Borrowing By Banks And AIG (AIG) Hits Extraordinary Levels

AIG (AIG) moved rapidly to sell assets and borrowed heavily from it US government loan. According to The Wall Street Journal, "The insurer has now borrowed $70.3 billion from the government in three weeks."

The news raises the question of whether AIG can sell units fast enough, especially in a major credit crisis, to shore up its own balance sheet before it runs through its $125 billion loan from the Fed.

Large banks and brokerage firms are taking record amounts of cash from the Fed as well. The agency reports that average total daily borrowing hit over $420 billion last week, up from $368 billion the week before.

As shocking as it may seem, AIG may have to arrange to get more than $125 billion from the US government to keep from failing. If markets fall much further, there may be no ready buyers for even it most healthy assets.

If bank shares sell of another third and drop significantly below their 52-week lows, the rate at which they take capital from the Federal Reserve could rise to more than $500 billion a day. That money is exchanged for assets, some of them deeply impaired, the banks use as collateral. The value of that paper is probably dropping quickly.

The Fed may end up with less than it expected to show for its loans, but that probably does not matter. It has to open the door even wider to avert catastrophic consequences.

Douglas A. McIntyre