Sept. 17 (Bloomberg) — American International Group Inc. averted the worst financial collapse in history by accepting an $85 billion federal loan and giving the government a majority stake.
The U.S. reversed its opposition to a bailout of AIG, the nation’s biggest insurer by assets, after private efforts failed and the Federal Reserve concluded that “a disorderly failure of AIG could add to already significant levels of financial market fragility,” according to a Fed statement late yesterday.
“It’s an enormous relief,” said David Havens, credit analyst for UBS AG in Stamford, Connecticut. “Nobody really knows what it would have meant if they would have been allowed to fail, but there was an enormous amount of systemic risk. The problem was, nobody really knew how bad it could have been.”
AIG gives up a 79.9 percent stake to the government and senior managers including Chief Executive Officer Robert Willumstad, 63, will give up their jobs. Retired Allstate Corp. CEO Edward Liddy, 62, will be AIG’s new leader, according to a person familiar with the plans, who declined to be identified because the change hadn’t been formally announced. Allstate is the biggest publicly traded home and auto insurer in the U.S.
The two-year revolving loan gives AIG time to sell assets “on an orderly basis,” the New York-based insurer said late yesterday in a statement. The U.S. has the right to discontinue payment of dividends to AIG’s common and preferred stockholders, who are already reeling from a 94 percent drop in common shares this year.
Global Disruptions
The agreement, supported by the Treasury Department, may avoid wider chaos in world markets that threatened to engulf more financial companies. Industry losses could have totaled $180 billion if AIG collapsed, according to RBC Capital Markets.
“This should help to calm the markets in the short-term and hopefully provides AIG some time to get their house in order,” said Michael Cuggino, president and CEO of San Francisco-based Pacific Heights Asset Management LLC, which manages about $3.8 billion.
AIG posted three quarterly losses totaling $18.5 billion. The insurer was pushed to the brink of failure because of a business that sold credit-default swaps, the protection for debt investors that plunged in value as the securities they guaranteed declined. The company covered $441 billion of fixed- income investments for banks and other parties, including $57.8 billion in securities tied to subprime mortgages.
The insurer’s survival became uncertain after credit-rating downgrades on Sept. 15 threatened to force AIG to post more than $13 billion in collateral when the company was already short on cash. AIG couldn’t raise money by selling shares after the stock plunged to less than $4 a share, compared with $70.11 in October, 2007.
Loan Terms
The Fed’s loan doesn’t require asset sales or the company’s liquidation, though these are the most likely ways AIG will repay the Fed, central bank staff officials told reporters on condition of anonymity. Interest will accrue at the three-month London interbank offered rate plus 8.5 percentage points.
The Fed doesn’t have an expectation of whether AIG will be smaller, nonexistent or similar to its current form at the end of the loan’s term, the staffers said.
The Fed or Treasury will end up actually holding the AIG stake, the staffers said. The Fed bailed out AIG while refusing aid to Lehman Brothers Holdings Inc., which collapsed earlier this week, because financial markets were more prepared for a Lehman failure, a Fed staff official said.
“It’s extraordinary, I am floored,” said former Treasury counsel Peter Wallison in an interview. “No one could have possibly imagined this a few months ago. I can’t imagine why the Fed would do this unless they were sure AIG’s failure posed systemic risk. It does speak to the fears in the market.”
From: AIG Gets $85 Billion Fed Loan, Cedes Control to Avoid Collapse
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