AIG loses $61.7B; Treasury, Fed step in with $30B aid package

NEW YORK -- The government said in a statement it will provide the insurance giant with $30 billion of new capital to "stabilize the financial system," and won't shy away from giving future help.

Stocks tumbled as news that AIG needed more help stoked fears that the financial system is in even more dire straits than previously thought. The Dow Jones industrials fell 300 points to 6763 for its first close below 7000 in nearly 12 years.

The Treasury Department and Federal Reserve stressed the need to step in with more assistance, saying, "AIG provides insurance protection to more than 100,000 entities, including small businesses, municipalities ... and companies who together employ over 100 million Americans."

AIG insures everything from property and casualty to life. However, its problems stem from its financial service unit, where it sold complex contracts such as credit-default swaps that act as insurance to protect investors against default in a range of assets, including subprime mortgages and corporate bonds. Investors pay AIG regular payments to buy the swaps.

As the credit markets froze up in the fourth quarter of 2008, defaults rose and investors demanded payouts. But AIG found itself short of funds because it, too, had invested the premiums in residential and commercial mortgage-backed securities, whose values fell dramatically.

Indeed, AIG wrote down $25.9 billion in assets in the quarter, mostly mortgage-backed securities and credit default swaps. "The economy and capital markets remain in turmoil," CEO Edward Liddy said in a statement.

The government had provided AIG with a total of $150 billion in capital in September and November to help it remain in business. But since then, AIG has been unable to sell businesses to raise cash and pay back the federal loans with interest.