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£48bn rescue plan for AIG, the giant they could not allow to fail
Simon English, City Correspondent17 Sep 2008
The credit crunch has claimed its biggest victim so far, with giant insurer American International Group being taken over by the US government.
AIG - best known in the UK for its sponsorship of Manchester United - was bailed out in an £48 billion deal after US authorities decided it would be "catastrophic" to allow the insurer to fail. In effect, Sir Alex Ferguson's team is now sponsored by the US taxpayer.
The US Treasury is lending the money to prop up AIG's balance sheet in return for an 80 per cent stake in the company.
Like Lehman Brothers before it, AIG faced bankruptcy due to the massive toxic assets it holds related to the US subprime mortgage crisis.
Unlike Lehman, AIG was deemed "too big to fail", a sign that regulators feared it would drag the global economy down with it if it were allowed to collapse.
AIG shares slumped 60 per cent on Monday morning as investors panicked. Last night US Treasury Secretary Hank Paulson pulled together a highly unusual deal in an attempt to prevent a domino effect around the world if AIG went bust.
Mr Paulson called AIG boss Robert Willumstad to tell him he was fired, and brought in another insurance executive, Edward Liddy, to lead the firm.
Mr Liddy's job will be to sell off AIG's profitable businesses as quickly as possible to repay as much of the £48 billion as he can.
The Federal Reserve said in a statement: "This loan will facilitate a process under which AIG will sell certain of its businesses in an orderly manner, with the least possible disruption to the overall economy."
Large chunks of Wall Street, supposedly the home of capitalism, are now under government control. On 6 September the US government seized mortgage giants Fannie Mae and Freddie Mac as they teetered towards collapse. It also helped engineer a bailout of investment bank Bear Stearns and approved the sale of Merrill Lynch to Bank of America.
But it refused to rescue Lehman Brothers, leading to thousands of job losses.
AIG earlier attempted to raise funds from other financial institutions to stay in business. When this failed, it had little choice but to ask for government assistance. The shares had fallen by more than 90 per cent this year before they were suspended. The Federal Reserve said that a "disorderly" collapse of AIG would devastate the economy, hence the need for public money.
The White House backed the move. Spokesman Tony Fratto said: "These steps are taken in the interest of promoting stability in financial markets and limiting damage to the economy."
AIG's problems stemmed from the insurance it sold to other investors against mortgage-backed investments tumbling in value.
As the mortgage-related securities sank in value, AIG was facing spectacular liabilities that it was unable to meet. In turn this left major banks facing losses that would have pushed them into bankruptcy.
New York Governor David Paterson said AIG had so many business interests that it had to be rescued. He added: "Its tentacles go further into the avenues of business, in mortgages, in credit, in hedge funds, in countless ways that affect consumers, that affect homeowners."
The bailout will face some serious political opposition. Charles Schumer, a New York Democrat politician, said of the move: "The administration is approaching an unprecedented step, but unfortunately we are living in unprecedented times."
FIRM'S TENTACLES SPREAD INTO ALMOST EVERY BRITISH HOME
AIG is not a household name but most British families will have had dealings with the firm without even knowing it.
The tentacles of the sprawling financial giant spread far beyond its New York base.
It writes 12 million home and car insurance policies in the UK each year, sells mortgages and loans through its Ocean Finance arm and underwrites warranties on goods sold at John Lewis, among others. AIG employs 116,000 people across the world, of which 3,000 work in 11 offices in Britain. At one point it was the 18th biggest company in the world.
It has a stake in London City airport and owns ILFC, the world's largest aircraft leasing company. It also has a wealth management arm. These businesses are among those likely to be sold off.
AIG has existed since 1919 but the modern firm was built by former chief executive Hank Greenberg, a titan of the US financial scene who was recently tainted by an accountancy scandal and forced out in 2005. He remains its biggest individual shareholder.
He was replaced at the helm by Martin Sullivan, an Essex boy who joined the London office as a 17-year-old clerk. Mr Sullivan quit in June as losses spiralled.
In calling for AIG to be rescued, Mr Greenberg described the business as a "national treasure".
US taxpayers may not agree.
