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Tuesday, September 16, 2008


In a scramble to avert what would have been the biggest casualty of the credit crisis to date, the United States government Tuesday night agreed to sweep in and bail out global insurance giant American International Group (AIG/NYSE).

The dramatic U-turn puts AIG in the government's control in exchange for an emergency loan after the group at the heart of the financial system failed in a drive to raise about $85-billion from a private consortium, according to people familiar with the deal.

Leaders on Capitol Hill were briefed on the package last night, according to a Congressional aide who confirmed the broad outlines of the agreement to the National Post, which comes after regulatory officials earlier this week rebuffed the cash-starved company's requests for financing.

Hank Paulson, the U.S. Treasury Secretary, had steadfastly rejected the idea of a government bailout for Manhattan-based AIG, the largest insurer in the world with US$1-trillion in assets. He and other federal officials had been pushing AIG and Wall Street banks to come up with a private sector solution for the billions in emergency financing.

But those attempts came up dry after two days of searching for funds and with a potentially catastrophic bankruptcy looming as early as today, Washington was backed into a corner.

After meeting with George W. Bush, the U.S. President, on Tuesday, it was agreed that consequences of letting AIG fail were too catastrophic for the financial system.

The Congressional aide said political leaders on both sides of the aisle were focused on what a collapse of AIG would have meant for Americans, but did not discount the possibility that the deepening crisis could slow the drive of Republican presidential candidate John McCain for the White House.

An AIG bankruptcy would have been a much greater financial calamity than the relatively orderly liquidation of Lehman Brothers Holdings, the fourth-largest Wall Street investment bank, which filed for bankruptcy Monday after the U.S. government refused to come to its rescue.

"I don't know of a major bank that doesn't have some significant exposure to AIG," Kenneth Lewis, chief executive officer of Bank of America, told CNBC in an interview. "An AIG collapse would be a much bigger problem than most that we've looked at."

A implosion of AIG, which offers insurance protection to companies around the globe, could have slammed financial institutions with US$180 billion in losses, Hank Calenti, an analyst with RBC Capital Markets estimated in a report on Tuesday. Canadian banks could have been hard hit.

Still, the U.S. government was loath to step in with a bailout. After coming to the rescue of Bear Stearns Cos. and government-sponsored mortgage behemoths Fannie Mae and Freddie Mac, Mr. Paulson and others from the Bush administration had been growing increasingly worried about the issue of "moral hazard" – essentially encouraging risky behavior on the part of financial institutions by providing them with a safety net when things go bad.

But with AIG unable to round up the multi-billion dollar lifeline it needed from private sources, the government officials felt they had no other choice, people familiar with the negotiations said.

With time fast running out for the company, the government bailout option got put on the table Tuesday afternoon as executives and officials huddled in meetings in the New York Federal Reserve building in downtown Manhattan.

New York Governor David Paterson, who on Monday agreed to bend rules that would allow AIG to borrow US$20-billion from its subsidiaries to cover its day-to-day operations, told CNBC business channel Tuesday morning that the company only had a day to find the US$75-billion in emergency financing it was then seeking to survive.

The bailout comes as the credit crisis, now in its fourteenth month, appears to be deepening, rather than abating as regulators had hoped.

Soon after it was clear over the weekend that Lehman would have no choice but to file for bankruptcy protection, Merrill Lynch & Co. opted to agree to a takeover by Bank of America to avoid the same fate.

As with Lehman and Merrill, AIG's shares started to nosedive last week as investors grew increasingly spooked about the company's massive exposure to toxic mortgage loans.

As word of a possible Fed bailout leaked on Tuesday, AIG's shares went on a roller-coaster ride, dragging the broader stock market along with it.

Its shares closed yesterday down 21% at US$3.75 – about 95% off from its peak value of in late 2006 when the company ranked among the top five financial companies around the globe.

Hank Greenberg, who was ousted as chief executive of AIG three years ago amid an accounting scandal, hinted in a government filing yesterday that he's considering making a bid for the company as its – and his – fortunes tumble.

Now, with a government bailout and the likelihood that shareholders will see their investments all but wiped out, Mr. Greenberg, the largest individual shareholder in AIG, is poised to end up a big loser.

Even before last night's developments, he had seen has seen his wealth shrink by an estimated US$6-billion amid the stock's swoon.

In a letter to current AIG CEO Robert Willumstad dated on Tuesday, Mr. Greenberg complained that his many offers to help the ailing company were rebuffed because of fears he would "overshadow" the current management.

"I respectfully suggest to you, and to the board, that the continuing refusal to work together to save this great company is far more important than any concern over personal matters or perceptions," he wrote.

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