donsutherland1

This evening, CNBC reported:

American International Group is increasingly likely to succeed in getting a huge bridge loan from the federal government, allowing it to avoid bankruptcy, people close to the situation told CNBC.

Sources put the size of the loan at $85 billion to $90 billion, adding that it will be secured and include incentives for quick asset-sales by AIG.

As part of the deal, the government will get warrants for most of AIG’s equity—severely diluting existing shareholders.

In my opinion, the biggest factor that shattered the federal government's (Fed and Treasury) initial position against any federal intervention was the dramatic drying up of liquidity during overnight transactions. That situation signaled loudly that uncertainty concerning AIG, especially if AIG were to be forced into bankruptcy, posed systemic risk from which the contagion could spread rapidly across international financial markets.

It will be interesting to see if Congress seeks some input into finalizing the arrangement. After all, earlier in the day, Bloomberg.com reported, "Senate Banking Committee Chairman Christopher Dodd warned the Fed and Treasury against a rescue of AIG without checking with him first, expressing anger about past incidents where he was only informed afterwards. He also said he was skeptical that AIG merited aid while Lehman didn't."

MC.no.spin

Dodd:Fed Should Force Banks To Work With Troubled Borrowers

Talk about pot meet kettle. Dodd heads the Senate Banking Committee. Senator Dodd should look in the mirror as to who ignored the warning signs.

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The heart of human intelligence is pattern recognition ~ Ray Kurzweill

American

Dodd needs to be investigated, indicted and frog-marched back to Connecticut.

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It's Obama's fault!

donsutherland1

In agreeing to the transaction in which it provided AIG with a loan facility of up to $85 billion for 24 months, the Federal Reserve cited the potential for systemic risk for its decision. "The Board determined that, in 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 materially weaker economic performance," the Federal Reserve explained. "This loan will facilitate a process under which AIG will sell certain of its businesses in an orderly manner, with the least possible disruption to the overall economy," it added.

For those who are interested, the Federal Reserve's announcement of its transaction concerning AIG was as follows:

The Federal Reserve Board on Tuesday, with the full support of the Treasury Department, authorized the Federal Reserve Bank of New York to lend up to $85 billion to the American International Group (AIG) under section 13(3) of the Federal Reserve Act. The secured loan has terms and conditions designed to protect the interests of the U.S. government and taxpayers.

The Board determined that, in 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 materially weaker economic performance.

The purpose of this liquidity facility is to assist AIG in meeting its obligations as they come due. This loan will facilitate a process under which AIG will sell certain of its businesses in an orderly manner, with the least possible disruption to the overall economy.

The AIG facility has a 24-month term. Interest will accrue on the outstanding balance at a rate of three-month Libor plus 850 basis points. AIG will be permitted to draw up to $85 billion under the facility.

The interests of taxpayers are protected by key terms of the loan. The loan is collateralized by all the assets of AIG, and of its primary non-regulated subsidiaries. These assets include the stock of substantially all of the regulated subsidiaries. The loan is expected to be repaid from the proceeds of the sale of the firm’s assets. The U.S. government will receive a 79.9 percent equity interest in AIG and has the right to veto the payment of dividends to common and preferred shareholders.

Earlier in the day, the Federal Reserve's FOMC observed, "Strains in financial markets have increased significantly..."