Big government

Tuesday evening --

The precise details of the government's plans were still being formulated. The primary option being hammered out involved the Fed providing AIG with a short-term loan of $85 billion, according to people familiar with the situation. In exchange, the government would receive warrants in AIG representing the right to buy its as much as 80% of its stock under certain conditions, according to one person familiar with the matter.

Monday evening --

J. C. Flowers & Company, a buyout firm focused on financial services firms, offered $8 billion for preferred shares in A.I.G. — but the offer also included an option to buy all of the insurer down the road at a discounted price. Two other firms, Kohlberg Kravis Roberts and TPG, also said they would buy preferred shares in the insurer, but only with a backstop from the Fed.

So AIG rejected private deals because it thought -- correctly as it turns out -- that it could get a better deal from the government. Not that anyone needs reminding, but this happens under a president who thinks that there's a risk of too many children having publicly funded health care.

UPDATE: How bad can the private terms have been? AIG will pay 2.88+8.50=11.38% on its government loan (3 month LIBOR + 850 basis points)! AIG will be bleeding cash at that rate.

2nd UPDATE: The rejected bid from JC Flowers is important, since the legal authority being used by the Fed to lend to AIG requires showing that AIG could not obtain bank credit from any other source. Did JC Flowers have lenders lined up to support the company if its bid was accepted?