AIG rescued by Fed
Capping an extraordinary day in financial markets, US authorities pieced together an emergency $85 billion rescue of insurance company American International Group Inc to stave off a bankruptcy that could have thrown world markets into deeper turmoil.
AIG’s rescue calls for the US Federal Reserve to lend up to $85 billion to AIG for two years in exchange for a 79.9% equity stake. It comes just two days after US authorities refused to bail out investment bank Lehman Brothers Holdings Inc, forcing it into bankruptcy court despite pleas from Wall Street’s chiefs.
AIG will pay interest at a steep 8.5 percentage points above the three-month London Interbank Offered Rate, making the current rate equal to about 11.4%. That gives AIG a big incentive to embark on a massive asset sale program to pay back the loan quickly. “Thank God,” exclaimed Daniel Fuss, an influential bond manager who oversees more than $100 billion at Loomis, Sayles & Co in Boston. “AIG is interwoven with so many people and touches many companies around the world. This is a huge relief to many parts of the financial markets.” Around the time the AIG deal was announced, Barclays gave Wall Street another boost: It agreed to buy several parts of Lehman, the Wall Street investment bank that went bankrupt on Monday, for $1.75 billion.
News of the AIG package pushed up US stocks in after-hours trading, while sending the dollar and oil higher, and boosting most Asian stock markets. US stocks earlier had clawed back from their largest one-day drop in seven years on speculation about the AIG and Lehman deals. The two largest US investment banks, Goldman Sachs Group Inc and Morgan Stanley, also reported better-than-expected earnings. The bailout keeps AIG from surpassing Lehman as the largest US corporate failure ever.
It comes on the heels of a government bailout just over a week ago of mortgage finance companies Fannie Mae and Freddie Mac, and six months after the Fed helped to finance the fire sale of failed investment bank Bear Stearns to JPMorgan Chase & Co.
AIG’s bailout brings to about $700 billion the total of US rescue efforts to stabilize the financial system and housing market. Authorities may get much of that sum back provided asset prices don’t continue to slide. “In current circumstances, 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.
Senior Fed staff told Reuters that AIG’s broader business ties and its retail products meant a rescue was necessary, unlike Lehman. President George W. Bush was briefed on the plan during a Tuesday afternoon meeting, which included Fed Chairman Ben Bernanke, US Treasury Secretary Henry Paulson and US Securities and Exchange Commission Chairman Christopher Cox.
AIG’s management would be replaced, including CEO Robert Willumstad, who only held the reins for three months, a person briefed on the matter said. Edward Liddy, who was a former CEO at insurer Allstate Corp., will be named the new CEO, another source said.
AIG faced a cash crunch after $18 billion of losses over three quarters, largely because of complex securities that are tied to mortgages, and which plunged in value as the nation’s housing crisis deepened. Investors and credit rating agencies grew more doubtful that AIG could offset its losses with enough capital, which became prohibitively costly to raise as its share price plunged.
AIG’s life insurance, property and casualty insurance and aircraft leasing operations are considered healthy. The insurer, founded in Shanghai 89 years ago, now employs about 116,000 people and operates in more than 100 countries. “The Administration is approaching an unprecedented step, but unfortunately we are living in unprecedented times,” New York Sen. Charles Schumer said. “The alternatives are much worse.”
While the bailout prevents the massive immediate job losses likely to have occurred in a bankruptcy there is still a sense of disbelief among employees and others in the insurance industry about the suddenness of AIG’s decline. “I think throughout the industry there is definitely a sense of shock and sadness that by some measures the leading insurance company in the world could be brought down so quickly,” said Donald Light, an insurance industry analyst at Boston-based consultant Celent LLC.
Shares of AIG fell $1.15, or 31%, to $2.60 in after-hours trading, after dropping 79% in the prior three trading days. “This would mean another shareholder wipeout,” said David Ader, head of government bond strategy at RBS Greenwich Capital in Greenwich, Connecticut, referring to the bailout.
For 83-year-old former AIG CEO Maurice “Hank” Greenberg, who built the firm over a 38-year reign before being forced out in 2005, the meltdown will have been particularly painful. Not only did Greenberg, who controls 11% of the stock, lose a fortune in recent weeks, but his attempts to offer to help in its hour of need were rebuffed by the company.
The AIG deal overshadowed a Fed decision earlier in the day to hold its benchmark interest rates steady. “The Federal Reserve obviously thought the systemic risk from a major insurance company was too great to let go,” said Chris Orndorff, who helps oversee $50 billion at Payden & Rygel Investment Management in Los Angeles. “AIG not only does major business with Wall Street and the financial markets but also Main Street,” he added. “That is why the Fed stepped in. It would have been disruptive, in no uncertain terms, if AIG went bankrupt.” An AIG collapse could have cost financial institutions $180 billion, or 50% of the capital they have raised since the credit crunch began last year, RBC Capital Markets analyst Hank Calenti wrote.
Still, some said that the Fed may have wiped out what credibility it won resisting Lehman’s rescue pleas and may have opened the door to countless other companies to come calling for help. “We’re essentially continuing a system where profits are privatized and ... losses socialized,” said Nouriel Roubini, a professor at New York University’s Stern School of Business, adding that automakers, airlines and other struggling businesses will be lining up for a government bailout.
Barclays’ purchase includes Lehman’s North American sales, trading, and research and investment banking businesses, as well as its midtown Manhattan headquarters and two New Jersey data centres. About 10,000 of Lehman’s 26,000 employees would join Barclays. Barclays said the purchase requires bankruptcy court approval, and that it can walk away if the deal is not completed by September 24. “This is a once-in-a-lifetime opportunity for Barclays,” Barclays President Robert Diamond said in a statement. “We will now have the best time and most productive culture across the world’s major financial markets, backed by the resources of an integrated universal bank.”
The announcement was notable in that it made no mention of the future of Richard Fuld, Lehman’s long-time chief executive. In a sign of how much US authorities have been trying to prop up the markets, the Federal Reserve Bank of New York took the unusual step of providing some $87 billion in financing to help underpin trading with Lehman units to prevent disruption as customers fled, court documents showed. (Reuters)
SUPPORT THE BUDAPEST BUSINESS JOURNAL
Producing journalism that is worthy of the name is a costly business. For 27 years, the publishers, editors and reporters of the Budapest Business Journal have striven to bring you business news that works, information that you can trust, that is factual, accurate and presented without fear or favor.
Newspaper organizations across the globe have struggled to find a business model that allows them to continue to excel, without compromising their ability to perform. Most recently, some have experimented with the idea of involving their most important stakeholders, their readers.
We would like to offer that same opportunity to our readers. We would like to invite you to help us deliver the quality business journalism you require. Hit our Support the BBJ button and you can choose the how much and how often you send us your contributions.