Nationalization of AIG: Treasury to get 80% stake in return for $85 billion

Why don't we just do it all now and get it done with? Why piece by piece?

Let's have the government run insurance companies, auto companies, banks, mortgage companies, home builders, brokerages, gas stations, and for good measure let's throw in pizza parlors.

Here is the rumor (it's true).

Bloomberg is reporting Treasury Said to Be Considering AIG Conservatorship.

The U.S. Treasury is considering taking over American International Group Inc. under a conservatorship as one option to address the insurer's crisis, according to two people briefed on the discussions.

Executives from AIG, bankers and Treasury and Federal Reserve officials are meeting today on the company's situation at the New York Fed. A number of options are under being discussed to fill a shortfall of $75 billion to $100 billion in funding, one of the people said. The talks are continuing, he said.

Goldman Sachs Group Inc. and JPMorgan Chase & Co., which have been leading efforts to find a private-sector solution, informed the Fed that such an effort would be difficult, the person said. Under another option, the Fed would extend a loan to New York-based AIG, according to a person informed of the matter.

Notice how shortfalls have increased from $40 billion, to $70 billion, to $100 billion. Is there any reason for it to stop there.

Two Scenarios

1) AIG has been fraudulently tapping its insurance subsidiaries
2) AIG simply screwed up its main corporate office

If it's #1 there should be prosecutions, if it's #2 then AIG should be allowed to go under. The Fed can deal with the aftermath. Nowhere should taxpayers be footing the bill for stupid corporate mistakes.

While typing this post futures suddenly reversed by about 20 points in a matter of minutes. Bloomberg just announced the Treasury is going to take AIG into Conservatorship.

Here is the announcement.

Fed Readies A.I.G. Loan of $85 Billion for an 80% Stake

In an extraordinary turn, the Federal Reserve was close to a deal Tuesday night to take a nearly 80 percent stake in the troubled giant insurance company, the American International Group, in exchange for an $85 billion loan, according to people briefed on the negotiations.

All of A.I.G.’s assets would be pledged to secure the loan, these people said, and in return, the Fed would receive warrants that would give it an ownership stake. Stock of existing shareholders would be diluted, but not wiped out.

If the Fed takes a controlling stake, it is likely that it would want to replace A.I.G.’s board as well as its chief executive and chairman, Robert B. Willumstad.

Conservatorship or Nationalization?

If you guessed Nationalization you guessed correctly. It is highly unlikely this will be "temporary". As with Fannie and Freddie, common shareholders are going to get wiped out and taxpayers are going to be on the hook. It will not stop at $85 billion. Lord only knows what this will cost.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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