In an extraordinary turn, the Federal Reserve was close to a deal Tuesday night to take a nearly 80 percent stake in the troubled giant insurance company, the American International Group, in exchange for an $85 billion loan, according to people briefed on the negotiations.

All of A.I.G.’s assets would be pledged to secure the loan, these people said, and in return, the Fed would receive warrants that could be exchanged for an ownership stake. Stock of existing shareholders would be diluted, but not wiped out.

Edward Harrison says (in combination with not lowering rates): this is exactly what a central bank should do. Weigh in on his blog.

Update: Mish isn't particularly happy.


Aristotle at 21:53 2008-09-16 said:
To me this deal just proves that Bernanke & Co. are profoundly stupid.

Any lien on AIG's assets is going to be subordinate to all existing liens on their assets. The option to convert the loan to "ownership interest" is also subject to all of the creditors' claims, secured and unsecured, on the assets of the parent and all of the subsidiaries.

The Fed would have been far better off letting AIG file a Chapter 11 and making an $85 Billion DIP loan which would have been first priority for repayment and first priority on all of AIG's ownership interests in its subsidiaries.

Obama, crank up the commercials complaining about a bail out of the rich, like old Hank, the former President/CEO of AIG. Permalink

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