Take your second deep breath of the week. We are at a cusp tonight, with a Treasury deal allegedly on the table to provide a $80b bridge loan to doombound insurance company AIG. The deal would apparently include warrants to the government, and heavy incentives to disgorge AIG’s many assets quickly in a kind of low-grade firesale.
It seems clear that were that not to happen tonight then AIG would file for bankruptcy tomorrow, and that would have immense and unknowable consequences. While that does not make an AIG bailout required, it is also true that chemistry experiments with unknown outcomes should be done on small scale and at home, not in global capital markets during a crisis.
The main risks tonight are political, not economic, however. Congress is frustrated at feeling like it is playing from behind in this debacle, and in an election year with massive financial commitments being made — Bear Stearns plus Fannie/Freddie plus A.I.G. plus, plus — and with an angry electorate having had this ill-explained to them, we are at an incredibly risky moment along multiple dimensions.