Dollars and Jens
Wednesday, September 17, 2008
From the Fed announcement on the AIG bailout:
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.I'm not sure "bailout" captures the flavor of this nearly as well as "non-bankruptcy bankruptcy". The money costs a lot, and, if AIG doesn't end up having to liquidate, the shareholders are diluted to the sky. If shareholders are wiped out, bond holders aren't probably getting a whole lot out of this that doesn't amount to a little more order in the way things are wound down. If the market responds in the next couple days as though it believes this alleviates all worries about AIG's existence as a going concern, then AIG will continue, mostly as it was, but with heavy Fed ownership. If AIG is forced to use this facility, though, you're probably going to be watching a gradual liquidation.
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.
Update: Just to note: When I first heard that the Fed was lending a bunch of money to AIG, I was disappointed. When I read these terms, I wanted to hug Bernanke.