Tuesday, September 16, 2008

Fed dances with AIG

from www.federalreserve.gov

Press Release

Release Date: September 16, 2008
For release at 9:00 p.m. EDT

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.

2008 Other Announcements

Ok so they backstopped AIG at a very high interest rate .. LIBOR + 8.5% .. AIG should be able to borrow... should be... from the open market knowing that the Fed/Treasury have 85B line of credit to AIG. If AIG takes the loan - Fed/T expects to be repaid by selling AIG assets. All in all its an OK move... I am still concerned about what happens if AIG's liabilities exceed their assets. I would HOPE that the Fed/T loan would be considered most senior. Also worrying is the Fed is using up a substantial amount of its 800B balance sheet quickly. The Treasury is backstopping the Fed. Eventually we'll be asking questions about the Treasury's balance sheet. Long way from that yet... Now back to your regular programming... WaMu, Wachovia ... Is the MER transaction gonna happen? What will happen to the two remaining Investment Banks - Goldman and Morgan? Also the market cap of the largest US bank by "assets" - Citigroup has fallen dramatically - its now 3rd or 4th I think in terms of its market value... Ouch.. So what happens to Citi? These are all questions that seem to be playing out with surpising speed right here, right now in these historic days. I will never forget Sept 15 yesterday - the day when LEH and MER both got taken out.