All things considered, it sounds more like an equity investment:
In an extraordinary turn, the Federal Reserve agreed Tuesday night to take a nearly 80 percent stake in the troubled giant insurance company, the American International Group, in exchange for an $85 billion loan.
I suspect Hank Greenberg is very unhappy, although with roughly $450 billion in credit default swaps in play, I doubt many care how he feels.
UPDATE: Word from the Fed:
The AIG facility has a 24-month term. Interest will accrue on the outstanding balance at a rate of three-month Libor plus 850 basis points. AIG will be permitted to draw up to $85 billion under the facility…
The loan is collateralized by all the assets of AIG, and of its primary non-regulated subsidiaries. These assets include the stock of substantially all of the regulated subsidiaries. The loan is expected to be repaid from the proceeds of the sale of the firm’s assets. The U.S. government will receive a 79.9 percent equity interest in AIG and has the right to veto the payment of dividends to common and preferred shareholders.
Now it sounds much more like what they were trying to do to Lehman last weekend – separate the good from the bad, and hold out a carrot for whomever wanted to invest in the bad. Only this time, the horse is the taxpaying public. Proceeds coming from the liquid assets are used to pay back the loan, and a few lucky buyers get some prizes. Then the government is left with an equity position in a business that likely still holds a toxic level of risk for which little premium will be forthcoming.
At least it gets everyone’s mind off AIG for a few weeks.