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Bailout funds going quickly

AIG's rescue tab grows to $150 billion, only adding to pressure to aid automakers and other struggling firms.

November 11, 2008|Jim Puzzanghera | Puzzanghera is a Times staff writer.

WASHINGTON — Will $700 billion be enough?

That question emerged Monday as the Bush administration decided to pump more money into insurance giant American International Group Inc. and lawmakers pushed to extend the government's rescue to the ailing automobile industry.

The extra money for AIG, part of a major overhaul of the effort to keep the company out of bankruptcy, brings the government's tab to about $150 billion, up from about $123 billion. In a concession that the previous fix was inadequate, the Treasury Department said it would also spend $40 billion to buy an equity stake in the company.

Though the additional steps may ease financial stress on that company, they may only feed the demand from others seeking a share of the $700-billion rescue package that Congress had approved for the financial industry.

"It strengthens the argument of others to say, 'Well, why not us?' " said Gary Schlossberg, senior economist with Wells Capital Management in San Francisco. He predicted that the additional dollars going to AIG would "lower the bar" for requests for government money from outside the financial industry.

The new AIG pledge, coupled with similar aid for banks and other institutions, means that a significant portion of the $700 billion that Congress had approved for rescuing financial and other companies deemed vital to the economy has been committed. And pressure to widen the scope of such aid is growing as the economy sinks deeper into trouble.

"The money could go quickly," said Daniel J. Ikenson, associate director of the Center for Trade Policy Studies at the Cato Institute, a free-market think tank. "As long as there is a big pot of money sitting here in Washington, every industry is going to ready its lobbyists to get a slice of that pie."

Already, the government has committed $250 billion to buy direct stakes in banks, and an additional $40 billion from the fund will go to AIG to supplement loan guarantees made before the rescue legislation was passed.

"What if a lot of these Silicon Valley start-ups can't get financing -- do we start bailing them out? Or Apple, or Microsoft, or Yahoo?" said Timothy J. Yeager, an associate finance professor at the University of Arkansas at Fayetteville and a former economist at the Federal Reserve Bank of St. Louis. "Where do you stop?"

In the latest sign of pressure to help teetering U.S. automakers, the Michigan congressional delegation wrote to Treasury Secretary Henry M. Paulson on Monday urging him to authorize "emergency assistance" for the domestic auto industry.

Over the weekend, House Speaker Nancy Pelosi (D-San Francisco) and Senate Majority Leader Harry Reid (D-Nevada) also wrote to Paulson, asking him to review the terms of the rescue legislation to determine whether automakers qualify.

"A healthy automobile manufacturing sector is essential to the restoration of financial market stability, the overall health of our economy and the livelihood of the automobile sector's workforce," they wrote.

Congress had authorized up to $25 billion in government-backed loans for automakers, but with General Motors Corp., Chrysler and Ford Motor Co. weakened by the economic crisis, industry leaders and lawmakers are calling for much more help.

President-elect Barack Obama said Friday that the industry is "the backbone of American manufacturing" and its troubles affect "countless suppliers, small businesses and communities throughout our nation."

Senate leader Reid believes the $700-billion financial rescue legislation is worded broadly enough to allow help for automakers, spokesman Jim Manley said. Sen. Carl Levin (D-Mich.) said Saturday that in case the Treasury Department rejected that view, he was preparing an amendment to the legislation to allow it.

On Monday, Sen. Sherrod Brown (D-Ohio) joined the call for aid to automakers, noting that "tens of thousands of Ohio families rely on the auto industry for their livelihood."

"The collapse of the domestic auto industry is not a viable option for our nation's economic security," Brown said.

Treasury spokeswoman Jennifer Zuccarelli said no decisions had been made about automaker eligibility. Although the White House has not embraced aid for automakers, spokeswoman Dana Perino said Monday that it was willing to listen to ideas.

The need to restructure the AIG bailout after less than two months demonstrates the difficulties of such rescue operations in relieving a continuing credit crunch.

"We have accomplished a great deal in a short period of time. But our work is only beginning," Neel Kashkari, interim assistant Treasury secretary for financial stability, said at a securities industry conference in New York.

The original AIG bailout consisted of an $85-billion emergency line of credit established in September, supplemented by $37.8 billion more early last month. The goal was to stabilize AIG so that it could sell some of its numerous assets throughout the financial system and stave off bankruptcy.

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