Days after allowing Lehman Brothers Inc. to topple into bankruptcy, the Federal Reserve Board late Tuesday saved American International Group Inc. with an $85 billion bridge loan that gives the central bank a 79.9 percent stake in the world's largest insurer.
The Federal Reserve was unwilling to bet that already roiling financial markets could withstand the shock of AIG's bankruptcy, particularly so soon after Lehman's Chapter 11 filing on Monday.
The plan, which AIG accepted on Tuesday night, severely dilutes existing shareholders. The seizure of AIG comes only nine days after the Department of the Treasury took control of Fannie Mae and Freddie Mac, two private enterprises that together hold more than $5 trillion in mortgage-related debt obligations.
Observers had said the collapse of AIG would have had dire consequences for the global economy, because the insurer was a counterparty to so many banks. It also insured more than $441 billion of fixed-income investments held by the world's leading institutions, including $57.8 billion in paper related to subprime mortgages.
With the macroeconomic concerns easing, the big question now is whether AIG -- once an American financial titan -- can finally begin to put its problems behind it.
The New York insurer has lurched from crisis to crisis since early 2005 when then New York attorney general Eliot Spitzer and the Securities and Exchange Commission began to investigate the operations. That led to a sequence of calamities, including the ousting of CEO Hank Greenburg, that resulted in the company's market capitalization plunging from $205 billion in April 2004 to $3 billion at one point Tuesday.
According to the official statement, the deal, "with the full support of the Treasury Department, authorizes the Federal Reserve Bank of New York to lend up to $85 billion to AIG under Section 13(3) of the Federal Reserve Act. The U.S. government will receive a 79.9 percent equity interest in AIG and has the right to veto the payment of dividends to common and preferred shareholders."
The loan has a 24-month term, with interest accruing on the outstanding balance at a rate of three-month Libor plus 850 basis points and is collateralized by all the assets of AIG and its primary nonregulated subsidiaries.
Bloomberg reported that Chairman and Chief Executive Robert Willumstad will be replaced by former Allstate Corp. CEO Edward Liddy. Willumstad had joined AIG in 2006 after being denied the top job at Citigroup Inc., where he had been in charge of banking operations.
The government will have AIG sell assets to repay the loan, but with breathing room, the insurance company should be able to avoid letting its businesses go at fire sale prices. The bridge loan was likely AIG's last chance to salvage the situation after talks with private equity firms collapsed over the weekend.
These sales will no doubt include an orderly disposal of financial assets to lower the company's risk. But the new management will also face the decision on whether to strengthen the balance sheet by selling some of AIG's stronger businesses, including the International Lease Finance Corp. aircraft leasing operation.
"We believe ILFC, AIG's airline leasing unit, is probably the most likely asset to be sold," said Standard & Poor's equity analyst Catherine A. Seifert in a note Monday.
The Wall Street Journal, citing people familiar with the situation, reported Wednesday that ILFC chairman Steven Udvar-Hazy is working on a plan to buy out the unit. The paper said Udvar-Hazy and other ILFC officials have been in around-the-clock discussions with potential investors since late Sunday.
AIG's shares have been under tremendous pressure since last week; sliding 21.22 percent to close at $3.75 on Tuesday. The bleeding continued into after-hours trading, when the stock was down 55 percent by 5 p.m. The company has lost 70 percent of its value since its Friday close.
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