Feds Take Equity Control of AIG

In an interesting twist, the Federal government has apparently decided to provide an $85 billion loan to AIG and in return, receive an 80% interest in the equity of the firm. While some may describe this as a "bailout," I think it's a pretty smart move to help stabilize the global financial system and should be a very good investment as well.

AIG has $1 trillion in assets, so the loan from the Feds should be virtually risk-free and paid off in a relatively short period of time. Further, the 80% investment could easily be worth $50 to $100 billion over the same time period. The tricky question is how long the federal government is willing to hold its investment, since it is certainly not in the policy interest of Americans for the government to be controlling large private institutions. (I certainly don't want the government to own the equity of the auto companies, as political interests will inevitably work their way into the companies. Think Fannie Mae.)

But in this instance given the expected repercussions of an AIG failure, I think it is a very good solution and should make money for taxpayers. And because it results in significant dilution to existing shareholders, I don't think it sets up as much a moral hazard as one might expect. I just don't want to see this strategy repeated often.

*Update*
As more details come out, it is clear that this is even a better deal than suspected. The Fed interest rate (Libor+850) is unheard of for a government loan, which will net approximately $10B/year in interest payments and should incentivize AIG to repay it quickly. I estimate that the government will end up profiting at least $75B+ from this deal.