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Former Allstate CEO May Become AIG Chief

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The Associated Press

Published: September 18, 2008

WASHINGTON - Another day, but not just another bailout. This one's a stunning government takeover.

In the most far-reaching intervention into the private sector ever for the Federal Reserve, the government stepped in Tuesday to rescue American International Group with an $85 billion injection of taxpayer money. Under the deal, the government will get a 79.9 percent stake in one of the world's largest insurers and the right to remove top management.

AIG's chief executive officer, Robert Willumstad, is expected to be replaced by Edward Liddy, the former head of insurer Allstate Corp., according to a person with knowledge of the matter. The person asked not to be identified by name because the deal had not officially been announced. Willumstad had been at the helm of AIG since June.

Two calls to AIG to confirm the executive change were not immediately returned.

It was the second time this month the feds put taxpayer money on the hook to rescue a private financial company, saying its failure would further disrupt markets and threaten the already fragile economy.

Company To Sell Some Assets

AIG said it will repay the money in full with proceeds from the sales of some of its assets. It will be up to the company to decide which assets to sell and the timing. The government does, however, have veto power.

Under the deal, the Federal Reserve will provide a two-year $85 billion emergency loan at an interest rate of about 11.5 percent to AIG, which teetered on the edge of failure because of stresses caused by the collapse of the subprime mortgage market and the credit crunch that ensued. In return, the government will get a 79.9 percent stake in AIG and the right to remove senior management.

AIG shares on Wednesday sank $1.69, or 45 percent, to close at $2.06. They traded as high as $70.13 in the past year.

The government's move was similar to its bailout of Sept. 7 of mortgage giants Fannie Mae and Freddie Mac, where the Treasury Department said it was prepared to put up as much as $100 billion over time in each of the companies if needed to keep them from going broke.

The Fed said it determined that a disorderly failure of AIG could hurt the already delicate financial markets and the economy.

It also could "lead to substantially higher borrowing costs, reduced household wealth and materially weaker economic performance," the Fed said in a statement.

The decision to help AIG marked a reversal for the government from the weekend, when it refused to use taxpayer money to bail out Lehman Brothers Holdings. Lehman, which filed for bankruptcy protection Monday, collapsed under the weight of mounting losses related to its real estate holdings.

The White House said it backed the Fed's decision Tuesday.

"These steps are taken in the interest of promoting stability in financial markets and limiting damage to the broader economy," White House spokesman Tony Fratto said.

'Unprecedented Times'

After meeting with Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke in a late-night briefing on Capitol Hill, congressional leaders said they understood the need for the bailout.

"The administration is approaching an unprecedented step, but unfortunately we are living in unprecedented times. Hearing of these plans, you have to stop to catch your breath. But upon reflection, the alternatives are much worse," said Sen. Charles Schumer, D-N.Y.

In a statement late Tuesday, AIG's board of directors said the loan will protect all AIG policyholders, address concerns of rating agencies and buy the company time to sell off assets.

"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 statement said. "In return for providing this essential support, American taxpayers will receive a substantial majority ownership interest in AIG."

New York officials said the deal helps stave off a fiscal crisis for the state. AIG is based in New York.

"Policyholders will be protected, jobs will be saved," New York Gov. David Paterson said Tuesday night.

In an interview on ABC's "Good Morning America" program Wednesday, former AIG CEO Maurice "Hank" Greenberg was asked whether critics are being fair who say the situation at AIG and the financial markets generally happened because of greed, bad business and corruption.

"No, I think it's an unfair appraisal," said Greenberg, who was replaced as CEO three years ago as part of an accounting probe. "You know, there are many things that contributed to this unfortunate episode. after I left the company, all the risk management procedures that we had in place were obviously dismantled. I can't explain that. There's a new board of directors. One should be asking that board of directors what they did and why."

AT A GLANCE
American International Group Inc., which was bailed out by an $85 billion government loan Tuesday night, not only has posted billions of dollars in losses in its financial services operations but its more traditional insurance operations are not as profitable as they were a year ago.

Most problematic has been its financial services division, where operating losses topped $14 billion during the first half of the year. That steep decline was centered in its capital markets unit, which insures mortgage-backed securities and other risky debt against default.

Overall, AIG posted an operating loss of $20.02 billion from January to June. It earned $12.5 billion during the same six months a year ago.

Here is the breakdown in the operating income for its divisions:

GENERAL INSURANCE: Profits of $2.16 billion in the first half of 2008, compared with $6.07 billion a year ago.

LIFE INSURANCE, RETIREMENT: Loss of $4.23 billion in the first half of 2008, compared with a profit of $4.9 billion a year ago.

FINANCIAL SERVICES: Loss of $14.68 billion in the first half of 2008, compared with a profit of $339 million a year ago.

ASSET MANAGEMENT: Loss of $1.56 billion in the first half of 2008, compared with a profit of $1.68 billion a year ago.

Despite the mounting losses, AIG reported that it shareholder equity totaled more than $78 billion at the end of June. That's the difference between its $1.05 trillion in assets and $971.7 billion in liabilities listed on its June 30 balance sheet.

Although those figures indicate that its assets could easily cover all its outstanding liabilities if the government were to completely liquidate AIG, turmoil in credit markets during the summer could have knocked down asset values dramatically. The company has yet to release its third-quarter results.

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