Investment guru Mohamed El-Erian says the Federal Reserve’s bailout of insurer American International Group (AIG) won’t solve the world’s financial meltdown.
“The AIG issue may help a little bit, because it reduces uncertainty. But it won’t be a huge help,” the CEO of Pimco told CNBC.
The Fed agreed Tuesday to lend AIG $85 billion in exchange for a 79.9 percent equity stake in the world’s biggest insurance company. The two-year loan currently carries a steep interest rate of 11.4 percent.
“The deal is well designed for the government,” El-Erian says.
“The interest rate is high, and the loan is well collateralized. I think the government will make money out of this.”
But the biggest issue is the health of the financial system. “The problem with the AIG deal is that it may not stabilize the system,” he says.
On this point, the Fed’s injection of $70 billion into the banking system Tuesday was more important, as interbank lending began to freeze, El-Erian says. “That’s absolutely critical because if that lending goes, other things will break quickly.”
He says it would have been better if the Treasury, rather than the Fed, had bailed out AIG because the central bank has already committed a lot of money to buoy the financial system.
“The Fed’s balance sheet is starting to get encumbered by too many things,” El Erian says.
Other experts agree that the AIG deal was necessary.
“It would have been a chain reaction. The spillover effects could have been incredible, " Princeton University economist Uwe Reinhardt told The New York Times.
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