- The government announced Monday it will provide AIG more funds and renegotiate existing loan terms.
- The new deal is the government's fourth attempt to resuscitate AIG and coincides with AIG announcing a Q4 2008 net loss of $61.7 billion.
- This deal underscores the government's commitment to stabilize AIG, which comforted AIG's shareholders Monday. But the move also hints at potential systemic risks.
- Again, AIG is being treated in an inconsistent way from other imperiled financial companies—leaving markets on shaky ground.
(Editor's Note: MarketMinder does NOT recommend individual securities; the below is simply an example of a broader theme we wish to highlight.)
On Monday, chaos brewed as snowstorms battered the Northeast and battered AIG received another federal bailout. The snow will one day melt (Spring's around the corner), but the less natural relationship between insurance giant AIG and the US government will no doubt persist for some time.
The government announced Monday it will provide AIG more funds and renegotiate existing loan terms. The Treasury will make available to AIG an additional $30 billion as needed from the Troubled Asset Relief Program (TARP) and convert its current $40 billion of preferred shares into essentially common stock. The Fed will lower the interest rate on the $60 billion credit facility extended to AIG and, along with the Federal Reserve Bank of New York, plans to invest up to $26 billion in preferred interest and make $8.5 billion in new loans to benefit AIG's life insurance subsidiaries.
The new deal is the government's fourth attempt to resuscitate AIG and coincides with AIG wheezing forth a Q4 2008 net loss of $61.7 billion. This deal underscores the government's commitment to stabilize AIG, which could comfort AIG's policyholders, business partners, and shareholders. But the seemingly loose way TARP funds are doled out adds to the uncertainty—TARP was never intended to bail out troubled insurers, and now 10% of the funds are earmarked for AIG alone. We've noted the government's inconsistent messages as a source of market angst, and here is another example.
There's no definitive end in sight to AIG's problems. AIG's laborious attempts to restructure and sell various business units are made more difficult by forces outside its control, like credit ratings and economic conditions. The size of its Q4 loss is possibly a sign much more government assurance (i.e., aid) is needed to keep AIG afloat and to attract buyers. The new commitments to aiding AIG could entrench the government for years to come and add new layers of opacity—which could produce unintentional, market-distorting consequences. It seems investors agree, as global markets again touched lows.
If the government has an exit strategy, these "bridge" loans could help sort out AIG's mess and shrink the losses in the broader financial sector without additional collateral damage to the economy. At this point, however, the government still seems to be plugging leaks as they spring, leaving markets on shaky ground and searching for consistency. But while government fumbling can raze markets in the short term by heightening fear and uncertainty, over the longer run, global capital markets' fate—and an eventual economic recovery—does not hinge upon AIG.