(AFP) – Sep 17, 2008
WASHINGTON (AFP) — In a move aimed at averting a new global economic shock, the US Federal Reserve agreed an unprecedented 85-billion-dollar rescue loan for American International Group.
The deal, sealed late Tuesday, saved AIG from collapse and gave the US government a 79.9 percent stake in the insurance behemoth.
AIG had appeared to be in a death spiral after more than a week of turmoil in financial markets that led to the failure of investment giant Lehman Brothers and the sale of Wall Street rival Merrill Lynch.
It also came just nine days after the US government nationalized two other giants of the financial system, Fannie Mae and Freddie Mac, drowning from the collapse of the US real estate market.
A central bank statement said the Federal Reserve Board made the decision "with the full support of the Treasury Department" under Section 13(3) of the Federal Reserve Act with terms that "protect the interests of the US government and taxpayers".
The 24-month line of credit will carry an interest rate equivalent to the London interbank rate plus 850 basis points -- or 8.5 percentage points above the rate used for most interbank loans. The government will have the right to veto the payment of dividends to shareholders.
Treasury Secretary Henry Paulson said he approved the deal, saying it would "mitigate broader disruptions and at the same time protect the taxpayers."
As part of the deal, Paulson demanded that AIG chief executive Robert Willumstad step down, according to the Wall Street Journal.
Willumstad, named to the top job just three months ago, will be succeeded by Edward Liddy, the former head of insurer Allstate Corp, the Journal reported Wednesday on its website.
After being briefed on the plan, Senator Charles Schumer, a banking committee member, said "You have to stop to catch your breath. But upon reflection, the alternatives are much worse."
But Speaker of the House Nancy Pelosi railed against the loan as "our nation's largest bailout ever".
"An 85-billion-dollar loan is a staggering sum and is just too enormous for the American people to bear the risk," she said in a statement. "Congress will demand answers to prevent this from happening again."
Some analysts had argued that an AIG collapse could trigger a wave of failures in the global financial system and deepen the credit crunch.
Mike Shedlock at SitkaPacific Capital Management said the deal appeared to be a government takeover.
"If you guessed nationalization you guessed correctly. It is highly unlikely this will be temporary," he said in a blog posting.
"As with Fannie and Freddie, common shareholders are going to get wiped out and taxpayers are going to be on the hook. It will not stop at 85 billion dollars. Lord only knows what this will cost."
Robert Brusca at FAO Economics said however it was "not a nationalization because the Fed does not intend to run AIG. The Fed will get a profit on this, which it should."
Brusca said the deal appears structured in a way similar to the one that bailed out Chrysler in the 1980s that gives the government warrants that are special shares.
He said the loan is at "an extremely high rate" and will encourage AIG to quickly sell off assets to pay back the loan.
"It's likely going to ensure the survival (of AIG) and orderly disposition of the units that AIG would like to sell," he said.
"The government has taken an institution that was too big to fail and too interconnected to fail and lent it the money it needs to liquidate its assets."
Shares in AIG -- a company with one trillion dollars in assets and tentacles in many markets -- went on a roller-coaster ride Tuesday, eventually closing down 21 percent after a 60-percent plunge Monday.
News of the AIG loan did not erase global market volatility, however. Asian stocks closed mixed Wednesday, with Hong Kong shedding 3.6 percent and Shanghai 2.9 percent on uncertainties over the impact of the US financial crisis.
Europe's main stock markets were also erratic.
In a statement earlier, AIG said its insurance, retirement and other financial services were operating normally.
AIG said its businesses, "including its extensive Asian operations, continue to operate normally and remain adequately capitalized and fully capable of meeting their obligations to policyholders".
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