Rigged

Why Would Treasury Cut AIG's Interest Payment?

Lowering the interest rates will make AIG cash flow and financial looks better. This would then may result in some credit upgrades and remove the needs for collateral.

Your assumption that under the current model AIG is less likely to default is not correct. If it was, the credit agencies would not be downgrading AIG and is looking to do more downgrade. The credit agencies only see the terms of the $85B line-of-credit and they are looking the other way regarding your assumption that everything at AIG is backed by the the Govt.

You must agree that this loan at 8.5% + libor for drawn portions and 8.5% for undrawn portion is onerous and not consistent with any other Federal loans in place. Even if you go back to the old Chrysler bailout. Or if you look at FNN or FRE or what is offer under TARP.

If AIG financial and operating cash flows looks better, maybe it can raise capital on the open market (for its remaining 20%) and it will have more leverage in selling off assets to pay the Govt.

Its a win-win for the Fed and AIG shareholder if the $85B loan is under better terms. AIG market cap goes up because its a loan that AIG can realistically pays off. With AIG market cap going up the Govt.'s 80% shares goes up also.