Fed steps in again to head off meltdown

Earlier this week, ex-AIG chairman Maurice "Hank" Greenberg told CNBC that the company, the world's largest insurer, was an American national treasure. It seems that the Federal Reserve agreed with him. On Wednesday, the US central bank made AIG fast running out of cash the American taxpayer's nationalised treasure. Just a week after the rescue of Fannie Mae and Freddie Mac, and days after it allowed Lehman Brothers to go to the wall, the US government bailed out AIG with an $85bn (£47bn) emergency two-year rescue loan in return for a 79.9% stake, control over all AIG's assets and a veto on dividend payments. The punitive terms of the deal mean that "this is to all intents and purposes a controlled bankruptcy", said Marco Annunziata at UniCredit.

Too big to fail

The trouble is, now "every other struggling US company will line up for help", said Richard Beales on Breakingviews, meaning "taxpayers' cash will probably never be recouped, making the bailout a gigantic example of moral hazard". However, AIG genuinely looked too big to fail. Lehman's demise may already have caused "unprecedented strain" on financial markets, said Meredith Whitney at Oppenheimer, but an AIG failure would have had "more far-reaching consequences". AIG is "interwoven with so many people and touches many companies around the world", said Daniel Fuss at Loomis Sayles. "This is a huge relief to many parts of the financial markets."

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What next?

Still, the losses associated with AIG coming apart haven't disappeared. They've just been nationalised by the US government and will thus be underwritten by US taxpayers. Meanwhile, there's clearly a very long way to go before the credit crisis ends. As Capital Economics points out, if market conditions are now so bad that AIG needs a bail-out, "what about the smaller and weaker players"? It's ominous for them that the credit crunch and housing-market slump are grinding on on both sides of the Atlantic. The deflation of the debt bubble of the last few years is far from over. As Michael Holland of Holland and Co. said,"we are unwinding years of silliness in financial markets".