AIG bailout question: Why rescue banks but not me?
By Kevin G. Hall | McClatchy Newspapers
WASHINGTON — The dramatic late-night rescue of insurance and finance giant American International Group raised as many questions as it answered. The company was saved from bankruptcy, but the move effectively put the nation's largest insurer under government control, which flies in the face of America's free-market values.
Coming Tuesday night after four days of government signals that it wasn't likely to step in, the action left investors worried Wednesday that financial conditions might be even worse than they appear.
Here are some answers to questions about this week's complex developments in financial markets:
Q. Why did the Federal Reserve lend AIG $85 billion, after Treasury Secretary Henry Paulson seemed to frown on it days earlier and the government let investment bank Lehman Brothers fail Monday? Aren't free markets supposed to be free from government intervention?
A. The Fed thought that AIG posed a risk to the global financial order, and if that fell into chaos, the U.S. economy and the lifestyles of average Americans would be endangered. Lehman was considered less of a risk, and was allowed to fail. Lehman's problems were known for six months, which gave many investors time to untangle themselves from their deals with Lehman.
In contrast, AIG's stock lost more than 60 percent of its value Monday. It came under the equivalent of a bank run very quickly, much like the circumstances that prompted the Fed's intervention with investment bank Bear Stearns in March. The Fed took $29 billion of Bear's shakiest assets onto its books as collateral to persuade JP Morgan Chase to acquire it. Bear Stearns' financial interrelationships around the world also posed a potential global meltdown if left to collapse.
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