The United States Federal Reserve Board came to AIG’s rescue late Tuesday evening by authorizing the Federal Reserve Bank of New York to lend up to US$85 billion to the insurance company. In exchange, the U.S. government will own 79.9% of AIG.
“The board determined that, in current circumstances, a disorderly failure of AIG could add to already significant levels of financial market fragility and lead to substantially higher borrowing costs, reduced household wealth, and materially weaker economic performance,” says a Fed statement.
The purpose of the two-year loan is to help AIG in meeting its obligations as they come due. The loan will facilitate a process under which AIG will sell certain of its businesses in an orderly manner, with the least possible disruption to the overall U.S. economy.
The loan is collateralized by all the assets of AIG, and of its primary non-regulated subsidiaries. These assets include the stock of substantially all of the regulated subsidiaries. The loan is expected to be repaid from the proceeds of the sale of the firm’s assets.
“AIG is a solid company with over $1 trillion in assets and substantial equity, but it has been recently experiencing serious liquidity issues,” says a company statement. “We believe the loan, which is backed by profitable, well-capitalized operating subsidiaries with substantial value, will protect all AIG policyholders, address rating agency concerns and give AIG the time necessary to conduct asset sales on an orderly basis.”
Meanwhile, both Sun Life and Manulife announced their exposure to AIG. Sun Life holds bond securities belonging to AIG and its subsidiaries with a par value of C$315 million. It also has “deminimus exposure to AIG derivative instruments, net of collateral.”
And Manulife holds fixed income investments issued by the parent company with a par value of $38 million, with an additional $202 million issued by subsidiaries. It also holds $40 million in “other exposures” to the parent and subsidiaries, as well as $84 million in derivatives exposure, net of collateral.
“These amounts, in aggregate, represent approximately one-half of 1% of our $164 billion in assets,” says Donald Guloien, senior executive vice-president and chief investment officer.
AIG Timeline 1919: Company is founded as American Asiatic Underwriters by Cornelius Vander Starr 1968: Starr names Maurice “Hank” Greenburg as his successor 1969: AIG goes public 1990: Acquires International Lease Finance (ILFC) for US$1.2 billion 1996: AIG Investments is created by consolidating the investment divisions of various AIG subsidiaries worldwide. Assets under management are $75 billion 1998: Purchases majority ownership in 21st Century 1999: Buys SunAmerica for $18 billion; acquires majority ownership of John McStay Investment Counsel 2000: Stock hits all-time high of $103.75 2001: Spends $23 billion on purchase of American General 2005: Greenburg resigns after the U.S. Securities and Exchange Commission and New York State accuse both him and the company of financial misconduct; Martin Sullivan is named CEO August 2007: AIG reports a 34% rise in Q2 earnings to $4.3 billion and says virtually all of its subprime mortgage holdings are safe November: A decline in the value of credit default swaps push profit down 27% to $3.1 billion in the third quarter; AIG announces share buyback as the stock reaches a 52-week low of $56 December: Value of credit default swaps fall by $1.1 billion in October and November February 11, 2008: AIG says the decline was actually $4.9 billion, not $1.1 billion; stock drops 12% to $44.74 February 28: Reports a Q4 loss of $5.3 billion after an $11.1 billion write-down of credit default swaps February 29: Company says it has excess capital of as much as $19.5 billion May 8: AIG posts a record loss of $7.8 billion in first quarter and announces plans to raise $12.5 billion May 20: Company now plans to raise $20 billion; shares fall to $38.12 June 6: The U.S. Securities and Exchange Commission and the Justice Department began probe into the way AIG values credit default swaps; the stock closes at $33.93 June 15: Sullivan is replaced as CEO by chairman Robert Willumstad June 30: Assets under management at AIG Investments top $750 billion August 6: AIG reports a Q2 loss of $5.4 billion; shares fall to $29.09 September 15: AIG seeks help from the Federal Reserve as Lehman Brothers files for Chapter 11 bankruptcy protection and Merrill Lynch sells itself to Bank of America; the State of New York has allows AIG to borrow $20 billion from its subsidiaries to fund day-to-day operations; S&P and Moody’s both cut their ratings on AIG; stock plunges 61% to $4.76 September 16: The Federal Reserve authorizes the Federal Reserve Bank of New York to loan up to $85 billion to AIG and the U.S. government will take a 79.9% stake in the insurance company; shares closed at $3.75 |
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