U.S. government considers bailout for AIG

Section:

Authorities Consider Loan to AIG

By Francesco Guerrera, Aline van Duyn, and Krishna Guha
Financial Times, London
Tuesday, September 16, 2008

http://www.ft.com/cms/s/0/271257f2-83f1-11dd-bf00-000077b07658.html?ncli...

US authorities on Tuesday night were considering rescuing AIG with a loan of up to $100 billion, in an effort to prevent a collapse of the troubled insurer that would send shockwaves through the global financial system.

AIG's board was meeting on Tuesday night as the US Treasury and the Federal Reserve were working out details of a plan that would mark the latest government intervention to pull a troubled financial group back from the brink.

People close to the situation warned a final decision on the AIG rescue had not yet be taken and the plan could still fall apart.

They said a bridge loan from the government would keep AIG afloat until it unwinds billions of dollars in bad assets but added that other options were being considered, including putting the company into conservatorship -- a form of government takeover.

Under the bridge loan plan, there also could be incentives for AIG to sell assets quickly. Bankers involved in the talks said the structure also could involve US authorities receiving equity warrants in AIG.

During a frantic day of emergency meetings at the New York Fed, the Treasury and the Fed reversed their inital reluctance to bail out another financial institution.

AIG is a huge multinational insurer, but it is much more than that. A glance at the group’s structure shows why. Should it follow Lehman into administration, it would create shockaves across global financial markets.

In March, the Fed helped JPMorgan Chase buy Bear Stearns by providing a $29 billion credit line. Earlier this month, the Treasury seized control of troubled US mortgage giants Fannie Mae and Freddie Mac.

But at the weekend, the authorities refused to back Lehman Brothers and encouraged Merrill Lynch to sell itself to a rival. Lehman filed for bankruptcy in the early hours of Monday morning, rocking the financial system, while Merrill announced a $50 billion takeover by Bank of America on the same day.

AIG's plans for a private sector capital infusion were dashed by a further slump in its shares on Tuesday after sharp cuts in the insurer's credit ratings on Monday threatened to fuel a liquidity crisis and push it into bankruptcy.

Tim Geithner, president of the New York Fed, skipped the Fed's interest-setting meeting to focus on AIG -- a sign of the regulators' heightened state of alert over the insurer's plight.

AIG shares fell 21 per cent in New York on Tuesday to $3.75. It was far from clear how any intervention would affect equity and debt holders.

Amid increasingly desperate lobbying for government help, David Paterson, New York's governor, had said earlier in the day that the beleaguered insurer, which lost billions of dollars on derivatives and mortgage-backed securities, had "a day" to solve its problems.

Goldman Sachs has been hired by AIG to assess the potential losses on its badassets. JPMorgan Chase and Blackstone are advising the company, while Morgan Stanley is helping the Fed consider its options.

AIG's fight for survival came as Hank Greenberg, AIG's former chief executive and the company’s biggest shareholder, announced he was considering a bid to take over all or parts of the company.

Mr Greenberg has sent a letter to AIG's board and its chief executive, Robert Willumstad, complaining about their refusal to take up his repeated offers to help the company he ran for decades.

In a letter published in Wednesday's Financial Times, Mr Greenberg urged the US government to step in to provide a loan if private lenders could not be found.

He said AIG needed a temporary bridge loan in order to prevent further ratings cuts "which would likely prove fatal" and "pose systemic risk to the US and international financial systems."

Analysts at RBC said the demise of AIG could result in over $180 billion (E127 billion) of losses for financial institutions, with European banks particularly exposed.

AIG is the biggest provider of commercial insurance and life assurance in the US and the biggest provider of fixed annuities, a popular retirement savings product. It also has enormous global operations.

Once the biggest insurance company in the world, its market capitalisation has fallen to just over $7.5 billion.

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