New York — The federal government moved swiftly late Tuesday to save American International Group Inc. (AIG) with an $85 billion loan. With roughly $1 trillion in assets and a huge derivatives business, an AIG collapse could trigger the demise of other financial institutions—so-called systemic risk, say experts.
"A disorderly failure of AIG could add to already significant levels of financial market fragility," the Fed said in a prepared statement. The loan gives the U.S. government a 79.9% stake in the company.
The decision comes on the heels of the U.S. Treasury Department’s decision to take over the quasi-government mortgage finance companies Fannie Mae and Freddie Mac, in what was then called the most radical intervention in private business in the central bank’s history.
In a report on CNBC, Maurice "Hank" Greenberg, the former chief executive of AIG and its largest shareholder, said the company required a bridge loan and less pressure from ratings agencies to avoid going out of business. C.V. Starr Co., the firm he currently runs, had said Tuesday that it may try to take control of the insurer.
The 24-month loan is expected to be repaid from the proceeds of the sale of the firm’s assets, said the statement. “The loan is collateralized by all the assets of AIG, and of its primary non-regulated subsidiaries, and of its primary non-regulated subsidiaries.”
Further to its statement, the Fed said, "This loan will facilitate a process under which AIG will sell certain of its businesses in an orderly manner."
New York Gov. David Paterson, who oversees AIG's main regulator, reported on Tuesday that the insurer had one day to shore up its finances, stressing that a collapse of the New York-based company would be "catastrophic."
Earlier today, officials from the Treasury Department, the Federal Reserve and the New York State Insurance Department met at the Federal Reserve Bank of New York with AIG and representatives from other leading financial institutions to discuss possible solutions to the insurer's predicament earlier Tuesday.
AIG said late Tuesday it won't reduce capital at any of its subsidiaries or tap into Asian operations for liquidity.
The company also stressed in a formal statement that AIG's life insurance, general insurance and retirement services businesses, including its large Asian operations, continue to operate normally, remain adequately capitalized and are capable to meeting obligations to policyholders. AIG shares failed to recover after the statement.
A Treasury spokeswoman referred MarketWatch, a major source for this story, to comments made Monday by Treasury Secretary Henry Paulson. "Nothing is more important right now than the stability of our capital markets," he said during a news conference after the bankruptcy of New York-based Lehman Brothers. “We're very vigilant, but we do not take, and I don't take, lightly, ever putting the taxpayer on the line to support an institution."
When asked whether that meant no more government bailouts of financial institutions, Paulson said: "Don't read it as no more; read it as that it's important, I think, for us to maintain the stability and orderliness of our financial system."
AIG has been stunned by the housing crisis and credit crunch because its derivatives unit sold guarantees on mortgage-related securities known as collateralized debt obligations, or CDOs, using credit-default swaps.
AIG reported a quarterly net loss of more than $5 billion in August as it wrote down these exposures and suffered impairments on some of its mortgage-related investments.
Sources: The New York Times, MarketWatch, Dow Jones
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