Slate points out this morning: "At first the government seemed intent on making sure AIG paid high interest rates for the taxpayer funds, but now those dreams seem to be over as officials have concluded the insurance company is so intertwined with other parts of the financial sector that its collapse would be much more expensive in the long run." (Which, by the way, is also why we need to save the auto industry.) From the New York Times:
The federal government agreed Sunday night to provide an additional $30 billion in taxpayer money to the American International Group and loosen the terms of its huge loan to the insurer, which is preparing to report a $62 billion loss on Monday, the biggest quarterly loss in history, people involved in the discussions said.
The intervention would be the fourth time that the United States has had to step in to help A.I.G., the giant insurer, avert bankruptcy. The government already owns nearly 80 percent of the insurer’s holding company as a result of the earlier interventions, which included a $60 billion loan, a $40 billion purchase of preferred shares and $50 billion to soak up the company’s toxic assets.
Federal officials, who worked feverishly over the weekend to complete the restructuring, said they thought they had no choice but to prop up A.I.G., because its business and trading activities are so intricately woven through the world’s banking system.
But the deal also presents more financial risks to taxpayers at a time when the public and Congress have been sharply questioning the wisdom of risking federal money to bail out private enterprises.
The government’s commitment to A.I.G. far eclipses its rescue of other financial companies, including Citigroup, which has received $50 billion in rescue financing, and Bank of America, with $45 billion.
Credit rating agencies like Moody’s, Fitch Ratings and Standard & Poor’s had been preparing to sharply downgrade A.I.G.’s credit ratings on Monday because of the record quarterly loss. That would have forced A.I.G. to default on its debt, threatening to set off shock waves throughout the financial system as banks holding A.I.G. derivatives contracts would probably demand cash collateral and other payments from A.I.G. during a time when it has little to spare.
The major credit-rating agencies were briefed on the pending deal between A.I.G. and the government, the people involved in the talks said, and they have committed not to downgrade the company’s debt as a result.
Under the deal, the government will commit $30 billion in cash to A.I.G. from the Troubled Asset Relief Program, should the company need it, according to the people involved in the talks. A.I.G. is not expected to draw down the money immediately, but the government’s commitment was enough to satisfy the rating agencies.