WASHINGTON - In the largest single financial intervention in the nation's history and a measure of the depths of America's financial crisis, the Federal Reserve will lend insurance giant American International Group Inc. $85 billion to finance the company's liquidation over the next two years, people familiar with the decision said last night.
The loan represents an abrupt turnaround for the Fed, which as late as Monday night indicated that the nation's big investment banks would provide emergency financing for AIG and as recently as last weekend appeared to be signaling an end to government rescues of private firms by allowing Lehman Bros. Holdings Inc. to go belly up and Merrill Lynch & Co. to be snapped up in a rushed purchase by Bank of America.
Fed Chairman Ben S. Bernanke acted after AIG, the world's largest insurer, told the government that without aid the company would file for bankruptcy last night, a move that Fed officials concluded would send devastating ripples through the global financial system and jeopardize economies around the world.
Bernanke and Treasury Secretary Henry M. Paulson Jr. went to Capitol Hill at 6:30 p.m. to brief top House and Senate leaders in the offices of Senate Majority Leader Harry Reid of Nevada. But people familiar with the discussions said the central bank chairman and the top Bush administration official had already made the decision on the loan by the time they arrived.
The two-year loan will be backed by all of AIG's assets, and is expected to be repaid by sales of the firm's assets. It will give the U.S. government an 80 percent stake in the company and the power to veto dividend payments to common and preferred shareholders.
In a statement issued at 9 p.m., the central bank said that the Fed board approved the loan after determining that "in current circumstances, a disorderly failure of AIG could add to already significant levels of financial market fragility and lead to substantially higher borrowing costs, reduced household wealth and materially weaker economic performance."
AIG has its corporate fingers in 130 states and nations across the United States and around the world. The New York-based holding company with its scores of subsidiaries is the second-largest insurer in the United States in direct written premiums and the largest in the world when measured by its about $1 trillion in assets.
