[FT]US considers $85bn AIG rescue

US considers $85bn AIG rescue
By Francesco Guerrera in London, Aline van Duyn in New York and Krishna Guha in Washington
Published: September 16 2008 14:47 Last updated: September 17 2008 01:33
US authorities on Tuesday night were considering a deal to take control of AIG in return for an $85bn loan aimed at staving off a collapse of the giant insurer that plays a crucial role in the global financial system, people familiar with the talks said.
Under the plan, the authorities would receive equity warrants giving them a 79.9 per cent stake in AIG. In returrn, the insurer would receive a bridge loan of $85bn to keep it afloat until it could dispose of billions of dollars in assets.
The issuance of the warrants to the government is designed to prevent existing shareholders from profiting from a rescue of the company, which has been hobbled by the losses on complex securities backed by mortgages and other assets.
AIG’s board was meeting on Tuesday night as the Treasury and Federal Reserve were working out details of a plan that would mark the latest intervention to pull a troubled financial group back from the brink.
People close to the situation warned that a decision on the AIG rescue had not been taken and the plan could fall apart.
Spiralling subsidiaries
AIG is a huge multinational insurer, but it is much more than that. A glance at the group’s structure shows why. Should it follow Lehman into administration, it would create shockaves across global financial markets. View our diagram of AIG’s structure
Even as the plan was being being mapped out, there were already signs of political opposition.
“I hope they don’t go down the road of a bailout, because where do you stop?’’, Richard Shelby, top Republican on the Senate Banking Committee, told Bloomberg Television.
During a day of emergency meetings at the New York Fed, the Treasury and Fed reversed initial reluctance to bail out another financial institution.
In March, the Fed helped JPMorgan Chase buy Bear Stearns by providing a $29bn credit line. This month, the Treasury seized control of troubled mortgage giants Fannie Mae and Freddie Mac.
But at the weekend the authorities refused to back Lehman Brothers and encouraged Merrill Lynch to sell itself to a rival. Lehman filed for bankruptcy early Monday, rocking the financial system, while Merrill announced a $50bn takeover by Bank of America the same day.
AIG’s plans for a private sector capital infusion were dashed by a further slump in its shares after sharp cuts in the insurer’s credit ratings on Monday threatened to fuel a liquidity crisis and push it into bankruptcy.
Tim Geithner, president of the New York Fed, skipped the Fed’s interest-setting meeting to focus on AIG – a sign of the regulators’ heightened state of alert over the insurer’s plight.
AIG shares fell 21 per cent in New York to $3.75. It was not clear how an intervention would affect equity and debt holders.
Amid increasingly desperate lobbying for help, David Paterson, New York governor, had said earlier that the beleaguered insurer had “a day” to solve its problems.
Goldman Sachs has been hired by AIG to assess the potential losses on its bad assets. JPMorgan Chase and Blackstone are advising the company, while Morgan Stanley is helping the Fed consider its options.
AIG’s fight for survival came as Hank Greenberg, AIG’s former chief executive and the company’s biggest shareholder, said he was considering a bid to take over all or part of the company.
Mr Greenberg has sent a letter to AIG’s board and its chief executive, Robert Willumstad, complaining about its refusal to take up repeated offers to help the group he ran for decades.
In a letter in today’s Financial Times, Mr Greenberg urged the government to provide a loan. He said AIG needed a temporary bridge loan in order to prevent further ratings cuts “which would likely prove fatal” and “pose systemic risk to the US and international financial systems”.
Analysts at RBC said the demise of AIG could result in over $180bn of losses for financial institutions.
AIG is the biggest provider of commercial insurance and life assurance in the US.
Copyright The Financial Times Limited 2008