Economies: AIG nationalised

The US government is now the largest player in the US housing mortgage market.

Two weeks ago, it effected a takeover of Freddie Mac and Fannie Mae - and for the past year it has been steadily taking over smaller banks - often at the rate of about three each month - without anyone paying much attention.

In the case of those smaller banks, the process was different to the Freddie Mac and Fannie Mae approach. The smaller banks were subject to intervention - in effect put into administration under the control of what is now a very efficient and well-oiled FDIC machine.

The AIG approach is different again. The global company is massively exposed to the US housing market. It insures the "top-up" cover that allows buyers to borrow more than banks consider prudent (see How top up loans killed AIG )

AIG is not the only company with this problem.

I have seen the opinion of an economist whose name, unfortunately, I did not catch. He said that AIG should not be allowed to fail because it would lead to the failure of financial institutions who are not at fault. I pass no comment on whether AIG should be allowed to fail - certainly if it did so, the consequences would be catastrophic. But I entirely disagree that the financial institutions were not at fault.

They interpreted risk, went outside that which their own calculations considered prudent because they could insure against it. Without examining other causes - self certification loans, valuers bullied into pricing into valuations anticipating price rises, fraudulent income certificates and more - the hard truth is this: imprudent lending by primary lenders led first to a credit boom, then a credit bust. Families cannot afford the loans that the banks were more than happy to give them.

The US Government has offered USD85 milliard to AIG but the terms amount to a buy-out. The company had a market capitalisation of USD10 milliard before the crisis. The government will take "warrants" - tantamount to shares - in AIG for the value of its "loan."

Technically, it's not a nationalisation - but the purpose is to effect an orderly disposition of AIG's assets. In short, it's a form of nationalisation coupled with administration - but without the stigma of a court-administered administration or insolvency procedure.