US government could bail out insurance giant AIG in U-turn deal

The US government could end up controlling the insurance giant AIG under a deal being considered late last night.

An agreement for the US Treasury to bail out the troubled company would be a dramatic U-turn for the government, but AIG's pivotal role in the financial markets led many Wall Street executives to describe the company as "too big to fail".

Reports suggested a bridge loan of more than $80bn (£45bn) could be made available to AIG, but with conditions, including the issue of warrants that would severely dilute the company's existing investors and potentially turn the US Treasury into the biggest single shareholder.

Government intervention was put back on the table after crisis talks to save the company went into a fifth day with diminishing hope for a private sector solution.

Participants said that time was running out following a downgrade of the company's credit rating, and amid mounting concern that its bankruptcy could cause chaos in the world's credit markets.

The overnight decision by the three main rating agencies to cut AIG's credit rating means the insurer can now be asked to post billions of dollars in additional collateral to the Wall Street banks who use it to insure $440bn in fixed-income assets.

With AIG so deeply enmeshed in the world's capital markets, the Federal Reserve and the US Treasury have been working closely with the company and its advisers to try to hammer out a rescue deal, and AIG shares swung wildly yesterday amid a swirl of contradictory rumours about whether the government might extend some of the $80bn in loans it could need to stay afloat.

AIG had been huddled with advisers since Friday night, when the rating agency Standard & Poor's first threatened a downgrade. The company – until recently the world's largest insurer – has profitable businesses it can sell, but needs bridging loans to tide it over until it can find buyers.

Hank Greenberg, its founder who was ousted as chief executive in 2005, said the government should help to save "a national treasure" which had been brought low not because it was insolvent, but because of a short-term liquidity crisis.

Jonathan Wilmot, strategist at Credit Suisse, said a liquidation of AIG would strain credit markets already reeling from the collapse of Lehman Brothers, and would trigger a new wave of writedowns by financial institutions.