AIG collapse too awful to contemplate – White House

Published on Wednesday 17 September 2008 22:16

THE White House yesterday defended the multibillion-dollar rescue package for the troubled insurance giant American International Group (AIG), saying it had prevented even greater harm to the world's economy.

Under the deal, the United States Federal Reserve will give AIG a two-year, $85 billion (47 billion) emergency loan at an interest rate of about 11.5 per cent. In return, the government will gain a 79.9 per cent stake in the world's largest insurer and the right to remove senior management.

AIG said it would repay the money in full with the proceeds from the sales of some assets. It will be up to the firm to decide which assets to sell, and the timing. The US government does, however, have veto power.

AIG shares sank 46 per cent, to $2.03, in morning trading yesterday. They traded as high as $70.13 in the past year.

The US government decided to act over AIG to avert a collapse that would have been felt the world over.

The White House spokeswoman, Dana Perino, said US treasury and Federal Reserve chiefs and other government advisers had determined that some of the companies facing difficulties "were so big that to allow them to fail would have caused even greater harm and damage to the economy".

She said other bail-outs would be on a case-by-case basis.

The Fed said it had determined that a disorderly failure of AIG could have hurt the already delicate financial markets and the economy. It also could have led to "substantially higher borrowing costs, reduced household wealth and materially weaker economic performance".

The White House said that it backed the Fed's decision. "These steps are taken in the interest of promoting stability in financial markets and limiting damage to the broader economy," a spokesman said.

The US government's AIG move was similar to its bail-out earlier this month of the two mortgage giants Fannie Mae and Freddie Mac, under which the treasury department said it was prepared to put up as much as $100 billion over time into each of the companies, if needed, to keep them from bankruptcy.

The decision to help AIG marked a reversal for the US government from its position at the weekend, when it refused to use taxpayers' money to bail out Lehman Brothers. The bank, which had filed for bankruptcy protection on Monday, collapsed under the weight of mounting losses related to its real-estate holdings. Yesterday, congressional leaders said after a meeting with Henry Paulson, the treasury secretary, and Ben Bernanke, the Fed chairman, that they understood the need for the bail-out.

"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 Senator Charles Schumer.

AIG had teetered on the edge of failure as a result of stresses caused by the collapse of the subprime mortgage market and the ensuing credit crunch.

It said that the loan would protect all policyholders, address rating agencies' concerns and would buy the company time to sell off its assets.