U.S. Federal Reserve Puts AIG Rescue Plan into Action
In the face of American International Group’s failure to raise much-needed capital, and the reluctance of the private sector in throwing a life-line to the company, the U.S. Federal Reserve has stepped in with a loan of as much as $85 billion in return for a 79.9 percent stake in AIG. Treasury Secretary Henry Paulson noted that the Federal Reserve made the right move with regard to assisting AIG to continue meeting its obligations, which at the same time protects American taxpayers and to an extent allays fears of broader disruptions.
The announcement of Lehman Brothers filing for bankruptcy and the sale of Merrill Lynch to Bank of America exacerbated fears of AIG failing. These fears were further intensified when on Monday Fitch Rating, Moody’s Investors Services and Standard & Poor’s Ratings Services all lowered the insurer’s credit ratings. Although officials opted out of assisting Lehman Brothers and it seemed unlikely that they would rescue AIG, by Tuesday evening the decision was taken to bail the company out, as the failure of the insurance giant would have far-reaching consequences, especially considering the fact that AIG has more than 74 million clients in 130 countries.
A statement released by the company on Tuesday said that “AIG is a solid company with over $1 trillion in assets and substantial equity, but it has been recently experiencing serious liquidity issues.” It further noted that the loan “will protect all AIG policyholders, address rating agency concerns and give AIG the time necessary to conduct asset sales on an orderly basis.” The company also commended the Treasury Department and the Federal Reserve for the action taken to “address AIG’s liquidity needs and broader financial market concerns.” With AIG being a significant provider of life insurance, casualty insurance, property insurance and annuities, as well as playing a major role in the market for credit default swaps, analysts agree that the failure of the company would have had a global impact.
Senior Fed officials acknowledge that an eventual liquidation of AIG is more than likely on the cards, but the loan buys the insurer time to do this in a controlled fashion and not fire-sale style. The line of credit extended to AIG is available for two years, during which time the company will restructure and sell off some of its assets to repay the loan. Sale of assets and dividend payments will be done under government supervision. As the loan is backed by AIG’s assets and subsidiaries, the American taxpayer will not be footing the bill. The board of directors at AIG will remain, but the management team will be replaced.
The AIG rescue plan highlights the fact that the ongoing credit crunch has moved beyond Wall Street players and is impacting dramatically on the broader financial industry. The general consensus is that the bailout came just in time and should restore some calm to the current turbulent market.