Fed Considering Lending to AIG (Update: Or Treasury Conservatorship)

I guess someone at the Fed figured that letting the financial system blow up on its watch was not such a hot idea. But as far as the Fed’s purview is concerned, lending to AIG is just about as far afield as lending to General Motors.

What is surprising (at least based on this report) is that the Fed appears to be going solo, AIG is a global firm with considerable operations in Asia. Having other central banks or private firms participate in the package would improve appearances, as well as spread risks more equitably (of course, rounding up enough of the usual suspects to go along is another matter….)

From Bloomberg:

The Federal Reserve is considering extending a “loan package” to American International Group Inc., the insurer facing a cash shortage, according to a person familiar with the negotiations.

The stance by federal regulators is a reversal from a position they held as late as last night, and people with knowledge of the talks are “cautiously optimistic,” said the person, who declined to be identified because negotiations are confidential.

The person gave no timetable for reaching an agreement or estimate on how much money New York-based AIG would need….

“To the extent that a bridge loan or some type of liquidity provision allows AIG time to sell some assets on its balance sheet and time to maintain it’s investment-grade rating at A or higher, I think it’s a good move,” Bill Gross, co-chief investment officer of Newport Beach, California-based Pacific Investment Management Co. said …

“The Fed doesn’t have to necessarily put its own capital at risk,” Gross said. “We’ll see what the plan says, but I think it’s definitely a necessary step.”

Goldman Sachs Group Inc. and JPMorgan Chase & Co. were working with AIG to determine how much the insurer needs, said two people familiar with the talks yesterday. Goldman has helped the Fed appreciate the effects that an AIG collapse would have on financial institutions, the first person said….

Senate Banking Committee Chairman Christopher Dodd warned the Fed and Treasury against a rescue of AIG without checking with him first, expressing anger about past incidents where he was only informed afterwards. He also said he was skeptical that AIG merited aid while Lehman didn’t.

“Tell me why this situation is different from Lehman,” he said today. “I’m willing to listen.”

I was shocked at the lack of Congressional pushback after the Bear bailout. Clearly the mood has changed.

Update 5:10 PM, Bloomberg says conservatorship is under consideration:

The U.S. Treasury is considering taking over American International Group Inc. under a conservatorship as one option to address the insurer’s crisis, according to two people briefed on the discussions.

Executives from AIG, bankers and Treasury and Federal Reserve officials are meeting today on the company’s situation at the New York Fed. A number of options are under being discussed to fill a shortfall of $75 billion to $100 billion in funding, one of the people said. The talks are continuing, he said.

Goldman Sachs Group Inc. and JPMorgan Chase & Co., which have been leading efforts to find a private-sector solution, informed the Fed that such an effort would be difficult, the person said. Under another option, the Fed would extend a loan to New York-based AIG, according to a person informed of the matter.

Treasury Secretary Henry Paulson earlier this month seized Fannie Mae and Freddie Mac and put them into conservatorships, where officials will oversee the firms and aim to protect their assets.

This actually could turn out to be attractive financially. Don’t throw brickbats. If this is indeed a holding company liquidity crisis, there may be considerable value in the subs. I heard second-hand the views from some people who know AIG’s Asian operations (the company started in China) and say is has considerable value.

Bur would the business get run into the ground in a conservatorship? It would be difficult to keep good people in that sort of regime.

Unfortunately, I think whichever route gets chosen will be driven by political considerations rather than what arrangement makes most sense.


Originally published at Naked Capitalism and reproduced here with the author’s permission.

One Response to "Fed Considering Lending to AIG (Update: Or Treasury Conservatorship)"

  1. williambanzai7   September 16, 2008 at 6:58 pm

    It may be the lesser of two evils to bail AIG out. But if it happens, it should only happen with lots of strings attached, including a change of management, wiping out equity, compensation freeze etc…A company so critical for the survival of the global financial system is run by a bunch of morons who have been sipping lattes during the build up of the biggest crisis in since the great depression. Really, what evasive measures did they take? None! The shareholders that allowed this management team to lounge around for months need to be punished if taxpayer money is availed.