U.S. Gives AIG $85 Billion Loan in Bid to Avert Contagion

Sept. 17, 2008
Government takes an 80% stake in company

In a move aimed at averting a new global economic shock, the U.S. Federal Reserve agreed an unprecedented $85 billion rescue loan for American International Group. The deal sealed late on Sept. 16 saved AIG from collapse and gave the government a 79.9% 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 government nationalized two other giants of the financial system, Fannie Mae and Freddie Mac, drowning from the collapse of the 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 U.S. 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 on Sept. 17.

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 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.

Shares in AIG -- a company with one trillion dollars in assets and tentacles in many markets -- went on a roller-coaster ride on Sept. 16, eventually closing down 21% after a 60% plunge on Sept. 15.

News of the AIG loan did not erase global market volatility, however. Asian stocks closed mixed on Sept. 17, with Hong Kong shedding 3.6% and Shanghai 2.9% on uncertainties over the impact of the U.S. financial crisis.Europe's main stock markets were also eratic.

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."

Copyright Agence France-Presse, 2008

Sponsored Recommendations

Voice your opinion!

To join the conversation, and become an exclusive member of IndustryWeek, create an account today!