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It's Morning Edition from NPR News. Good morning, I'm Steve Inskeep.
RENEE MONTAGNE, host:
And I'm Renee Montagne. It may be the understatement of Wall Street's rolling crisis: "These are challenging times." It's how the Treasury secretary began his announcement that the Federal Reserve will bail out one of the world's biggest insurance companies, American International Group. For the central bank, it is an unprecedented intervention in private business. In an historic move, the government will control the giant company after lending it $85 billion. The rescue of AIG is a reversal for the Fed which had implied it would not intervene directly. In the end, AIG was, as we've now come to find out, too big to fail. NPR's John Ydstie joins us to tell us how all this came about. Good morning, John.
JOHN YDSTIE: Good morning, Renee.
MONTAGNE: Now, AIG is the fifth huge financial company in less than two weeks to teeter on the brink. Why - when the last of these, Lehman, was allowed to die - is the government saving AIG?
YDSTIE: Well, it's because the possible collapse of AIG was viewed as a much greater threat to the financial system than the collapse of Lehman. Here's what a statement from the Federal Reserve Board announcing the loan to AIG said. It said, "In the current circumstances, a disorderly failure of AIG could add to already significant levels of financial market fragility and lead to substantially higher borrowing costs, reduced household wealth, and a materially weaker economic performance." In fact, estimates were that losses in the financial industry could have totaled $185 billion if AIG collapsed.
The government didn't want to face that outcome, so they decided to make 85 billion available to AIG and to keep it in business and allow it to liquidate its assets in a more controlled manner. In addition, Fed staff members who briefed reporters last night contrasted AIG with Lehman Brothers by saying AIG is a complicated firm with operations in a lot of places, and it has insurance products, some of which are not protected by state regulators.
MONTAGNE: But - and then this bailout, though, is it putting taxpayers on the hook?
YDSTIE: Well, the Fed and the Treasury, which approved the plan, say taxpayers will be very well-protected. Because in exchange for the $85 billion loan, AIG is giving the government an Equity Participation Note, warrants for stock equal to virtually 80 percent of the stock of the company. So the government could take an equity stake in the company worth that amount at any time. And Fed staff members pointed out that this included stock in regulated insurance subsidiaries of AIG that are profitable and money-making concerns right now, not just the troubled parent company.
The plan is for the company to stabilize itself with this $85 billion loan, go about the business of selling off its assets in an orderly fashion, and then use the proceeds to repay the government at the end of two years. What the company would look like at that time or whether the company survives remains to be seen.
MONTAGNE: Well, at this point in time, is the government taking control of AIG in the way that it took control of Fannie Mae and Freddie Mac?
YDSTIE: No. As you've suggested, it's not technically a conservatorship, which is what happened with Fannie and Freddie. But it is virtual control. The government will have a veto power over any major action of the company. The government could veto the sale of a major asset, for instance, if it didn't feel the price was right. Or it could veto the company paying a dividend to shareholders. In addition, the senior management of the company will be replaced. The new CEO will be Edward Liddy, a former head of Allstate Insurance.
Current shareholders who've seen the price of their shares go down 95 percent in the past year and 80 percent in the past week will have their value further diluted as the government exercises these claims on equity. If, however, AIG survived and thrived, the government could actually make money on the deal, though I think that would be considered a highly optimistic view at this time.
MONTAGNE: Well, just before I leave you, let's take a brief look back at how AIG got into such trouble.
YDSTIE: Well, AIG got in trouble because it was selling insurance to investors who'd bought mortgaged-back securities to protect them from those securities going bad. And of course with all the millions of foreclosures already in the U.S., the company had to pay off billions in insurance. And mortgages continue to go bad, so losses continue to mount.
MONTAGNE: Well, we have a few seconds left. Why don't I ask you quickly, if this government bailout was because of concern about the economy, how destructive could it have been if AIG had died?
YDSTIE: Well, at some point AIG couldn't cover the payoffs of this insurance. And there's an interconnected web of markets - firms in this market, so a lot of people could have got in trouble. Also, money funds had invested a lot in AIG, and they're viewed as very safe investments. If they'd started to go bad, it could've really injured confidence in the economy.
MONTAGNE: John, thanks very much.
YDSTIE: You're welcome, Renee.
MONTAGNE: NPR's John Ydstie.
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