Too big to fail: AIG gets another $30 billion

Barack Obama says some jobs only government can do.  That apparently includes throwing money away on bad investments, even with the Dow Jones showing each day that plenty of people can do that all by themselves.  After a $40 billion buyout and a potential $150 billion line of credit failed to rescue insurance giant AIG, Treasury Secretary Tim Geithner added another $30 billion to the kitty:

American International Group will gain access to $30 billion more in taxpayer money as part of another restructuring of its federal bailout, the company announced this morning. It marks the fourth time the government has stepped in to help the ailing insurance giant since September.

The reworked plan is aimed in part at helping AIG avert a potential disaster as the company on Monday announced the biggest quarterly corporate loss in U.S. history — a staggering $61.7 billion for the fourth quarter of 2008, due largely to the continued deterioration of credit markets and charges related to AIG’s restructuring. The figure brought the company’s total net loss for 2008 to nearly $100 billion. The government’s latest reworking of the rescue package is rooted in the idea that a collapse of AIG, which has ties to nearly every major financial institution in the world, would endanger the entire economy. Credit-rating agencies would have likely downgraded AIG in the face of such staggering losses, burying the company in a wave of new debt and possibly sending it into bankruptcy protection.

“The steps announced today provide tangible evidence of the U.S. government’s commitment to the orderly restructuring of AIG over time in the face of continuing market dislocations and economic deterioration,” the Federal Reserve said in a statement.

But the commitment of new funds from the Treasury Department’s Troubled Assets Relief Program is meant to demonstrate that AIG can make good on its public and private debts and return to viability.

Why did they need a second infusion?  AIG lost another $61.7 billion in the last quarter, and without it, their credit would have gotten downgraded.  That would have increased the cost of lending to AIG, which would have pushed them over into bankruptcy.  Thanks to their insuring of assets created by government intervention, Geithner and Obama felt they had to intervene more to alleviate the effects of the earlier interference.

The structure of the deal takes a lot of pressure off of AIG in relation to the government.  It had to surrender equity stakes in two of its most stable businesses and pledge to provide divident payments from their operations, but in return, they got rid of some onerous dividend requirements from the original bailout. They can take some of their operations public to generate more cash, and the Washington Post reports that they may recombine some operations and relaunch under a new name — probably with new leadership.

Did the move work?  For today, yes.  Fitch kept AIG’s ratings high, as it became clear that the Obama administration considers AIG Too Big To Fail.  Unfortunately, the increased government stake also means increased real risk for taxpayers, although at this point, that’s almost irrelevant.  Geithner’s actions has all but guaranteed AIG, so practically speaking, we’re on the hook for the whole company regardless of how much money we pour into it or keep out of it.

Can we expect increased transparency in return for all of this bailout cash to AIG, which now amounts to ten percent of the original TARP allocation?  Michelle says don’t count on it.  So far, bailouts look like a failed policy, but like any bad gambler, the statists see little choice but to gamble bigger just to hope to get back to break-even.  Like most gamblers, they will almost certainly fail.

Blowback