WASHINGTON -- The government showed flexibility Monday in applying the $700 billion financial rescue plan, announcing that — for the first time — it would invest outside the banking sector. The move prompted speculation about which companies might be next in line for aid.
The Treasury Department will buy $40 billion of newly issued, preferred shares of global insurance giant American International Group. That ups Treasury and the Federal Reserve's stake in AIG to more than $150 billion, making AIG the largest recipient of government aid during the current financial crisis.
AIG posted a net loss of $24.47 billion in the third quarter, the company said Monday.
Treasury's purchase of preferred shares will be funded under the Troubled Asset Relief Program passed by Congress. Already, $250 billion has been allocated for cash infusions into banks to help thaw frozen credit markets.
The Fed said it was restructuring its loan package with AIG, which has essentially been under government control since mid-September when the Fed stepped in, arguing that AIG's reach was too deep to let it fail. The Fed said the new terms provide bigger bang for the buck and better protection for taxpayers. "This action was necessary to maintain the stability of our financial system," Neel Kashkari, the interim head of Treasury's financial relief program, said in a speech.
The move comes as a number of companies in other industries are asking for government help. House Speaker Nancy Pelosi, D-Calif., and other lawmakers are advocating aid for the auto industry after meeting with the CEOs of all three domestic automakers last week.
Anthony Sabino, a business and law professor at St. John's University, says propping up AIG is necessary given how intertwined the company is in the world economy. But he warns that the government has to be careful. "You can't bail out everybody," he says.
The changes to the 2-month-old rescue plan for AIG are intended to strengthen the insurance company as it restructures and sells some assets. Senior Fed staff in a conference call with reporters said they expect the loans will be repaid in full once the economy and the value of company assets improve. They were speaking on background, with the understanding their names would not be used.
The Federal Reserve in mid-September said it would provide AIG with an $85 billion emergency loan. Less than a month later, the Fed added $37.8 billion to the deal.