AIG Bailout Means Drastic About-Face for Feds

The company's stock has plummeted in the last two weeks as investors worry that the bank has too many bad mortgages and loans on its books.

Troubles at WaMu

The bank has seen a doubling of defaults and has many outstanding adjustable-rate mortgages that are due to reset to a higher, harder-to-pay rate shortly. In July, WaMu reported a $3.3 billion loss for the second quarter. Since April, the bank's share price has plummeted about 75 percent from $13.15 to around $2.

It has not been a good year for banks. So far, 11 banks have failed and had to be taken over by the Federal Deposit Insurance Corp., or FDIC, the largest being IndyMac.

To put that in perspective, there are nearly 8,500 banks nationwide covered by the FDIC.

But all it takes is one big failure to throw the system into turmoil. So far -- with the exception of IndyMac -- this year's failures have been small, regional banks with minimal impact on the overall economy.

If Washington Mutual goes under, most customers would be protected by the FDIC insurance. But such a failure could wipe out the remaining balance in the bank-funded FDIC insurance pot. If that were to happen, the FDIC would turn to the U.S. Treasury for more cash to protect depositors. Individuals with money in troubled banks would, for the most part, be safe but taxpayers could end up footing the bill to protect those deposits.

The AIG Bailout Details

The loan to AIG will be available for two years at a current interest rate of 11 percent. AIG can use the money to meet any of its financial obligations and it is expected that the loan will most likely lead to the company selling off certain parts of its business, without further upsetting already fragile financial markets.

The loan will be secured through assets AIG currently holds and the U.S. government will receive nearly 80 percent of stock in AIG.

Current management of the company will be replaced, though the board of directors will stay in place for the time being. But the board's power may be limited, as the federal government now has veto power over important decisions such as which divisions to sell, what companies to buy and whether dividends should be paid.

With reports from Alice Gomstyn

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