Impact Of AIG Bailout Examined
MICHELE NORRIS, host:
Diane Brady is a senior editor at Business Week, and she joins us from our New York bureau. She's here to help us make sense of the government's plans for AIG. Welcome back to the program.
Ms. DIANE BRADY (Senior Editor, Business Week): Nice to be here. Thanks.
NORRIS: Diane, this is widely described as a bailout. Is that actually the right term?
Ms. BRADY: Technically, it's a loan. But in essence, it is a bailout because this is a company that could have gone bankrupt. The government does want to characterize it as a loan. It's 85 billion dollars. It's loan shark rates in some respects, double digits that AIG has to pay back. But in essence, the question is taxpayers could still be on the hook, and they now essentially own 80 percent of this company.
NORRIS: What happens if they don't pay that back at those, as you say, loan shark rates?
Ms. BRADY: Well, in essence AIG is going to be trying to sell off its assets as quickly as possible, but try to get the best price. The issue right now is that there just is not a lot of money in the markets. You look at the fact that the government did say no to AIG. Then it had to come back and say yes. Why? What happened in that interim is they went to Wall Street. Wall Street didn't have the cash. Investors don't have faith at the moment. There's nowhere else to get the cash. So, people are hoping it's aspirational, that AIG is able to pay this back. But they have a lot of debt. They have a lot of obligations on their books. If the whole market blows up, somebody's going to be on the hook for it. And now the biggest owner of this company essentially is the government and the taxpayers.
NORRIS: But the government doesn't actually own AIG. They have a 79.9 percent equity stake.
Ms. BRADY: Exactly.
NORRIS: Exactly what does that mean? What kind of terms can they dictate?
Ms. BRADY: They have warrants. They do - they are able to dictate. And you see that in the fact that the CEO was immediately replaced with somebody that, of course, Paulson and Bernanke picked, the former Allstate CEO. So I think essentially the government is now calling the shots. What they're trying to do here is contain the crisis. That's the big issue. What they don't want is to see the problems at AIG cascade. So the people who are the frontline sufferers in this are the shareholders. Essentially, the value for them has been wiped out by this move.
The angriest person today you'll find is Hank Greenberg, the former chairman. He was the largest single individual shareholder. He wanted a loan to this company, short-term capital. Instead what they did was essentially, in his eyes, nationalize it, because what they said is, OK, fine, we'll lend to you, but we're going to essentially call the shots at this point.
NORRIS: Now, tell me about Edward Liddy. Who is he, and what exactly is his charge?
Ms. BRADY: Well, he is the former Allstate CEO. He's on the board of Boeing. He knows a lot about the domestic property casualty business. Is he somebody you would pick to run AIG as an entity that stays together? No. Because it's a huge financial services giant. It's global. It's in 130 countries. What he is going to be charged with doing is trying to find the highest bidders for AIG's assets. Some of those bidders may be people who've already been circling, such as Hank Greenberg, the former chairman. But what he's trying to do is make sure that there is the orderly disposal of assets so that the government gets its money back as quickly as possible.
NORRIS: So the Federal Reserve said it wanted to avoid a disorderly failure. This is something like the - it seems that they're trying instead to oversee a more controlled dismantling?
Ms. BRADY: Exactly. And one thing that people - I think has been out there that's a little misunderstood about AIG, this is not a case that this company is just so big, and we all hold policies, and so wouldn't it be terrible if AIG fails? The issue is that they are the ones that have backed a lot of these mortgage-backed securities. As this market has been spiraling, if AIG backs out of the picture, then all of a sudden there's a domino effect, and everybody else starts to fall. That's the concern here, is that all the counter parties, all the people that have done business with AIG, if this company had gone under would suddenly have to face the reality of their own assets, and we could see a lot more failures. At this point, the economy is so weak they don't want that to happen.
NORRIS: Diane, very, very quickly, because I have to let you go. Does that mean the government is on the hook for those insurance policies?
Ms. BRADY: The government is on the hook for the success of the sale of AIG at this point. They - the shareholders are essentially out of the picture. The people who are going to have to make sure this works are the U.S. taxpayers.
NORRIS: That's Diane Brady, senior editor at Business Week. Diane, thank you very much.
Ms. BRADY: Thank you. Transcript provided by NPR, Copyright NPR.
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