The government takes control of AIG in $85 billion rescue package.

The government takes control of AIG in $85 billion rescue package.

The government takes control of AIG in $85 billion rescue package.

A summary of what's in the major U.S. newspapers.
Sept. 17 2008 6:42 AM

In for a Pound

News keeps pouring out of Wall Street, and all the papers lead with the Federal Reserve's startling decision to lend insurance giant American International Group up to $85 billion in a bailout deal that would give the government control over the company. The New York Times calls it "the most radical intervention in private business in the central bank's history." In exchange for its cash, the government would get a 79.9 percent equity stake in the company. The Washington Postnotes that the rescue package "effectively nationalizes one of the central institutions in the crisis that has swept through markets this month." The Wall Street Journal points out that this is "a historic development, particularly considering that AIG isn't directly regulated by the federal government."

The move marked an astounding about-face for the government that had been resisting AIG's pleas for help over the last few days and earlier chose to let Lehman Bros. fail rather than put forward more taxpayer money. "The main difference between the two situations: AIG is so huge and its operations so intertwined in the financial system that the Fed feared an AIG failure could harm the broader economy," USA Today summarizes. Or as the WSJ puts it: "This time, the government decided AIG truly was too big to fail." The Los Angeles Timesnotes that while Fed officials said the action was due to the fact that AIG insures the assets of millions of Americans, it seems the main reason "was fear that the company's failure could weaken or destroy nearly a half-trillion dollars' worth of financial protection that AIG provides Wall Street firms and the biggest companies of Europe and Asia."

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In the last few days, government officials had been talking tough about how this was a private-sector problem that needed to be solved by the private sector. But once all efforts to secure private financing failed, federal officials decided they couldn't just sit on their hands and watch AIG collapse. "The spillover effects could have been incredible," an economics professor tells the NYT. Under the terms of the agreement, AIG is putting up all its assets as collateral for the two-year loan. Fed officials insist that they fully expect AIG to repay the loan either through its day-to-day operations or the sale of its assets. The WSJ highlights that "taxpayers could reap a big profit" if the company manages to turn around.

As part of the deal, AIG's senior management will be replaced, and the government will have veto power over any major decision that the company makes. The LAT says that in private conversations, lawmakers expressed "deep wariness about the loan" but for the most part talked about it as the best choice in a slew of bad options. House Speaker Nancy Pelosi, however, was not shy about criticizing the deal, a move that suggests Bush administration officials will face tough questions in congressional hearings. "An $85 billion loan is a staggering sum and is just too enormous for the American people to bear the risk," Pelosi said.

The NYT points out that one of the big worries is that the AIG bailout "won't be the last." Indeed, Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke told lawmakers there was no way to know whether this would be the last major government intervention into the market. For those keeping track at home, the next company that could soon be approaching the government hat-in-hand is Washington Mutual.

"How far will the bailout binge go?" asks the LAT in a Page One piece that notes this year's "cornucopia of handouts and guarantees" is already larger than the rescue of the savings-and-loan industry, which cost taxpayers around $124 billion. Of course, proponents of the bailouts insist that not doing anything would end up being much more expensive in the long run, but critics say the practice helps companies get out of messes that they themselves created. Also, as more money is handed out, more companies are likely to seek the government's help, which means the next president is going to face some difficult decisions trying to figure out who deserves to be rescued and who doesn't. For example, if Congress approves a loan program for automakers that could reach as high as $50 billion, there's no reason why airlines wouldn't ask for the same thing. Some contend the big problem here is that there is no clear set of rules that can help guide the decisions, which could mean that those with the biggest lobbying prowess or companies that are based in key swing states could have an unfair advantage.

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The NYT's David Leonhardt, who is back from a particularly ill-timed leave, praises Bernanke and Paulson, who may have had "some early missteps" but lately have been acting "aggressively to keep the financial system functioning." The problem now, though, is that while everyone is rushing to deal with the current crisis, no one is trying to figure out how to resolve the problems that created this mess. Bernanke and Paulson "have done a nice job of playing defense," writes Leonhardt. "But when will someone start playing offense?"

In the meantime, there's still a lot of defense to play. The WSJ fronts a look at how banks suddenly stopped lending to one another or began charging exorbitant rates yesterday across the globe as fears grow that any financial institution could be the next on the chopping block. Central banks in several countries, including the United States and Japan, injected billions into the banking system to try to keep the money flowing. Meanwhile, the Fed decided to keep its benchmark interest rate steady yesterday. The move is seen as recognition that there's little the Fed can do on interest rates that can help alleviate the current crisis. "The market is not short of liquidity; it is short of confidence," an economist tells the NYT.

Amid all the gloom and doom, the WP takes a look at a rare bit of good news for consumers as oil prices fell again yesterday and closed at $91.15. Earlier this year, it seemed oil was on an unending upward spiral, but prices have been steadily dropping over the past two months, saving the world more than $4 billion a day in energy costs. In related news, the House of Representatives passed an energy bill that, among other things, would end a ban on offshore oil drilling. The measure would let states decide whether they would permit drilling 50 to 100 miles off their coasts.

There was also a bit of good news out of Lehman as the WSJ reports that Barclays, the British bank, has agreed to buy "a stripped-clean version of Lehman's North American business" for $1.75 billion. The move allows Barclays to take over Lehman's securities business without getting into the risky mortgage assets. It's certainly a gamble for Barclays, but it seems to have gotten a good deal, particularly considering that Lehman's headquarters building is also included in the package, and that alone could be worth as much as $900 million. It's unclear how many of Lehman's employees will get to keep their jobs, but early estimates put the number at around 10,000. "If you want to transform yourself from a minor player into a major firm, this is the time to do it," an analyst tells the NYT.

The NYT and WP both take a look at the difficulties facing John McCain as he tries to convince voters that he's the best candidate to deal with the mess on Wall Street. The NYT takes the wider view, noting that McCain is not only sounding more like a populist, he is also trying to portray himself as someone who has lots of experience dealing with economic issues due to his time on the Senate commerce committee. McCain appeared on pretty much any network that would have him to say that he understood the economy is in crisis and called for a commission to study the problem. His campaign stumbled in the effort yesterday though as one of his advisers suggested McCain had helped to create the BlackBerry, which, of course, brought back memories of the whole Al Gore-invented-the-Internet flap. (The campaign quickly called it "a boneheaded joke.")

For its part, the WP focuses on how McCain, who "has usually reverted to the role of an unabashed deregulator," is now busy pushing for new regulation on businesses. The change isn't lost on Barack Obama, who used the opportunity to highlight what he called McCain's "newfound support for regulation." Democrats usually have an advantage when there is trouble in the economy, and McCain's long record of opposing regulation in a variety of industries clearly gives Obama a straight line of attack.

The WP's Richard Cohen, who has often been accused of giving McCain a free pass on several issues, has now officially joined the ranks of those who once admired the Republican nominee but now can't stand what he has become. Cohen's moment of reckoning came while watching The View, where McCain was questioned about two anti-Obama ads and said, "They are not lies," even though they are. "McCain has turned ugly," says Cohen. McCain might think that if he wins the election he can return to being his old self and tell the truth, just as he did in South Carolina during the 2000 primary. "It won't work," Cohen writes. "Once is tragedy, a second time is farce. John McCain is both."

Daniel Politi has been contributing to Slate since 2004 and wrote the Today’s Papers column from 2006 to 2009. Follow him on Twitter.