A Possible USSA

It seems that the United States of America has got an extra "S" in its name to become the United Socialist States of America. You sure have heard about the major American insurance corporation AIG's (American International Group, Inc) financial problems and expected bankruptcy. And on Tuesday night, the Fed decided to lend AIG $85 billion, and the U.S. government will effectively get a 79.9% equity stake in the insurer. The loan is secured by AIG's assets, including its profitable insurance businesses, giving the Fed some protection even if markets continue to sink. And if AIG rebounds, taxpayers could reap a big profit through the government's equity stake.

The Federal Reserve Board on Tuesday, with the full support of the Treasury Department, authorized the Federal Reserve Bank of New York to lend up to $85 billion to the American International Group (AIG) under section 13(3) of the Federal Reserve Act. The secured loan has terms and conditions designed to protect the interests of the U.S. government and taxpayers.
The Board determined that, in current circumstances, a disorderly failure of AIG could add to already significant levels of financial market fragility and lead to substantially higher borrowing costs, reduced household wealth, and materially weaker economic performance.
The purpose of this liquidity facility is to assist AIG in meeting its obligations as they come due. This loan will facilitate a process under which AIG will sell certain of its businesses in an orderly manner, with the least possible disruption to the overall economy.
Source: Federal Reserve Board - Press Release

It's clear that the US government is doing this in order to save their own economy, especially that AIG is considered, according to the 2008 Forbes Global 2000 list, the 18th-largest company in the world. And It's a major component of the Dow Jones Industrial Average since April 8, 2004 [Wikipedia]. But what makes them that sure that the bailout is the optimum solution for this.

Like nearly all conservatives, I'm not happy with government bailouts in principle, but I'm afraid that the deal the Fed made to lend AIG $85 billion in exchange for an 80% stake in the company was necessary and prudent. The ripple effects of an AIG bankruptcy would have been enormous.
Source: Power Line Blog.

Anyway, all this makes me wonder, is the Insurance giant being Nationalized!?

My first reaction to hearing the news about AIG: what makes government officials think that they can run an insurance company efficiently? This may help short term, but what will happen over the long term? And what type of signal does this send to capital markets (not a pretty one, if the current stock market decline -300 points is any indication). Lastly, what type of signal does this send regarding government bailouts?
Source: Market Power Blog.

But some other bloggers don't see it the same way:

Is it a bailout? Is it a takeover? To me it looks more like bankruptcy by another name. Effectively it gives AIG some time to sell a lot of its assets--more than just the junk--and reorganize itself. In the meantime, its creditors will be made whole. Equity holders may properly bear some of the cost as the government has veto power over dividends. At the end of the 24 month period...hopefully...the company, in whatever form it takes, can resume something approaching normalcy. Assuming, of course, that it has any reputation left. Perhaps sometime during or after that 24 months a suitable buyer can be found. These are questions that no one can answer now.
Source: William J. Polley Blog.

Also many Bloggers and Blog Readers were debating if the American taxpayers should pay the bills for AIG executives faults.

AIG has no one to blame except themselves for this matter. The Board of Directors and the Executive Officers should be held accountable for their mistakes in this company. The American taxpayers should not have to foot any bill regarding this company, nor should banks take a risk to lend them money to keep them solvent
Source: Richard @ Blogging Stocks.

Any CEO that puts a business in that kind of debt not only needs to be fired but put in jail. The idea of paying a criminal ceo millions of dollars for destroying a business revolts me. They should have to pay back every cent they earned and the money should go into the pension plans for the employees they screwed.
Source: Rob @ Blogging Stocks.

The US has to let these useless corrupt institutions die take the pain and move on if you want a decent future for your kids. This present US government is the most fucked up corrupt bunch in a century led by a clueless idiot who´s only solution to anything is to bomb the shit out of 3rd world countries. Wake up people its payback time.
Source: Anonymous @ Bonddad Blog.

CDS (Credit Default Swaps) are considered the main reason for the collapse of AIG.

The firm’s sickly financial health was a prominent topic in weekend talks among Wall Street chieftains who gathered at the Federal Reserve Bank of New York to discuss the potential collapse of the investment bank Lehman Brothers. A.I.G. had become one of the biggest underwriters of complex debt securities known credit default swaps, used as insurance for a wide range of products, including the mortgage instruments that have been the bane of Wall Street for the last year and a half.
Source: The New York Times.

And Blogging Stocks wrote about AIG/CDS too.

As I posted yesterday, the reason AIG got into such a mess is that it owed $14.5 billion in Credit Default Swap (CDS) premiums. "[CDSs] pay the buyer face value in exchange for the underlying securities or the cash equivalent should a country or company fail to adhere to its debt agreements," according to Bloomberg News.
Source: Blogging Stocks.

But, what is Credit Default Swaps, and why did some financial experts expected it to be the next crisis a while ago.

Credit default swaps are insurance-like contracts that promise to cover losses on certain securities in the event of a default. They typically apply to municipal bonds, corporate debt and mortgage securities and are sold by banks, hedge funds and others. The buyer of the credit default insurance pays premiums over a period of time in return for peace of mind, knowing that losses will be covered if a default happens. It's supposed to work similarly to someone taking out home insurance to protect against losses from fire and theft.
Except that it doesn't. Banks and insurance companies are regulated; the credit swaps market is not. As a result, contracts can be traded — or swapped — from investor to investor without anyone overseeing the trades to ensure the buyer has the resources to cover the losses if the security defaults. The instruments can be bought and sold from both ends — the insured and the insurer.
Credit default swaps were seen as easy money for banks when they were first launched more than a decade ago. Reason? The economy was booming and corporate defaults were few back then, making the swaps a low-risk way to collect premiums and earn extra cash. The swaps focused primarily on municipal bonds and corporate debt in the 1990s, not on structured finance securities. Investors flocked to the swaps in the belief that big corporations would seldom go bust in such flourishing economic times.
But as the economy soured and the subprime credit crunch began expanding into other credit areas over the past year, CDS investors became jittery. They wondered if the parties holding the CDS insurance after multiple trades would have the financial wherewithal to pay up in the event of mass defaults. "In the past six to eight months, there's been a deterioration in market liquidity and the ability to get willing buyers for structured finance securities," causing the values of the securities to fall, said Glenn Arden, a partner at Jones Day who heads up the firm's worldwide securitization practice and New York derivative.
Source: Time - Business & Tech.

Finally, to tell you a secret, the main reason that made me write all this is that I was lost in all those financial terms I came across while reading about this issue. So I tried to gather all those posts along with the possible explanation of the financial and business jargon used in them in order understand what those guys are talking about here :)