WASHINGTON Another day, but not just another bailout. This one's a stunning government takeover.
In the most far-reaching intervention into the private sector ever for the Federal Reserve, the government stepped in Tuesday to rescue American International Group Inc. with an $85 billion injection of taxpayer money. Under the deal, the government will get a 79.9 percent stake in one of the world's largest insurers and the right to remove senior management.
AIG's chief executive, Robert Willumstad, is expected to be replaced by Edward Liddy, the former head of insurer Allstate Corp., according to The Wall Street Journal, citing a person it did not name. Willumstad had been at the helm of AIG since June.
A call to AIG to confirm the executive change was not immediately returned.
It was the second time this month the feds put taxpayer money on the hook to rescue a private financial company, saying its failure would further disrupt markets and threaten the already fragile economy.
AIG said it will repay the money in full with proceeds from the sales of some of its assets. It will be up to the company to decide which assets to sell and the timing. The government does, however, have veto power.
Under the deal, the Federal Reserve will provide a two-year $85 billion emergency loan at an interest rate of about 11.5 percent to AIG, which teetered on the edge of failure because of stresses caused by the collapse of the subprime mortgage market and the credit crunch that ensued. In return, the government will get a 79.9 percent stake in AIG and the right to remove senior management.
AIG shares sank $1.34, or 36 percent, to $2.41 in morning trading Wednesday. They traded as high as $70.13 in the past year.
The government's move was similar to its bailout of Sept. 7 of mortgage giants Fannie Mae and Freddie Mac, where the Treasury Department said it was prepared to put up as much as $100 billion over time in each of the companies if needed to keep them from going broke.
The Fed said it determined that a disorderly failure of AIG could hurt the already delicate financial markets and the economy.
It also could "lead to substantially higher borrowing costs, reduced household wealth and materially weaker economic performance," the Fed said in a statement.
The decision to help AIG marked a reversal for the government from the weekend, when it refused to use taxpayer money to bail out Lehman Brothers Holdings Inc. Lehman, which filed for bankruptcy protection Monday, collapsed under the weight of mounting losses related to its real estate holdings.
The White House said it backed the Fed's decision Tuesday.
"These steps are taken in the interest of promoting stability in financial markets and limiting damage to the broader economy, " White House spokesman Tony Fratto said.
After meeting with Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke in a late-night briefing on Capitol Hill, Congressional leaders said they understood the need for the bailout.
"The administration is approaching an unprecedented step, but unfortunately we are living in unprecedented times. Hearing of these plans, you have to stop to catch your breath. But upon reflection, the alternatives are much worse," said Sen. Charles Schumer, D-N.Y.
In a statement late Tuesday, AIG's board of directors said the loan will protect all AIG policy holders, address concerns of rating agencies and buy the company time to sell off assets.
"We expect that the proceeds of these sales will be sufficient to repay the loan in full and enable AIG's businesses to continue as substantial participants in their respective markets," the statement said. "In return for providing this essential support, American taxpayers will receive a substantial majority ownership interest in AIG."
New York officials said the deal helps stave off a fiscal crisis for the state. AIG is based in New York.
"Policy holders will be protected, jobs will be saved," New York Gov. David Paterson said Tuesday night.
In an interview on ABC's "Good Morning America" program Wednesday, former longtime AIG CEO Maurice "Hank" Greenberg was asked whether critics are being fair who say the situation at AIG and the financial markets generally happened because of greed, bad business practices and corruption.
"No, I think it's an unfair appraisal," said Greenberg, who was replaced as CEO three years ago as part of an accounting probe. "You know, there are many things that contributed to this unfortunate episode. after I left the company, all the risk management procedures that we had in place were obviously dismantled. I can't explain that. There's a new board of directors. One should be asking that board of directors what they did and why."
Greenberg said he has lost "my entire net worth. Literally, my entire net worth.'
"Worked 40 years building the greatest insurance company in history, one that everyone in the world envied who was in this industry. I'll get by, but my heart goes out for the thousands and thousands of employees and their families who shareholders and not only in the united states but worldwide. That is a tragedy," he said.
The Fed's move was part of a concerted push to help calm jittery markets and investors around the world.
On Tuesday, the Fed decided to keep its key interest rate steady at 2 percent, but acknowledged stresses in financial markets have grown and hinted it stood ready to lower rates if needed.
The central bank also pumped $70 billion into the nation's financial system to help ease credit stresses. In emergency sessions over the weekend, the Fed expanded its loan programs to Wall Street firms, part of an ongoing effort to get credit flowing more freely.
The stock market, which Monday posted its largest point loss session since the Sept. 11 attacks, recovered Tuesday after the Fed's decision on interest rates. The Dow Jones industrials rose 141 points after losing 500 points on Monday.
AIG's shares swung violently, though, as rumors of potential deals involving the government or private parties emerged and were dashed. By late Tuesday, its shares had closed down 20 percent and another 45 percent after hours.
The problems at AIG stemmed from its insurance of mortgage-backed securities and other risky debt against default. If AIG couldn't make good on its promise to pay back soured debt, investors feared the consequences would pose a greater threat to the U.S. financial system than this week's collapse of the investment bank Lehman Brothers.
The worries were heightened Monday after Moody's Investor Service, Standard and Poor's and Fitch Ratings lowered AIG's credit ratings, forcing AIG to seek more money for collateral against its insurance contracts. Without that money, AIG would have defaulted on its obligations and the buyers of its insurance such as banks and other financial companies would have found themselves without protection against losses on the debt they hold.
NEW YORK The Federal Reserve forged an extraordinary $85 billion rescue Tuesday night of insurance giant American International Group Inc., offering a respite from two days of chaos in the American financial system.
The move came hours after the Fed resisted a cut in interest rates to buoy Wall Street, which staged a slight rebound anyway from Monday's biggest point drop in the Dow Jones industrials since the 2001 terrorist attacks.
Investors had feared that a failure of AIG, the world's largest insurer, would set off even more financial turmoil than the collapse the day before by venerable investment house Lehman Brothers.
AIG, a company little known off Wall Street, does business with almost every financial institution in the world and insures $88 billion worth of assets, including mortgages and corporate loans.
A collapse of AIG would force Wall Street to untangle the complex credit derivatives markets and send the market scrambling to figure out who owes what to whom or even who owns what.
"Regulators knew that if Lehman went down, the world wouldn't end," money manager Michael Lewitt wrote in an op-ed column Tuesday in The New York Times. "But Wall Street isn't remotely prepared for the inestimable damage the financial system would suffer if AIG collapsed."
Under the plan orchestrated by the Fed during a day of crisis talks, the U.S. government will provide an emergency $85 billion loan and in return receive a 79.9 percent equity stake in the company, similar to the way the government took control of faltering mortgage giants Fannie Mae and Freddie Mac.
The Fed said in a statement that an AIG failure could "lead to substantially higher borrowing costs, reduced household wealth and materially weaker economic performance."
Treasury Secretary Henry Paulson said in a statement that the Bush administration was working closely with the Fed, the Securities and Exchange Commission and other government 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 tonight to assist AIG in continuing to meet its obligations, mitigate broader disruptions and at the same time protect taxpayers," Paulson said.
AIG stock swung wildly Tuesday as the company's fate hung in the balance. It was down as much as 60 percent, closed down 20 percent and then lost another 45 percent in after-hours trading.
The pressure already had grown when all three major credit rating agencies cut AIG's ratings at least two notches late Monday night. New York Gov. David Paterson had agreed to allow AIG to use $20 billion of assets held by its subsidiaries to pay for its business essentially giving it a bridge loan from itself but indicated that the company had only 24 hours to find the cash needed to stay in business.
The Fed stepped in hours after it decided, in its first unanimous vote this year, to keep the closely watched federal funds rate unchanged at 2 percent. At the same time, however, the Fed noted that strains on the market have "increased significantly" and said it was ready to act if needed.
Stocks slumped immediately after the Fed announcement. The Dow initially dropped about 100 points but rallied to finish the day up 141, and back over 11,000.
As AIG teetered, central bankers around the globe scrambled to revive credit markets. The Fed injected $70 billion into the American financial system. The European Central Bank pumped one-day financing of nearly $100 billion into the 15-nation zone. The Bank of Japan added $24 billion, and England's central bank almost $36 billion.
Cash left world markets Monday like an outgoing tide. The interest rate banks charge each other for overnight loans soared as high as 6 percent far above the Fed's target rate of 2 percent and a sign banks didn't trust each other enough to make even 12-hour loans.
Meanwhile, British bank Barclays PLC said Tuesday it had agreed to acquire Lehman Brothers' North American investment banking and capital markets businesses for $250 million in cash, just two days after walking away from a deal to purchase all of Lehman's.
The British bank will also purchase Lehman's New York headquarters and its two data centers in New Jersey for $1.5 billion.
Lehman Brothers filed the largest bankruptcy in American history on Monday. The Barclays deal will require approval from the bankruptcy court.
Separately, Bank of America Corp., which in July bought battered Countrywide Financial Corp., began to work out how it would digest its $40 billion acquisition of Merrill Lynch after its shotgun wedding with the brokerage on Sunday.
In the wings, Goldman Sachs Group Inc., which began the year as one of five large investment banks and is now one of two, reported its worst profit drop since going public in 1999. Goldman's third-quarter profit dropped 71 percent to $810 million, while revenues plummeted 50 percent.
The only other investment bank left standing, Morgan Stanley, had better news. It reported solid quarterly profits though down 7 percent from a year earlier and surpassed Wall Street's expectations.
Earlier this year, the federal government engineered the sale of Bear Stearns to JPMorgan Chase, and earlier this month the government assumed control of mortgage giants Fannie Mae and Freddie Mac.
On the campaign trail, Republican presidential nominee John McCain called for a commission to study the economic crisis. Democrat Barack Obama laughed the idea off as "the oldest Washington stunt in the book."
"This isn't 9/11," Obama told a noisy crowd of more than 2,000 at the Colorado School of Mines, dismissing the idea of a need for study. "We know how we got into this mess. What we need now is leadership that gets us out. I'll provide it. John McCain won't."
McCain, campaigning in Florida, promised reforms, too, to expose and end the "reckless conduct, corruption and unbridled greed" on Wall Street that he said had caused the financial crisis.To say that it is an unusual week in U.S. finance would be a huge understatement. On Tuesday, the Web site Christianity Today even posted an e-mail from an evangelical leader asking Christians to pray for Wall Street.
Contributing: Stephen Bernard, Ieva M. Augstums, Joe Bel Bruno, Tim Paradis, Martin Crutsinger and Rachel Zoll