Fed Steps in With $85B Bailout for AIG

Company was close to collapse; fed feared widespread economic fallout.

Sept. 16, 2008— -- As another financial crisis loomed with the possible collapse of insurance giant American International Group (AIG), the Federal Reserve stepped in Tuesday evening to take control of the company by providing up to $85 billion in loans.

With taxpayer dollars now supporting the world's largest insurance company, the government hopes that Wednesday morning, when the doors open for business at AIG offices around the world, it will be seem like business as usual.

With the recent dramatic changes on Wall Street, it is anything but.

With more than 74 million customers around the globe, AIG provides coverage for everything from cars to homes to businesses. And with more than $1 trillion in assets and more than 116,000 employees, AIG's looming collapse pushed the nation's central bank to take the dramatic step of bailing out the company, fearing its failure could have resulted in greater financial instability, higher borrowing costs, reduced household wealth and weaker national economic growth.

The decision comes only days after the federal government decided not to step in and save the nation's fourth largest investment bank, Lehman Brothers, which filed for bankruptcy.

Senior Federal Reserve officials said the belief was that there was more preparation for the failure of Lehman and that AIG was so complicated, with so many different business parts, including retail insurance products, that it was necessary in this case for the government to step in.

The loan to AIG will be available for two years at a current interest rate of 11 percent. AIG can use the money to meet any of its financial obligations and it is expected that the loan will most likely lead to the company selling off certain parts of its business in an orderly fashion, without further upsetting already fragile financial markets.

The loan will be secured through assets AIG currently holds and the U.S. government will receive nearly 80 percent of stock in AIG.

Current management of the company will be replaced, though the board of directors will stay in place for the time being. But the board's power may be limited, as the federal government now has veto power over important decisions such as which divisions to sell, what companies to buy and whether dividends should be paid.