This weekend, American International Group, Inc. officially cried for help after taking stock of its latest Treasury bailout proposal. It is one of many companies taking shelter in the government’s $700 billion bailout, the Troubled Asset Relief Program. In TARP’s control, AIG was originally eligible for an $85 billion bridge loan in September. Reminiscent of a teenager with his or her first credit card, AIG proved that $85 billion could be burnt through rather quickly. Scandal whispered throughout Capitol Hill when news of a week-long company trip to the St. Regis Resort in California hit just a week after the loan. Congress requested AIG cut the manicures and consider different solutions to the crashing company.Aware of clear internal problems within AIG’s management, the Treasury has reworked the original package to give AIG a better chance of survival. The new deal is around $152 billion with a smaller loan portion. It cuts the loan interest rate to 5.5 percent points and gives AIG five years, rather than two, to repay. The Treasury will also buy about $40 billion in stock from the company. Rather than loaning entirely lump sums, the new plan puts some money directly into the company’s subsidiaries causing the most trouble. The government hopes by buying residential mortgage securities with solid return prospects, it will be able to solve the company’s liquidity issues. It also plans to fund the company’s collateral problems through collateralized debt obligations, a product that allows investment in the cash flow of an asset. The poor credit default swaps AIG made prebailout have led to its cash crisis and inability to finance the collateral it needs. AIG and the Treasury hope that, with enough time, the company will be able to sell off assets and bounce back in the insurance industry.
AIG, however, has only been the beginning of the government’s attempts to fix market-wide cash problems. With AIG’s plan on the books, President-elect Barack Obama has promised to extend bailouts to the faltering automobile industry. General Motors has announced publicly that within several months, without government help, it will face bankruptcy. Detroit is calling for assistance, but the market has shown more reluctance to support a bailout for the auto giants. It may be that, faced with the mounting costs of corporation loans, Americans are beginning to wonder where the line will be drawn.
A loss of a large player in the automobile industry would have drastic consequences for employment, as automobile manufacturing is the largest manufacturing industry in America. Obama recognized in his speech last Friday the importance of the industry, both to Wall Street and to American culture. While AIG’s bailout was receiving a facelift during the weekend, Speaker of the House Nancy Pelosi, D-Calif and Senate Majority Leader Harry Reid, R-Nev wrote a letter to Secretary of the Treasury Henry Paulson asking that the $700 billion financial bailout be aimed toward helping Detroit. Congress has already sent equity analysts to review the situation.
Yet, even if the capital problems of GM are addressed, there is no clear promise that the company’s stock will improve. Current stockholders are in for a lose-lose situation, as their stocks are diluted by the bailout proposal. Even if GM’s cash problem is fixed for the time being, there is no definite answer as to whether a bailout would come in time to save the automaker. This begs the question, how often can the government provide bailouts in a market where even key industry players can disappear? Prioritizing has already taken place with most analysts considering the financial lending markets more immediately worthy of bailouts than other industries. It is hard to say which companies, upon receiving government support, will be most effective in upturning the overall economy. Yes, companies in the recession economy will continue to call for help, but how often can American taxpayers afford to answer?
Lauren’s column runs biweekly Thursdays. She can be reached at l.palmer@cavalierdaily.com.
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