AIG has had a very tough year. Rocked by the subprime crisis, the company has lost more than $18 billion in the past nine months and has seen its stock price fall more than 91% so far this year. It already raised $20 billion in fresh capital earlier this year.
Its troubles stem from its sales of credit default swaps and from its subprime mortgage-backed securities holdings.
AIG has written down the value of the credit default swaps by $14.7 billion, pretax, in the first two quarters of this year, and has had to write down the value of its mortgage-backed securities as the housing market soured. The insurer could be forced to immediately come up with $18 billion to support its credit swap business if its ratings fall by as little as one notch.
This year's results have also included $12.2 billion in pretax writedowns, primarily because of "severe, rapid declines" in certain mortgage-backed securities and other investments.
Acting to avert a possible financial crisis worldwide, the Federal Reserve reversed course on Tuesday and agreed to an $85 billion bailout that would give the government an ownership stake in the troubled insurance giant American International Group, according to people briefed on the negotiations.
The decision, only two weeks after the Treasury took over the quasigovernment mortgage finance companies Fannie Mae and Freddie Mac, is the most radical intervention in private business in the central bank’s history.
With time running out after AIG failed to get a bank loan to avoid bankruptcy, Treasury Secterary 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 top lawmakers generally 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 AIG and other institutions does business with.
What frightened Fed and Treasury officials was not simply the prospect of another giant corporate bankruptcy, but AIG’s its role as an enormous provider of financial insurance, which effectively requires it cover losses suffered by other institutions in the instance of defaults of securities that they have purchased. That means AIG is potentially on the hook for securities that were once considered safe.
If AIG had collapsed — and been unable to pay all of its insurance claims — institutional investors around the world would have been instantly forced to reappraise the value of billions of dollars in debt securities, which in turn would have reduced their own capital and the value of their own debt.
With an ear to the ground, waiting to see what would happen with AIG, Bloomberg.com reports that Asian stocks rose, helping the regional benchmark index rebound from the steepest plunge in eight months, after the Federal Reserve invoked emergency powers to save American International Group Inc. from collapse.
Read the New York Times article about the Fed takeover of AIG here.
Read the CNN.com article about the AIG bailout here.
Read the Bloomberg.com article about the worldwide reaction to the AIG bailout here.
plez sez: a band-aid was applied to another fragile house of cards on tuesday evening. how long will it be before there are no more band-aids for the rickety house of cards from XYZ financial firm (like lehman brothers)? plezWorld gets the strange feeling that the selective "saving" of these private firms that have our entire financial market by the shorthairs is only extending the day when the whole house of cards tumbles into the gutter of wall street, causing a catastrophic collapse of all world markets.
i'm no financial guru, but to my uninitiated eye, this AIG bailout appears to be the third or fourth "rescue" of financial institutions in last couple of weeks (Freddie Mac, Fannie Mae, Merril Lynch, Lehman Brothers, etc.). all of these companies fell victim to the slow bullet that was sub-prime mortgages that were given away like free coupons over the past decade... basically, the chickens are coming home to roost for the terribly bad decisions on the part of the institutions who are entrusted with maintaining the integrity of our economy. tuesday's bailout feels like warm jell-o being poured into a sieve, a lot is still oozing through the holes. how many more hits can my dwindling 401(k) and IRA take?
the millions of homeowners who are no longer in their homes have paid for this mistake. my subdivision is still littered with the overpriced unaffordable homes that were purchased and subsequently abandoned by overzealous speculators and equity-poor saps who signed the mortgage papers. when are the financial institutions that promoted this bad practice going to pay for their gross error? the economy is already in the crapper, these band-aids aren't making things any better, i would opine that these massive bailouts are only prolonging the inevitable "correction" that our economy so desperately needs. aren't economic downturns supposed to hurt? when are the folk on wall street going to feel the REAL PAIN that the rest of us are feeling?
and guess what? plezWorld hasn't been making a bunch of money this year while launching a new company in this very tenuous economy. WHO do i talk to about my bailout? for one thousandth of one percent (0.00001) of what the fed gave to AIG (less than a million dollars), plezWorld can be bailed out of my economic woes!
i can argue that my economic collapse will have dire consequences for my neighborhood and community... get back to me when ya'll have cut my check!
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