Government announces $85 billion loan to save AIG
AP
Government announces $85 billion loan to save AIG
Tuesday September 16, 9:25 pm ET
By Jeannine Aversa, Ieva M. Augstums and Stephen Bernard, AP Business Writers
Government announces $85 billion loan to rescue AIG to stave off further financial turmoil
WASHINGTON (AP) -- In a bid to save financial markets and economy from further turmoil, the U.S. government agreed Tuesday to provide an $85 billion emergency loan to rescue the huge insurer AIG.
The Federal Reserve said in a statement 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.
"The President supports the agreement announced this evening by the Federal Reserve," said White House spokesman Tony Fratto. "These steps are taken in the interest of promoting stability in financial markets and limiting damage to the broader economy."
Treasury Secretary Henry Paulson said the administration was working closely with the Fed, the Securities and Exchange Commission and other government regulators to "enhance the stability and orderliness of our financial markets and minimize the disruption to our economy."
"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 taxpayers," Paulson said in a statement.
The Fed said in return for the loan, the government will receive a 79.9 percent equity stake in AIG.
Earlier, Fed chairman Bernanke and Paulson met with Sen. Christopher Dodd, D-Conn., Majority Leader Harry Reid, D-Nev., and House Republican leader John Boehner of Ohio, to brief them on the government's option.
"At the administration's request, I met this evening with Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke. They expressed the administration's views on the deepening economic turmoil and shared with us their latest proposals regarding AIG," Reid told reporters. "The Treasury and the Fed have promised to provide more details in the near future, which I believe must address the broader, underlying structural issues in the financial markets."
On Tuesday, shares of the insurance company swung violently as rumors of potential deals involving the government or private parties emerged and were dashed. By late Tuesday, its shares had closed down 20 percent -- and another 45 percent after hours. Still, no deal emerged.
The problems at AIG stemmed from its insurance of mortgage-backed securities and other risky debt against default. If AIG couldn't make good on its promise to pay back soured debt, investors feared the consequences would pose a greater threat to the U.S. financial system than this week's collapse of the investment bank Lehman Brothers.
The worries were triggered after Moody's Investor Service and Standard and Poor's lowered AIG's credit ratings, forcing AIG to seek more money for collateral against its insurance contracts. Without that money, AIG would have defaulted on its obligations and the buyers of its insurance -- such as banks and other financial companies -- would have found themselves without protection against losses on the debt they hold.
"It might not just bring down other financial institutions in the U.S. It could bring down overseas financial institutions," said Timothy Canova, a professor of international economic law at Chapman University School of Law. "If Lehman Brother's failure could help trigger AIG's going down, who knows who AIG's failure could trigger next."
New York-based AIG operates an insurance and financial services businesses ranging from property, casualty, auto and life insurance to annuity and investment services. Those traditional insurance operations are considered healthy and the National Association of Insurance Commissioners said "they are solvent and have the capability to pay claims."
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I can just picture the greedy insiders rubbing their hands together - this is so sick! Manipulated!
From 2006:
AIG agrees to pay $1.6 billion in settlement
Associated Press Feb. 9, 2006 12:30 PM
NEW YORK - American International Group Inc., one of the world's largest insurance companies, has agreed to pay $1.64 billion to resolve allegations that it used deceptive accounting practices to mislead investors and regulatory agencies.
The deal - believed to be the biggest concluded by regulators with a single company - also requires the New York-based firm to adopt changes in its business practices that will ensure proper accounting procedures in the future.
AIG said in a statement that the settlement was approved by its board "in the best interest of the company."
The pact announced Thursday settles a civil lawsuit filed last May by New York Attorney General Eliot Spitzer with backing from the New York State Insurance Department and the U.S. Justice Department. The Securities and Exchange Commission, which also worked with Spitzer on the investigation, filed and settled allegations of accounting fraud with the company simultaneously.
The settlement does not cover Maurice "Hank" Greenberg, the company's former chairman and chief executive who was named in the suit but who has pledged to fight it in court.
While acknowledging the civil misconduct and facing a huge fine, AIG at the same time escapes the threat that a criminal case could have been brought.
The Justice Department said that AIG's agreement spares the company criminal prosecution in exchange for its cooperation with the ongoing federal criminal investigation.
Shareholders welcomed the announcement, sending AIG shares up 75 cents, or 1.1 percent, to $67.13 in afternoon trading on the New York Stock Exchange.
AIG said that under the settlement it will pay $800 million for investors who were deceived by AIG's accounting tactics, including a $100 million penalty to the SEC. In addition, it will pay $375 million to AIG policyholders, $344 million to states harmed by AIG's practices from 1986 to 1995 involving state workers' compensation funds, and fines of $100 million to the state of New York and $25 million to the U.S. Justice Department.
AIG said it would take a $1.15 billion after-tax charge in its upcoming fourth-quarter earnings report to cover the settlement. It also announced that it would take a $1.1 billion after-tax charge to increase its reserves to reflect the completion of a recently concluded internal risk study.
AIG said that as part of the deal, it also has agreed "to retain for a period of three years an independent consultant who will conduct a review" of the company's accounting and internal controls.
Donald Light, senior insurance analyst with Celent, a Boston-based research and consulting company, said the settlement "means AIG's board and management is off the hook for anything worse ... such as a criminal case."
He added: "They're paying a lot of money for that, but AIG is huge and this amounts to less than 2 percent of shareholders' equity."
Spitzer told The Associated Press in an interview, "This is a company that didn't have to cheat. But once they began, they found it hard to stop. And like an addict, they grew dependent on financial gamesmanship that could ultimately destroy the company."
He said that the new business practices AIG was adopting would improve the market for property and casualty insurance in the United States by creating "a new level of transparency in the market that all consumers will benefit from.
The SEC's enforcement director, Linda Thomsen, noted that the investigation looked at the entire industry and centered on misuse of specialized insurance vehicles, such as reinsurance.
"While this settlement concludes our investigation of AIG, our investigation continues with respect to others who may have participated in AIG's securities-laws violations," she said.
The settlement with AIG exceeds many of the fines the SEC imposed following a wave of corporate scandals in 2002, including civil fines and restitution of $750 million for WorldCom Inc., $715 million for Adelphia Communications Corp. and $300 million for Time Warner Inc.
It also surpasses the $850 million settlement Spitzer reached last year with New York-based Marsh & McLennan Companies Inc., the nation's largest property and casualty brokerage, over allegations of bid rigging and price fixing as well as hidden commissions.
AIG was among the companies that allegedly participated in the bid-rigging scheme, and four former AIG executives were among 20 insurance executives and officers who have pleaded guilty to charges, Spitzer's office said.
Besides naming AIG, Spitzer's suit alleged that Greenberg and former chief financial officer, Howard I. Smith, orchestrated the scheme.
Greenberg, who resigned from AIG in March, has repeatedly insisted that he followed proper accounting procedures during his 38 years at the helm of AIG. Smith, too, has denied wrongdoing, and neither of the men was involved in the negotiations with the SEC and Spitzer.
The accounting scandal centered on transactions that AIG under Greenberg concluded with Berkshire Hathaway's General Re. insurance group.
In its filing, the SEC said the $500 million transactions in 2000 and 2001 "were designed to inflate falsely AIG's loss reserves ... in order to quell analyst criticism that AIG's reserves had been declining."
Three former Gen Re executives and one former AIG executive were indicted last week in connection with the deceptive accounting scheme.
Greenberg was replaced as chief executive by Martin Sullivan, who oversaw the restatement of AIG's earnings back to 2000. The revisions knocked some $2 billion off shareholders' equity and nearly $4 billion off its profits.
Sullivan said in a statement Thursday that the settlement marked "a major step forward in resolving the legal and regulatory issues facing AIG." He said the company was "committed to business practices that provide transparency and fairness in the insurance market." |
