They broke it, you bought it

Congratulations, America! You now own a failed insurance company:

In a stunning turn, the Federal Reserve Board is lending as much as $85 billion to rescue crumbling insurer American International Group, officials announced Tuesday evening.

The Fed authorized the Federal Reserve Bank of New York to lend AIG (AIG, Fortune 500) up to $85 billion. In return, the federal government will receive a 79.9% stake in the company.

Officials decided they must act lest the nation's largest insurer file bankruptcy. Such a move would roil world markets since AIG (AIG, Fortune 500) has $1.1 trillion in assets and 74 million clients in 130 countries.

"[A] disorderly failure of AIG could add to already significant levels of financial market fragility and lead to substantially higher borrowing costs, reduced household wealth and materially weaker economic performance," the Fed said in a statement.

The bailout marks the most dramatic turn yet in an expanding crisis that started more than a year ago in the mortgage meltdown. The resulting credit crunch is now toppling not only mainstay Wall Street players, but others in the wider financial industry .

The line of credit to AIG, which is available for two years, is designed to help the company meet its obligations, the Fed said. Interest will accrue at a steep rate of 3-month Libor plus 8.5%, which totals 11.31% at today's rates. AIG will sell certain of its businesses with "the least possible disruption to the overall economy."

Taxpayers will be protected, the Fed said, because the loan is backed by the assets of AIG and its subsidiaries. The loan is expected to be repaid from the proceeds of the asset sales.

Now perhaps someone with better knowledge of economics than I have can clarify this, but if I read this correctly, the American taxpayer has taken a 79% stake in AIG by loaning it money at usurious interest. The collateral for this loan is the assets of AIG and its subsidiaries. But AIG has lost what, 80% of its value? This sounds to me like we just gave a huge dollar amount mortgage at a really high rate for a house that's depreciated so much it's practically worthless -- and they're telling us that because the loan is backed by this depreciating asset, our money is safe.

Hello? Anyone? Bueller? Bueller?