The US Federal Reserve announced that it will lend AIG up to $85bn in emergency funds in return for a government stake of 79.9 per cent and effective control of the company.Under the plan, the existing management of the company will be replaced and new executives will be appointed. Reports on Wednesday suggested Edward Liddy, the former Allstate chief executive, will replace chairman Robert Willumstad.
The government, which will retain veto power over major decisions at the company, will receive equity giving them a 79.9 per cent stake in AIG. In return, the insurer would receive a bridge loan of $85bn to keep it afloat until it could dispose of billions of dollars in assets. The Fed said the loan was expected to be repaid by the proceeds of selling AIG operating companies. A senior Fed staffer said the most likely outcome was an orderly liquidation of AIG, though it was possible that the firm could survive as an ongoing business.
The loan is at a punitive interest rate of three-month Libor plus 850 basis points, giving AIG a strong incentive to repay it as soon as possible. It will be secured on all AIGâ??s assets, including those of its subsidiary companies.
The Fed said in a statement that it was acting to prevent a disorderly failure of AIG which would add to already significant levels of financial market fragility and lead to substantially higher borrowing costs, reduced household wealth and materially weaker economic performance.
The issuance of the equity participation note to the government is designed to prevent existing shareholders from profiting from a rescue of the company.
AIG lost billions on its exposure to massive amounts of credit risk derivatives like CDS.
