Couldn’t the New AIG Bailout Have Waited Until January?

Last night I asked why AIG was getting a second bailout. I think the answer came this morning: AIG lost $24.5 billion in the third quarter.

Under the terms of the first bailout, AIG could effectively borrow that $24.5 billion from Treasury, and try to pay it back out of operating profits (ha!) at Libor +850bp. But at that point AIG would be so deep in the hole, and its interest payments would be so large, the US government might end up with a monster insurer dangling off the edge of its balance sheet for decades to come.

Yves Smith is justifiably furious at this deal. The mechanism for buying up CDOs is particularly opaque and unfair: if you’re lucky enough to own a CDO insured by AIG, then you will probably be able to sell it to them for the high price of 50 cents on the dollar. On the other hand, if your CDO is not insured by AIG, you’ll have to fall back onto the increasingly-forlorn hope that TARP will find some money to do what it was originally intended to do.

There’s certainly no doubt that communication surrounding the deal has been atrocious. How is it possible that every commentator thinks it’s a Really Bad Thing? Isn’t there a single contrarian out there willing to take the government’s side? Some very smart people put this deal together, how come their logic simply hasn’t been communicated to the press or to anybody else?

The most uncharitable explanation of what just happened is that the government balked at outright nationalization for ideological reasons, and structured this deal so as to have the best hope of being able to sell its equity stake in AIG with in a few years and put this whole episode behind it. My feeling is that it’s a bit of that, combined with a bit of hands-tied syndrome: Paulson has promised the nation that there won’t be any major financial-sector bankruptcies between now and January 20, and so he felt he had to bail out AIG. Again.

But AIG could have muddled through, under the terms of the first bailout, for another three months, when a new Treasury secretary would have arrived with a new big-picture economic plan. Why Paulson felt the need to meddle now is still very unclear.

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One Response to Couldn’t the New AIG Bailout Have Waited Until January?

  1. Its a AGI(american government info) government based article and asked some details and answers for it.

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