Here's the terms of the bailout:
Under the plan, the Fed will make a two-year loan to A.I.G. of up to $85 billion and, in return, will receive warrants that can be converted into common stock giving the government nearly 80 percent ownership of the insurer, if the existing shareholders approve. All of the company’s assets are being pledged to secure the loan. Existing stockholders have already seen the value of their stock drop more than 90 percent in the last year. Now they will suffer even more, although they will not be totally wiped out. The Fed was advised by Morgan Stanley, and A.I.G. by the Blackstone Group.
Honestly, I don't know what to think about this, but a bailout seems better than a complete collapse of the financial sector. Hard-core capitalists disagree, I suppose, and think we should risk a second Depression to allow for "market correction"... and I dunno, I have some sympathy for that viewpoint... but it seems that the people who would end up suffering the most wouldn't be stockholders and CEOs.
If you're curious about how it's legal for the Fed to take over a random industry not typically in its purview Marty Lederman has some thoughts. I found this part particularly fascinating:
As today's decision demonstrates, this New Deal law apparently gives an extraordinarily broad authority to the Fed to "discount" notes, drafts, and bills of exchange, without limit. Recall also, unitary executive fans, that the Fed could have made this loan over the objection of the President, although in this case the Treasury supports the Fed's decision.
I don't think I had ever really considered how powerful the Fed is. Interesting, to say the least.
Regardless, the next question is, of course, are we done bailing out companies yet, or are more dominoes about to fall?
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