Damage Control: Feds Rescue AIG With $85B

In Bid To Avert Market Crisis, U.S. Puts Taxpayer Money On The Hook To Bail Out Insurance Giant

(CBS/AP)  Another day, but not just another bailout. This one's more like a government takeover.

The U.S. government stepped in Tuesday to rescue American International Group Inc., one of the world's largest insurers, with an $85 billion injection of taxpayer money. Under the deal, the government will get a 79.9 percent stake in AIG 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.

Under the deal, the Federal Reserve will provide a two-year $85 billion emergency loan 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.

Sean Egan, president of rating company Egan Jones, said AIG would have gone bankrupt if it didn't raise at least $40 billion quickly, reports CBS News business correspondent Anthony Mason.

"Trust is so important with these securities that are being handled by the major financial institutions," he told CBS News. "And that's gone right now."

The move was similar to government's seizure on 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.

One bright spot for Americans amid Wall Street's chaotic week: The price of crude oil has fallen $55, or 37 percent since it peaked in July, reports CBS News correspondent Jeff Glor, who added that the slowing economy and decreasing demand has prompted talk of a national average for a gallon of gas soon dropping below $3.50.

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.

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.

[truth843792]

I need to clarify some earlier comments. Although the Federal Reserve Bank is an independent entity (quasi-govermental), they have to report to Congress yearly to report about the state of the US economy. What I''m getting at is that the Federal Reserve was given certain powers by Congress, including the power to print money. This money does not come from the taxpayers. I''m a little upset that people are saying that the money is comming from the taxpayers. The issue is.... When the Federal Reserve does print this $85 Billon, it comes from the printing press, not from the US Treasury. If you go to the US Treasury website, the Federal Reserve is NOT apart of it''s hierarchy. This money printed by the Federal Reserve actually HURTS the value of the US currency when valued against foreign currencies. So, as many of you many have read, the US Treasury began selling US Debt to other countries to make up for this currency devaluation.

[truth843792]

The taxpayers DO NOT own the Federal Reserve. AGAIN. It is a private corporation comprising of 12 regional banks that only ANSWER to Congress. The Federal Reserve bought AIG. NOT THE TAXPAYERS!

[mydiatribe]

The Feds (Taxpayers) now own 80% of AIG. So why is it that I feel like these Greedy Corprate vultures have us ALL right where they want us.
(By the Balls!)

[truth843792]

The last time I checked, the Federal Reserve was not the US Government. It is a "private corporation" that ANSWERS to Congress. This private corporation raises and lowers intrest rates according to INTERNAL process and is not directly controlled by the United States. So, with that said, I''m absolutely clueless as to why this article says that the United States used taxpayer money to bail out AIG. The money issued by the Federal Reserve is printed out of thin air as directed by Congress, only when it can be backed by labor. As such, the labor this bailout is back with is the LABOR OF AIG, NOT THE US TAXPAYER. Please stop making it sound like the US taxpayer is paying for this!!!