The US government was holding out against using taxpayer money to prop up the crisis-hit insurer American International Group last night, amid dire warnings that its failure could be a catastrophe for global markets.
Instead, the Federal Reserve was asking several Wall Street banks to provide bridging loans to tide the company over until it can conduct a firesale of assets and perhaps tap private equity companies for emergency cash.
Earlier in the day, AIG's regulator, the state of New York, handed it a temporary lifeline, giving it permission to access up to $20bn (£11.1bn) of capital that is normally held in its subsidiaries to cover insurance losses.
David Paterson, the governor of New York, said the extraordinary measure was made to allow AIG "to make a bridge loan to itself". He added: "This isn't a government bail-out. No taxpayer money is involved."
Officials from the Federal Reserve, which has become de facto regulator for the US financial system since the credit crisis exploded 13 months ago, were last night involved in AIG's fundraising plans, which have been going on non-stop since the rating agency Standard & Poor's threatened to downgrade AIG's credit rating last Friday afternoon. The company is believed to need at least $40bn to avert a downgrade.
If S&P carries out its threat, it has the potential to destroy a financial corporation which relies on a gold-plated credit rating to persuade clients to use it for insurance on a vast array of financial products. In turn, that promises to cause large and unpredictable losses for banks and hedge funds that are using AIG to hedge against market losses.
Ken Lewis, the chief executive of Bank of America, said the failure of AIG would be a bigger shock to the system than the bankruptcy of Lehman and urged the authorities to find a way to support the company. "I don't know of a major bank that doesn't have some significant exposure to AIG," he said. "That would be a much bigger problem than most that we've looked at."
In recent years, AIG has moved deeper and deeper into the credit markets, offering insurance on complex derivatives products, including those backed by mortgages that have collapsed in value. Its losses have spiralled this year, and S&P said last week that confidence in the company had deteriorated to such an extent that it would find it difficult to raise capital.
In an update to the market yesterday, the insurer said it would raise money by selling some of its key units, including its automotive and annuities businesses.
Private equity companies, including Kohlberg Kravis Roberts, TPG and JC Flowers, had been talking to AIG about taking a large stake in the company, but they backed away fearing that any investment could be wiped out if the insurer does not get a good price for the assets it is planning to sell. It was for that reason that, on Sunday, AIG began pleading for a bridging loan from the Federal Reserve.
Last night, the central bank was believed to have approached JPMorgan Chase and Goldman Sachs about providing a $70bn-$75bn bridging loan to AIG. The federal government was being advised by Morgan Stanley on its options, but there was little sign that either the US Treasury or the Federal Reserve wanted to offer taxpayer's money to prop up AIG, so soon after they had refused to use federal funds for a rescue of Lehman Brothers.
The investment guru Warren Buffett, the owner of the reinsurance giant Berkshire Hathaway, briefly held talks over a cut-price deal to buy AIG outright, which could have handed him the keys to what was, until the current crisis, the world's largest insurer. The talks appeared to go nowhere, however. AIG shares lost 60 per cent of their value yesterday, on top of the 30 per cent slide on Friday.Reuse content