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Massive Bailout for AIG

Federal Reserve to lend $85 billion to struggling giant

Sept. 17, 2008

By Mortgage Daily staff

The parent of United Guaranty and failed Wilmington Finance Inc. has received a bailout package from the U.S. government. Among the reasons cited in the extraordinary move by the government was concern over an increase in interest rates and a reduction in household wealth.

The Federal Reserve Bank of New York has been authorized to lend up to $85 billion to American International Group, a statement late Tuesday from the Federal Reserve Board said.

The 24-month facility will cost AIG 850 basis points above the 3-month London Interbank Offered Rate and is collateralized by all the assets of AIG and its primary non-regulated subsidiaries. In addition, the U.S. government will receive a 79.9 percent equity interest in AIG and has the right to veto the payment of dividends to common and preferred shareholders.

AIG said yesterday its board of directors approved the transaction, noting it was the best alternative for all of its constituencies -- including policyholders, customers, creditors, counterparties, employees and shareholders.

"We expect that the proceeds of these sales will be sufficient to repay the loan in full and enable AIG's businesses to continue as substantial participants in their respective markets," the New York-based company stated. "In return for providing this essential support, American taxpayers will receive a substantial majority ownership interest in AIG."

AIG owns mortgage insurer United Guaranty Corp. and American General Finance Corp. It also is parent to Wilmington Finance Inc., which shut down in June.

AIG will repay the loan from the proceeds of asset sales, including the sale of some of its businesses, the Fed noted.

"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," the fed said.

The U.S. Department of the Treasury fully supported the move.

"These are challenging times for our financial markets," Treasury Secretary Henry M. Paulson Jr. said in a statement Tuesday. "I support the steps taken by the Federal Reserve tonight to assist AIG in continuing to meet its obligations, mitigate broader disruptions and at the same time protect the taxpayers.

AIG Chief Executive Officer Robert Willumstad was fired as part of the deal, the Wall Street Journal reported.

Willumstad joined AIG more than two years ago after being passed over for Citigroup's top job. He was chairman and CEO of Citigroup's Global Consumer Group, where his responsibilities included consumer finance -- including mortgage lending -- and retail banking.

Citigroup's choice for its chief at the time, Charles Prince, stepped down last year amid massive losses at that company.

The Mortgage Graveyard
Failed, closed and a c q u i r e d mortgage-related entities.

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