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.So we're nationalizing AIG. Let's ignore for a moment the difference between the Federal Reserve owning it and the federal government owning it, though it's a real and interesting difference. I don't have the expertise to know whether or not that's a good idea. What gives me pause is that when the Federal Reserve offered a $30 billion credit line to JPMorgan Chase so that it would purchase Bear Stearns, the argument made was that this extraordinary step was needed to avert a chain of events which would cause numerous other companies, first in the financial industry and then in other industries, to collapse. Seems to be a good argument, if it were true that the credit line would have that effect. But I take it that the last couple of weeks, between FHLMC, FNMA, Lehman, Merrill, and now A.I.G. have demonstrated that no such crisis was averted, it was at best delayed (which may have been important, I say non-expertly). But now the same argument is being made with regard to the steps to remedy this crisis, and again it sounds like a good argument if the crisis is actually remedied. But if the crisis isn't remedied, it's not something that we can keep doing. The Federal Government's ability to intervene here by taking responsibility for debts which the market otherwise considers bad risks is not unlimited and if continued would fairly quickly (meaning in at most a few years) have severe effects on future U.S. standards of living. Further, my vague understanding (meaning I can't even cite specific examples) of foreign governments trying to avoid economic problems using similar means is that they have not in general worked well.
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 could be exchanged for an ownership stake. Stock of existing shareholders would be diluted, but not wiped out.
I'm not saying this will happen, just expressing my anxiety and ignorance. Maybe, on the other hand, A.I.G. will turn around and the government's 80% stake will make it easier to fund a new, better, government health insurance system. After all, “Most of A.I.G.’s businesses, including a dizzying array of insurance companies, an aircraft leasing business and an automotive unit, are healthy” and “A.I.G. has also considered sales of virtually all of its business assets, but conducting such sales quickly would be hard.” Perhaps the Fed's bridge loan will just allow this to take place in a non-panic sale setting where A.I.G. isn't forced to accept whatever is offered them.
I'll post more about this when I read someone else saying smart things which I understand. Krugman, probably.
Update (11:00 PM): Felix Salmon's most recent A.I.G. post is good, both for asking provocative questions and for having data on the amounts involved here.