AIG Bailout Means Drastic About-Face for Feds

Sept. 17, 2008— -- Hoping to avoid a worldwide financial meltdown, the U.S. government last night took the unprecedented step of loaning insurance giant American International Group, or AIG, $85 billion in exchange for a shocking 80 percent ownership in the company.

The move was a stark about-face for regulators, who just days ago resisted pleas from AIG for help, and was the latest in a stream of massive government bailouts for financial firms that bet wrong on the subprime housing market.

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Stocks started the day down sharply, with the Dow Jones industrial average off by about 200 points. In the end, the Dow lost about 450 points with investors clearly upset with the financial sector.

The AIG takeover comes less than two weeks after the government assumed control of mortgage giants Fannie Mae and Freddie Mac, an act that backed mortgages with $200 billion of taxpayer money. That is in addition to the $29 billion the government pledged in March to back J.P. Morgan Chase's fire-sale purchase of Bear Stearns.

To pay for all these bailouts, the Treasury announced this morning that is will be issuing a special series of Treasury bills, separate from its normal borrowing programs.

AIG is the world's largest insurance company, with more than 74 million customers around the globe. It provides coverage for everything from cars to homes to planes, in addition to offering life insurance policies and annuities.

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But that is not where AIG got into trouble. The company's downfall comes from a decision to insure investments in the subprime market. As subprime mortgages started to default, AIG was on the hook to pay out more money than it had ever expected, and it didn't have enough cash on hand to continue operating.

"They called it insurance, but they were gambling," said Nobel Prize-winning economist Joseph Stiglitz. "In a market economy, there has to be a sense of accountability. You can't come running to the government every time you have a problem."

Stiglitz, co-author of The Three Trillion Dollar War, said these bailouts are "a damning condemnation of the way we've managed our economy and regulation system" and that it's time to "draw a line."

In the short term, he said, it will be hard to let these companies fail, but "we will end up with a financial system that will probably be stronger" in the end.

But many others said that AIG was simply too big to fail and that its demise would send shockwaves throughout all corners of the economy.

Former AIG Chief Executive Maurice R. "Hank" Greenberg told Chris Cuomo on "Good Morning America" today that "it's in our national interest to keep this company alive."