By allowing ads to appear on this site, you support the local businesses who, in turn, support great journalism.
Government steps in again, bails out AIG with $85B
AIG NYML222 5893671
A man leaves an American International Group office building Tuesday, Sept. 16, 2008 in New York. Shares of American International Group Inc. fell Tuesday as investors questioned whether the huge insurer would come up with more money to stay in business and avoid igniting even more global financial turmoil. - photo by Associated Press

    WASHINGTON — Another day, but not just another bailout. This one’s a stunning government takeover.
    In the most far-reaching intervention into the private sector ever for the Federal Reserve, the government stepped in Tuesday to rescue American International Group Inc. with an $85 billion injection of taxpayer money. Under the deal, the government will get a 79.9 percent stake in one of the world’s largest insurers and the right to remove senior management.
    AIG’s chief executive, Robert Willumstad, is expected to be replaced by Edward Liddy, the former head of insurer Allstate Corp., according to a person with direct knowledge of the matter. The person asked not to be identified by name because it had not officially been announced. Willumstad had been at the helm of AIG since June.
    Two calls to AIG to confirm the executive change were not immediately returned.
    It was the second time this month the feds put taxpayer money on the hook to rescue a private financial company, saying its failure would further disrupt markets and threaten the already fragile economy.
    AIG said it will repay the money in full with proceeds from the sales of some of its assets. It will be up to the company to decide which assets to sell and the timing. The government does, however, have veto power.
    Under the deal, the Federal Reserve will provide a two-year $85 billion emergency loan at an interest rate of about 11.5 percent to AIG, which teetered on the edge of failure because of stresses caused by the collapse of the subprime mortgage market and the credit crunch that ensued. In return, the government will get a 79.9 percent stake in AIG and the right to remove senior management.
    AIG shares sank $1.54, or 41 percent, to $2.21 in afternoon trading Wednesday. They traded as high as $70.13 in the past year.
    The government’s move was similar to its bailout of Sept. 7 of mortgage giants Fannie Mae and Freddie Mac, where the Treasury Department said it was prepared to put up as much as $100 billion over time in each of the companies if needed to keep them from going broke.
    The Fed said it determined that a disorderly failure of AIG could hurt the already delicate financial markets and the economy.
    It also could ‘‘lead to substantially higher borrowing costs, reduced household wealth and materially weaker economic performance,’’ the Fed said in a statement.
    The decision to help AIG marked a reversal for the government from the weekend, when it refused to use taxpayer money to bail out Lehman Brothers Holdings Inc. Lehman, which filed for bankruptcy protection Monday, collapsed under the weight of mounting losses related to its real estate holdings.
    The White House said it backed the Fed’s decision Tuesday.
    ‘‘These steps are taken in the interest of promoting stability in financial markets and limiting damage to the broader economy, ‘‘ White House spokesman Tony Fratto said.
    After meeting with Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke in a late-night briefing on Capitol Hill, Congressional leaders said they understood the need for the bailout.
    ‘‘The administration is approaching an unprecedented step, but unfortunately we are living in unprecedented times. Hearing of these plans, you have to stop to catch your breath. But upon reflection, the alternatives are much worse,’’ said Sen. Charles Schumer, D-N.Y.
    In a statement late Tuesday, AIG’s board of directors said the loan will protect all AIG policy holders, address concerns of rating agencies and buy the company time to sell off assets.
    ‘‘We expect that the proceeds of these sales will be sufficient to repay the loan in full and enable AIG’s businesses to continue as substantial participants in their respective markets,’’ the statement said. ‘‘In return for providing this essential support, American taxpayers will receive a substantial majority ownership interest in AIG.’’
    New York officials said the deal helps stave off a fiscal crisis for the state. AIG is based in New York.
    ‘‘Policy holders will be protected, jobs will be saved,’’ New York Gov. David Paterson said Tuesday night.
    In an interview on ABC’s ‘‘Good Morning America’’ program Wednesday, former longtime AIG CEO Maurice ‘‘Hank’’ Greenberg was asked whether critics are being fair who say the situation at AIG and the financial markets generally happened because of greed, bad business practices and corruption.
    ‘‘No, I think it’s an unfair appraisal,’’ said Greenberg, who was replaced as CEO three years ago as part of an accounting probe. ‘‘You know, there are many things that contributed to this unfortunate episode. after I left the company, all the risk management procedures that we had in place were obviously dismantled. I can’t explain that. There’s a new board of directors. One should be asking that board of directors what they did and why.’’
    Greenberg said he has lost ‘‘my entire net worth. Literally, my entire net worth.’
    ‘‘Worked 40 years building the greatest insurance company in history, one that everyone in the world envied who was in this industry. I’ll get by, but my heart goes out for the thousands and thousands of employees and their families who shareholders and not only in the United States but worldwide. That is a tragedy,’’ he said.
    The Fed’s move was part of a concerted push to help calm jittery markets and investors around the world.
    On Tuesday, the Fed decided to keep its key interest rate steady at 2 percent, but acknowledged stresses in financial markets have grown and hinted it stood ready to lower rates if needed.
    The central bank also pumped $70 billion into the nation’s financial system to help ease credit stresses. In emergency sessions over the weekend, the Fed expanded its loan programs to Wall Street firms, part of an ongoing effort to get credit flowing more freely.
    The stock market, which Monday posted its largest point loss session since the Sept. 11 attacks, recovered Tuesday after the Fed’s decision on interest rates. The Dow Jones industrials rose 141 points after losing 500 points on Monday.
    The problems at AIG stemmed from its insurance of mortgage-backed securities and other risky debt against default. If AIG couldn’t make good on its promise to pay back soured debt, investors feared the consequences would pose a greater threat to the U.S. financial system than this week’s collapse of the investment bank Lehman Brothers.
    The worries were heightened Monday after Moody’s Investor Service, Standard and Poor’s and Fitch Ratings lowered AIG’s credit ratings, forcing AIG to seek more money for collateral against its insurance contracts. Without that money, AIG would have defaulted on its obligations and the buyers of its insurance — such as banks and other financial companies — would have found themselves without protection against losses on the debt they hold.
    On Wednesday, Fitch Ratings revised its outlook on AIG to ‘‘evolving’’ from ‘‘negative,’’ saying it views the deal ‘‘as a favorable development that alleviates significant near-term liquidity concerns.’’
    Fitch said that the agreement with the Fed provides ‘‘a platform of stability for AIG’s primary operating subsidiaries and significantly curtails substantive pressure on AIG to sell assets quickly to fund potential cash calls.’’
    Such action will enable AIG to take a more comprehensive and deliberate approach to restructuring the company that better serves the interests of policyholders and creditors, the rating agency said.
    The agency currently rates AIG’s senior debt ’A’, the sixth-highest investment grade.

Sign up for the Herald's free e-newsletter