Glad to see that my money is going to a good cause. Hey, can you bail me out of debt too! In the most far-reaching intervention into the private sector ever for the Federal Reserve, the government stepped in Tuesday to rescue American International Group Inc. with an $85 billion injection of taxpayer money.
From the Associated Press:
Under the deal, the government will get a 79.9 percent stake in one of the world’s largest insurers and the right to remove senior management.
AIG’s chief executive, Robert Willumstad, is expected to be replaced by Edward Liddy, the former head of insurer Allstate Corp., according to The Wall Street Journal, citing a person it did not name. Willumstad had been at the helm of AIG since June.
A call to AIG to confirm the executive change was not immediately returned.
It was the second time this month the feds put taxpayer money on the hook to rescue a private financial company, saying its failure would further disrupt markets and threaten the already fragile economy.
AIG said it will repay the money in full with proceeds from the sales of some of its assets. It will be up to the company to decide which assets to sell and the timing. The government does, however, have veto power.
Under the deal, the Federal Reserve will provide a two-year $85 billion emergency loan at an interest rate of about 11.5 percent to AIG, which teetered on the edge of failure because of stresses caused by the collapse of the subprime mortgage market and the credit crunch that ensued. In return, the government will get a 79.9 percent stake in AIG and the right to remove senior management.
AIG shares sank $1.34, or 36 percent, to $2.41 in morning trading Wednesday. They traded as high as $70.13 in the past year.
The government’s move was similar to its bailout of Sept. 7 of mortgage giants Fannie Mae and Freddie Mac, where the Treasury Department said it was prepared to put up as much as $100 billion over time in each of the companies if needed to keep them from going broke.
In an unprecedented move, the Federal Reserve Board is lending as much as $85 billion to rescue crumbling insurer American International Group, officials announced Tuesday evening.
The Fed authorized the Federal Reserve Bank of New York to lend AIG (AIG, Fortune 500) the funds. In return, the federal government will receive a 79.9% stake in the company.
Officials decided they had to act lest the nation’s largest insurer file bankruptcy. Such a move would roil world markets since AIG (AIG, Fortune 500) has $1.1 trillion in assets and 74 million clients in 130 countries.
An eventual liquidation of the company is most likely, senior Fed officials said. But with the government loan, the company won’t have to go through a tumultuous fire sale.
“[A] disorderly failure of AIG could add to already significant levels of financial market fragility and lead to substantially higher borrowing costs, reduced household wealth and materially weaker economic performance,” the Fed said in a statement.
The bailout marks the most dramatic turn yet in an expanding crisis that started more than a year ago with the mortgage meltdown. The resulting credit crunch is now toppling not only mainstay Wall Street players, but others in the wider financial industry.