In a scramble to avert what would have been the biggest casualty of the credit crisis to date, the U.S. government last night agreed to sweep in and bail out global insurance giant American International Group (AIG).
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 US$85-billion from a private consortium, according to people familiar with the deal….
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.
Which isn't to say the average AIG shareholder is sitting pretty:
American International Group Inc. lost 44 percent of its remaining value in early trading after investors learned that the U.S. rescue will curb the insurer's dividends and wipe out most of their stake….
The "punitive" interest rate on the two-year loan "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," said Marco Annunziata, an analyst at UniCredit SpA, in a note to clients. "This is to all extents and purposes a controlled bankruptcy."
A better word might be nationalization.