This morning the federal government announced that it is was going to inject additional capital into AIG and restructure the existing debt as part of a new bailout to save the troubled insurance giant AIG. For those not familiar with the situation, the government had originally offered AIG a lifeline loan of $85 billion, only to later pony up an additional loan of $37.5 billion when it became clear that the company needed more. Now the government is giving them another loan, this one nearly $30 billion. In addition, as part of the deal, the government is lowering the interest on the previous loans and extending the repayment term from two years to five years, according to the Associated Press. What it boils down to is that AIG didn’t want to have to fire sell their assets in order to pay back the government loan, so instead of forcing them to do so, the government offered up even more money and agreed to ease the terms on the previous loans. Is your head spinning on this one, too?
This would essentially be the equivalent of me going to the bank and saying I’m not going to be able to pay my mortgage anymore, so can I get a loan to stay afloat for awhile till things get better? They say yes, but then a little while later, I go back for more and they again say yes. But that still isn’t enough, so I go back a third time and when they ask me about other assets, I tell them sure, I have a 2008 Escalade fully paid for, but I wouldn’t dare sell it right now because the SUV resale market just isn’t good. Because the bank didn’t want to force me to make this sacrifice, they decided to give me yet another loan and make the terms easier on my previous ones. Does this scenario sound a little farfetched? I certainly don’t know any banks that would ever agree to terms on the first loan, let alone more down the road; that would be bad business. Now obviously in the real world, the AIG scenario isn’t quite as simple, considering how huge the company is and the fact that the government now has ownership interest in it, but the decision to inject the business with additional taxpayer capital when there are alternative ways the company could have raised the money is concerning to me.
I was just reminded of a Saturday Night Live clip from a while back, after AIG was infused with the second loan of $37.5 billion. In the segment “Oh Really” on Weekend Update, which skewers the news, they drill AIG about the executive retreat and then transition into the “Oh My God Are You Serious?” segment, where they are completely dumbfounded at why the government would give AIG more money. The clip is funny and definitely applicable to the situation at hand. The clip below is for the entire Weekend Update segment, but if you skip to about 2/3 of the way in--when there are around 2 minutes remaining--that is where the “Oh Really” portion starts.
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