Hi rodguy!
AIG is so big that its failure would paralyze world markets, as I understand it. The financial sectors are so interconnected (insurance/banks/mortgage companies/large manufacturers/pension plans/bokerage firms) that the failure of a very large insurer-investor like AIG can do real damage to a host of institutions. It has a snow ball effect and pretty soon lots of other companies are failing as well.
Things got so tight that credit was almost paralyzed, and without credit the economy simply cannot function. I think that this intervention is the last resort and is the only thing that could be done.
Everyday example on a smaller scale: Remember when Donald Trump got in financial trouble because of losses on some hotels and buildings? He’s still around, isn’t he? The reason is that the banks had loaned him so much money that they needed to make arrangements with him, rather than foreclosing and forcing him into bankruptcy. He got terms from the banks and was able to emerge from his problems without losing his shirt.
Think of AIG as Donald Trump. They have so many connections that they can’t be allowed to fail. I know it doesn’t seem fair, as a small guy on Main Street would simply go out of business, but unfortunately, this is the way of the world. The consequences of not doing anything would have been a lot worse.
I gotcha, basically too big to fail. Makes you wonder how a firm this large could go for so long with out lots of warning signs.
AIG also has tremendous assets. The feds got 79.9% of those for preferred convertible at 12% interest. That is a loan that has to be repaid. It also gets to cramdown the debt. This is a dream deal.
It is kind of like buying 80% of MSFT by loaning them a fraction of the revenue and being able to force Vista on the previous share holders. And getting first dibs on the revenue.
I’m more worried about the rest of this: 1) allowing MSH, GS, and MER to survive intact (AKA a NYC jobs program for three buggy-whip companies) and 2) approve the MER BAC merger. The big BDs need to fail. Liquidate the assets and cramdown the debt.
That is my understanding as well and the difference between Lemann (sp) and AIG