By Susan A. Baird
PBN Web Editor
NEW YORK – The nation’s largest insurer, American International Group Inc. (NYSE: AIG), will be kept afloat long enough to permit the selloff of its assets, under a federal rescue plan announced late last night.
The ailing giant has sustained record losses related to the collapse of the U.S. housing and mortgage markets. Its CEO, Robert Willumstad, was ousted last night by U.S. Treasury Secretary Henry M. Paulson Jr. in favor of Edward Liddy, a former Allstate Corp. CEO who is now a partner at private-equity firm Clayton Dubilier & Rice Inc., a person familiar with the matter told Bloomberg News.
AIG spokesman Nicholas Ashooh declined to comment about the management change, while Liddy and Willumstad weren’t immediately available for comment, the news service said. Bloomberg noted that, when Willumstad took control of AIG in June, he had promised to complete a strategic review by Sept. 25, but the insurer unraveled before he could unveil his plan.
The AIG board of directors “approved this transaction, based on its determination that this is the best alternative for all of AIG’s constituencies, including policyholders, customers, creditors, counterparties, employees and shareholders,” the company said in a statement prominently posted on its Web site.
“AIG is a solid company with over $1 trillion in assets and substantial equity, but it has been recently experiencing serious liquidity issues,” the company’s board continued. “We believe the loan – which is backed by profitable, well-capitalized operating subsidiaries with substantial value – will protect all AIG policyholders, address rating-agency concerns and give AIG the time necessary to conduct asset sales on an orderly basis. … Policyholders of AIG companies around the world can rest assured that AIG's commitments will continue to be honored.”
Federal regulators had been hoping to arrange a private bailout of the company – an effort that kept New York Fed President Timothy Geithner too busy to attend the meeting at which policymakers decided not to change the benchmark federal funds rate (READ MORE) – But after that attempt collapsed, they decided to intervene, offering a loan of up to $85 billion.
In a 9 p.m. statement explaining its policy reversal, the Federal Reserve board said that, “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.”
Fed officials emphasized that “the secured loan has terms and conditions designed to protect the interests of the U.S. government and taxpayers.”
The insurer’s borrowing “is expected to be repaid from the proceeds of the sale of the firm’s assets,” they added, and “the loan is collateralized by all the assets of AIG, and of its primary non-regulated subsidiaries.” Besides a home and auto loan company, retirement and asset-management services, life insurance and business insurance divisions, AIG owns the nation’s largest airline leasing company.
The loan terms give the federal government “a 79.9-percent equity interest in AIG,” substantial control over the company’s operations and management, including the right to veto dividend payments.
In return, AIG will be permitted to borrow up to $85 billion, for a term of 24 months, at an interest rate of 850 basis points above the three-month London Inter-Bank Offered Rate (LIBOR), based on the interest rate banks offer to other banks seeking short-term loans. (By comparison, the federal funds rate is the Fed target for overnight loans between banks.)
That “punitive” rate “makes it extremely clear that this is not a subsidy extended to keep the company afloat, but rather a stranglehold that makes AIG unviable while ensuring that its obligations will be met,” UniCredit SpA analyst Marco Annunziata wrote in a note to clients, according to Bloomberg News.
AIG common stock – which already had lost 94 percent of its value since the year began, closing yesterday to $3.75 per share – plummeted today on the takeover news. As of 11 a.m., they were trading at $2.137 per share, down 43 percent for the day.
“These are challenging times for our financial markets,” Paulson said in a statement after the Fed bailout was announced. “We are working closely with the Federal Reserve, the [U.S. Securities and Exchange Commission] and other regulators to enhance the stability and orderliness of our financial markets and minimize the disruption to our economy.
“I support the steps taken by the Federal Reserve … to assist AIG in continuing to meet its obligations, mitigate broader disruptions and at the same time protect the taxpayers.”
For more information about the American International Group Inc. (NYSE:AIG), visit www.aig.com. Additional information is available from the Federal Reserve Board at www.FederalReserve.gov and the U.S. Treasury Department at www.treas.gov.
