AIG's Huge Federal Rescue

Investors run for the exits as they try to make sense of the Fed's massive bailout

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by BusinessWeek staff, Associated Press, and other sources

American International Group (AIG), one of the world's largest insurers, has been saved with a staggering $85 billion injection of taxpayer money, joining Fannie Mae (FNM) and Freddie Mac (FRE) under the government's control. Investors' reaction: Not good.

Under the deal announced late on Sept. 16, 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% stake in AIG and the right to remove senior management. AIG Chief Executive Robert Willumstad is expected to be replaced by Edward Liddy, the former head of insurer Allstate (ALL), according to The Wall Street Journal, citing a person it did not name. Willumstad had been at the helm of AIG since June.

The emergency loan from the Fed is the first step in a process by which AIG will restructure itself, selling off some of its businesses. The loan will be repaid by the proceeds of those sales. With the loan, the company can do that in a more orderly fashion, and perhaps at higher prices. In a statement, AIG's directors said they expect the sales to "enable AIG's businesses to continue as substantial participants in their respective markets."

On the Block

Obvious candidates for the auction block include the aircraft leasing business and the consumer finance arm. Neither is likely to gain top dollar in a sale under current market conditions, but with recent downgrades of AIG debt, they are no longer benefiting much from the parent company's ability to borrow at low rates, and may do well enough on their own. Insurance divisions are also expected to be sold.

Former AIG CEO Hank Greenberg, who was unceremoniously ousted from the AIG corner office in 2005 and has since been embroiled in lawsuits over the propriety of his actions as CEO, could be among the bidders. In a Securities & Exxchange Commission filing posted only hours before the bailout came, Greenberg, who is still AIG's largest individual shareholder, and a group of other investors notified the company they had retained investment bank Perella Weinberg Partners as financial adviser. Actions being analyzed include possible acquisition of assets from AIG, seeking a seat on the board, and taking the company private, among others.

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 (LEH). Lehman, which filed for bankruptcy protection on Sept. 15, collapsed under the weight of mounting losses related to its real estate holdings.