September 16, 2008: US Government Seizes Control of Insurer American International Group (AIG)

AIG logo. [Source: American International Group (AIG)]In an historic move, the federal government bails out insurance corporation AIG with an $85 billion loan, giving control of the firm to the US government. After resisting AIG’s overtures for an emergency loan or other intervention to prevent the insurer from falling into bankruptcy, the government decided AIG, like the now-defunct investment bank, Bear Stearns, was “too big to fail” (see March 15, 2008). The US government will lend up to $85 billion to AIG. In return, the government gets a 79.9 percent equity stake in warrants, called equity participation notes. The two-year loan will carry a LIBOR interest rate plus 8.5 percentage points. LIBOR, the London InterBank Offered Rate, is a common short-term lending benchmark. The bailout comes less than a week after the government allowed a large investment bank, Lehman Brothers Holdings Inc., to fold (see September 14, 2008). As part of the loan agreement, Treasury Secretary Henry Paulson insists that AIG’s chief executive, Robert Willumstad, steps aside. Willumstad will be succeeded by Edward Liddy, the former head of insurer Allstate Corp (see September 18, 2008). [Wall Street Journal, 9/16/2008] Shares in AIG drop to $3.75 on the news. [Bloomberg, 3/5/2009]