The Federal Reserve stepped in, after much deliberation, and not wanting to approve funding for AIG, approved an eighty-five billion dollar loan for the company. If the company had been allowed to fail, the ramifications would have been horrendous around the world, not just in the United States. The loan was eighty-five million dollars, with collateral of eighty million dollars from AIG. The interest rate on the loan is eleven and one-half per-cent, over a two year period. Some of AIG's assets are to be sold to repay the loan. There is some thought that the Goverment may gain money on the transaction. A new CEO has been put in place, as the Government has virtually taken over AIG. The Fed reportedly feels that this stopped a total loss of confidence in the financial system. The stock market is down at the moment over three hundred points, and it is going to be interesting at the end of the day to see if in fact, confidence has been restored, or made worse. The fact that banks stopped lending each other money overnight, is indicative, that they realize that they must increase their individual cash reserves, because the Federal Reserve, by reluctantly approving the loan to AIG, sent the message that they will not be there to bail out every financial institution that flies, to close to the sun. On the news front, it is reported, that there will be more financial institutions, large ones, not named as yet, naturally which will possibly be closing their doors or looking for capital to stay afloat. This week's story with the reluctancy of the Fed, may be signaling that they will have to fail. Secretary Paulson had testified to Congress earlier this year, that the premise that failing financial institutions should be bailed out regardless, is a mindset that has to change. The theory is that it they fail, then the shedding of unsound companies will make the market more sound, not weaker. The question then becomes, what happens to consumer confidence in the short term, will that cause a run on the banking system. How do you ask people to trust that it will be a better environment, when the sky is virtually falling all around you. This is a very thin tight rope, in my humble opinion.
The stock market is reacting today to this very scenario, maybe the market will improve by the end of the day, but, this may be the beginning of a spiral, that will be unstoppable in the short term, based on the last few days, which has provided a reality check. Hang on to your collective hats.
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