Last month the Federal Reserve loaned AIG $85 billion for two years in return for a hefty interest rate and a warrant agreements to purchase 80% of AIG.  The objective was to give AIG enough breathing room to have an orderly disposition of its assets without a fire sale bringing the global financial system to its knees.  Now we know that the fire has spread far beyond AIG, even while it still burns within AIG’s walls.

It turns out that the price tag, for now, isn’t an $85 billion loan for which the federal government (and taxpayers) might stand a chance to at least cover the loan, let alone make a profit.  Tack on another $37.8 billion extended by the Federal Reserve Bank of New York to provide badly needed liquidity.  In exchange, AIG is giving the New York Fed investment-grade, fixed-income securities that it had previously lent out to other institutions for a fee. Those institutions are now returning these securities and want their money back, further accelerating the liquidity crunch at AIG.

AIG has already drawn down some $60+ billion of the credit line in the past two weeks to cover its cash requirements.  Let’s all hope that enough stability returns to the financial markets over the next several months to alllow an orderly disposition of its assets.