A closer look at the AIG bailout
The government is lending insurance giant AIG $85 billion in exchange for an 80 percent stake in the company. Is this a good deal for the government? Stacey Vanek-Smith talks to economist Mark Zandi.
Federal Reserve building (Marc Dorsett / iStockPhoto)
More on The Economy, Wall Street, Fed. Budget/Govt. Spending, Mergers/Acquisitions, America's Financial Crisis
TEXT OF STORY
Stacey Vanek-Smith: After bailing out Bear Stearns, Fannie Mae and Freddie Mac, the federal government seemed to be taking a tough love approach to our economic situation. It let Lehman Brothers fail. And when insurance giant American International Group asked for help, Uncle Sam balked. But this week things got really bad for AIG. It's stock price plunged to less than $5 a share. That's down about 95 percent for the year. And now the Fed has stepped in with a bailout. It will lend AIG $85 billion with an interest rate of 8.5 percent. In exchange, the government will get an 80 percent stake in AIG.
Mark Zandi is with Moody's economy.com. Mark, why did the government decide to bail out AIG?
Mark Zandi: I think they determined that AIG was just too big to fail. AIG is a very large insurer with operations all over the world. Its tentacles run deep into the financial system, and if it failed, it threatened to undermine the entire system.
Vanek-Smith: What do you think of the terms of the bailout, because they're kind of interesting?
Zandi: Well, the government got a good deal. I'm sure AIG shareholders are shell-shocked because of this. But for an $85 billion bridge loan, they got 80 percent of the company, effective control. I think it's an incredible deal.
Vanek-Smith: Do you think there's a chance that AIG will be able to pay the government back?
Zandi: I think that's a long shot given that things are moving so quickly and given their own financial pressures and given the difficulties in the broader economy, you know, I wouldn't hold out hope for that.
Vanek-Smith: What do you think of the government taking the helm of basically an insurance company? I mean there isn't the precedent there that there was for Fannie Mae and Freddie Mac.
Zandi: No precedent. I mean this is certainly historic. Of course, this has been a historic 10 days, historic year. I'm sure nobody wanted this. The federal government doesn't want to be an insurer. It certainly doesn't want to be running the nation's mortgage market either. But I think at the end of the day, it's necessary. This is clearly the worst financial crisis we've experienced since the 1929 stock market crash. And there's really no choice. I do think this is a very positive development near term. I think it's going to stem the financial crisis. There will be other financial failures, but I think we're coming closer to the end of this process than the beginning.
Vanek-Smith: What makes you say that you think we're coming -- I'm happy to hear it, by the way -- what makes you think we're coming to the end of this financial crisis.
Zandi: When policy makers act aggressively in a crisis, that historically has signaled the end, or at least the beginning of the end, of that crisis. And I think we can say clearly that the government policy makers are acting very boldly here. And to me, I think that's a signal that we're coming to the end of this process.
Vanek-Smith: Mark Zandi is chief economist at Moody's economy.com. Mark, thanks for talking with us.
Zandi: Yeah, thanks for having me.
Comments
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10/08/2008
I just want to make a comment to someone about this AIG bail out and the luxury retreat. Does anyone feel like a sucker? I don't have a magic solution, and I'm sure the loan is necessary at this point, but as its now clear, these same greedy people are going to continue down this road of destruction...but see to these people it does't matter, they can satisfy there lust for the high life at the expense of the rest of us. The greater good?, Whats that? I feel like a sucker. Don't you feel like a sucker? Or maybe I'm starting to feel nut. How long will we stand for this?
From New Orleans, LA, 09/18/2008
I have heard the interest rate on the loan to AIG referred to (on this station) as "loan shark rates." 8.5%? 11%? These are not loan shark rates. Ask any individual who is in personal financial crisis approaching bankruptcy. Their interest rates are more along the lines of 19%, 23% and above.
From Seattle, WA, 09/17/2008
Mr. Zandi says the Federal Government's takeover of AIG is a great deal. In the next breath, he says he doubts that AIG will ever be able to repay the $85B loan it is receiving from the tax payers. How can both these statements be true?
09/17/2008
It seems our country is based on free market capitalism when corporations are profiting and turns to socialism when the corporations fail!
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