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.
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The real problem I have is that the expected repayment of the loan is to come from the sale of their assets. How can you sell the very assets that control the terms of the loan? That is selling your collateral to pay your principal. Its like buying a Ferrari with credit and selling it to pay for the car itself. You cannot do it because the car itself is the collateral and the title has a lien preventing sale. Unless the GOV steps in and starts actively selling the assets of AIG (Which they (gov) lent money too (AIG), not bought out the company) our money has been given away, with a slim chance of what? Turning a profit? keeping jobs? they managed the company into the crapper when they had a hell of a lot more than 85 mil, think this will be better?
