company, were failing. And as a result, as you said, they decided that it was - this is one they couldn't say no to. They're lending the company - the Fed is lending the company 85 billion dollars. They fired the CEO. The company will be sold off in pieces, or that's the plan, and the government has the rights to take 80 percent of the company as a result. It's almost like French-style capitalism here in the U.S.

INSKEEP: Well, let's understand that. Is it fair to say that this company has been nationalized?

Mr. WESSEL: I think - it's certainly been seized by the government. I'm not sure what the technical definition of nationalized is, but it's pretty darn close.

INSKEEP: But is the government going into the insurance business or just trying to get rid of this company to private buyers when possible?

Mr. WESSEL: I am certain that the government does not want to be running any more big financial institutions. And in fact this creates quite a challenge for the government which is now in charge of Fannie Mae and Freddie Mac, in charge of a big insurance company, and who knows what companies will be lining up outside Ben Bernanke's door today. Insurance is a particularly weird business. It's not federally regulated, so they're not really set up for it. So, I think that that underscores that they must have been so concerned about the effect on the economy if AIG had gone under suddenly that they had to take these extraordinary measures.

INSKEEP: And just to understand AIG's trouble, they were insuring these mortgage-backed securities that turned out to be bad in such huge numbers, so they had huge losses. That's the basic problem, right?

Mr. WESSEL: Basically. And then the markets lost confidence and the rating agencies marked them down, and so they were unable to borrow the money they needed or raise new capital to keep going. I do think it's important to note that people who have AIG insurance coverage are OK, that there is a system set up for protecting policyholders overseen by the state of New York. So, those parts of the businesses seem pretty solid. Maybe they'll be sold soon.

INSKEEP: David Wessel of The Wall Street Journal, why do I feel like as a citizen, as an observer here, that the U.S. government keeps drawing a line in the sand and then crossing it. Wasn't it just Monday that Henry Paulson, the Treasury secretary, was saying he didn't want to do this sort of thing?

Mr. WESSEL: Yes. And in fact on Monday the Treasury secretary told us at the White House that the talks going on with AIG in New York were not involving a Fed loan. Now it turns out that those talks in New York weren't, but by the end of the day yesterday there were talks in Washington that were. I know that they wanted to draw a line in the sand. They felt they couldn't. That tells you how worried they were about what would happen if AIG went under.

INSKEEP: Well, is the government going to have to lend to even more companies?

Mr. WESSEL: Well, that's the big question. I mean, this thing is a spreading stain on the financial system. There are - the stock of big investment bank, Morgan Stanley was weak yesterday. As you know Ford and General Motors have asked for federal aid. It's hard to say never, given the most extraordinary things that we've seen in the last few days, each one of which would have been a six month crisis if it had happened last year.

INSKEEP: Well, if they're doing these amazing things, why didn't the Fed do the basic thing that they normally do in economic trouble which is cut interest rates, which they had an opportunity to do yesterday?

Mr. WESSEL: That's a very good question. They concluded that cutting the short-term interest rate they control would not have relieved the strains in the financial system. That when you have a system where the arteries are as clogged as the financial arteries of the U.S. are right now, giving someone a little bit of blood thinner may not be enough, and you have to go in and do the bypass operation. And so I think that they decided that they had to do this targeted action to save this institution, and this institution would not have been helped by lower interest rates. And so they've decided to keep that ammunition for another day.

INSKEEP: David, recognizing that this is a government that can print money and has trillions of dollars, is there some limit where the government says we just don't have any more money to lend?

Mr. WESSEL: I guess there is, but I don't think we're there yet. The Fed does have a big balance sheet, a lot of it it's been used up. But as you say, the government has - the Fed has the ability to print money, and so far the U.S. government has pretty much unlimited amounts of money it can borrow. Let's remember that there - this might not be a loser for the government, they might actually be able to make money on this AIG thing. But you have to worry about that. The thing is that the cost of doing nothing is so great that they had decided that it was worth taking the risk of borrowing so much.

INSKEEP: You said very briefly they can make money on this AIG thing?

Mr. WESSEL: Yes. When the pieces are sold off, they will presumably get 80 percent of the profits, the same thing with Fannie and Freddie. It's not clear that in the end that they won't be able to make some money on this portfolio. When the U.S. lent money to Mexico in the early '90s when they were in trouble, they got paid back with interest. AIG is paying interest on this loan at 8.5 percent above the rate that banks charge each other for money. That's a pretty good premium. It's kind of like a subprime loan made by your government.

INSKEEP: David, thanks very much.

Mr. WESSEL: A pleasure.

INSKEEP: He's with the Wall Street Journal.

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