U.S. Scrambles To Find Solution To AIG's Woes

Federal officials are working overtime in order to save American Insurance Group. The Federal Reserve and the Treasury Department say they are seeking a private-sector solution, but it is being asked if there will be another government-sponsored bailout.

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MICHELE NORRIS, host:

From NPR News, this is All Things Considered. I'm Michele Norris.

ROBERT SIEGEL, host:

And I'm Robert Siegel. Today, oil prices fell sharply, the Fed refused to cut rates, and the stock market rallied. But there was little movement on a concern that's been hanging over Wall Street after the implosion of Lehman Brothers and the sale of Merrill Lynch. For the giant insurance company, American International Group, or AIG, time appears to be running out. The company is struggling to get the cash it needs to stay alive, and its credit ratings have been downgraded. NPR's Jim Zarroli has our report.

JIM ZARROLI: AIG executives spent the day closeted with federal officials in New York trying to come up with a way to raise the tens of billions of dollars they need. There was talk about a bailout from some big private banks and rumors that the Fed itself might step in to help. But nothing came to pass. AIG's former CEO, Hank Greenberg, appeared on CNBC to warn about what would happen if the company is allowed to go under.

Mr. HANK GREENBERG (Former CEO, AIG): If they don't get a bridge loan either from the private sector or the Fed, and if the rating agencies don't give them breathing space, then there's no alternative. And that would be a disaster.

ZARROLI: New York Governor David Paterson who has tried to help the company arrange financing said AIG is so big and does so much business around the world that a collapse would be felt everywhere.

Governor DAVID PATERSON (Democrat, New York): They have a trillion dollars in assets. I know that that would have to reverberate in a lot of other areas: small businesses, mortgages, hedge funds. I mean this is a catastrophic problem waiting if we aren't able to curtail it.

ZARROLI: AIG got its start as an insurance company. If the company is forced into bankruptcy, a lot of its policy holders will probably try to flee the company and get coverage elsewhere. The result, says analyst Donald Light of Celent Communications, would be a huge disruption throughout the industry.

Mr. DONALD LIGHT (Senior Analyst, Celent Communications): I think it will be an alarm clock going off for both individuals and businesses. Am I confident that this company, my company, is going to be around, you know, in one year or five years if and when I have to make a claim?

ZARROLI: But that would be just the beginning of the damage a bankruptcy might inflict. More so than any other insurance company, AIG also has substantial involvement in complex financial products like derivatives. As with other big Wall Street firms, the full size and scope of its potential losses isn't clearly understood, and unwinding its portfolio would take a lot of time, time the company doesn't really have. Doug Elmendorf is a former Fed economist now with the Brookings Institution.

Mr. DOUG ELMENDORF (Former Fed Economist; Senior Fellow, Brookings Institution): A number of the problems that arise if Bear Stearns or Lehman or AIG fail wouldn't be problems if you could do it all in slow motion. The difficulty is that these things often happen very quickly.

ZARROLI: A bailout would give the company time to sell off some of its assets in an orderly way and avoid a meltdown. But the murkiness of its portfolio seemed to scare investors away, and Bush administration officials refused to bail out another big financial firm. Analyst Donald Light said a federal bailout of AIG now would set a dangerous precedent. Like many people, he believes investors would be more reckless because they'll think the government will always rescue them from the consequences of the choices they make.

Mr. LIGHT: Would it be good in the short term to keep AIG afloat? Absolutely. From a public policy point of view, it's a much harder question.

ZARROLI: As investors waited to hear AIG's fate, its stock price fluctuated. Shares fell 60 percent on Monday. Today, they were down as much as 40 percent more. And there was a kind of sadness in Hank Greenberg's voice today when the former CEO talked about what had happened to his company.

Mr. GREENBERG: Most of my net worth was in AIG. You know, it was something I built from the beginning, and I never believed it's possible for AIG to become impaired, ever.

ZARROLI: Jim Zarroli, NPR News, New York.

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Fed Rejects Rate Cut; Talks Aim At Aiding AIG

A man looks at an electronic display board showing falling share prices in Tokyo on Tuesday. i i

A man looks at an electronic display board showing falling share prices in Tokyo on Tuesday. Kiyoshi Ota/Getty Images hide caption

itoggle caption Kiyoshi Ota/Getty Images
A man looks at an electronic display board showing falling share prices in Tokyo on Tuesday.

A man looks at an electronic display board showing falling share prices in Tokyo on Tuesday.

Kiyoshi Ota/Getty Images

As Federal Reserve and Treasury officials huddled on Wall Street to try to find a way to save struggling insurer American International Group from bankruptcy Tuesday, Fed policy makers did nothing to ease the market pressure. They left the fed fund rates unchanged, deciding that fighting inflation was still a top priority.

In a statement released after the Federal Open Market Committee Meeting, the central bank said that while "strains in financial markets have increased significantly and labor markets have weakened further... the downside risks to growth and the upside risks to inflation are both of significant concern ..."

After a Monday in which Wall Street experienced its worst losses since 2001, investors today seemed to take a breath. The Dow Jones industrials gained 141 points Tuesday.

Last night, top rating agencies Standard & Poor's and Moody's Investors Service cut AIG's debt rating. That means the giant insurer will need to come up with more collateral — or raise cash — to cover its debts. It is unclear whether AIG will be able to do so.

Even before the ratings decision, the company was in a cash crunch. It has incurred some $18.5 billion in losses in the past three quarters because of its exposure to mortgage-backed securities.

On Monday, New York Gov. David Paterson tried to give the company some breathing room by allowing AIG to access some $20 billion of capital in its subsidiaries. That might not be enough.

"I think AIG has a day" to get a deal done, Paterson told CNBC on Tuesday morning. "I don't know if anyone is really understanding the ramifications of this crisis. We're in a terrible situation if we let the world's largest industrial and technical insurance company go down."

Experts agree that the failure of AIG would have tremendous consequences for the financial industry. It has insured some $441 billion in fixed income assets for banks and other investors. Because of that, most major banks have significant exposure to AIG.

The two biggest Asian stock markets — Tokyo and Hong Kong — plummeted Tuesday on the news of the downgrade of AIG's debt rating. Stocks in Europe also fell.

The sell-off started Monday after news broke that the largest U.S. brokerage, Merrill Lynch, had to sell itself to Bank of America just to stay afloat, and the nation's fourth-largest investment bank, Lehman Brothers, was forced to file for Chapter 11 bankruptcy. The Dow Jones industrial index closed Monday down more than 500 points, and the Standard and Poor's 500 closed down 59 points at 1,192.70, the lowest level since October 2005.

Asian markets followed the U.S. lead. On Tuesday, Tokyo's Nikkei 225 index sank nearly 5 percent to 11,609.72, its lowest close since July 2005. Hong Kong's Hang Seng Index fell 5.4 percent to close at its lowest level in almost two years.

The Federal Reserve has asked JPMorgan and Goldman Sachs to put up some $75 billion in lending that might help AIG weather the storm, but so far the two banks have balked. If AIG doesn't get some sort of lifeline, it will have to file bankruptcy.

'Rough Spots Along The Road'

Speaking to reporters Monday, Treasury Secretary Henry Paulson tried to put the best face on what had transpired. He said an "archaic" regulatory system was to blame for the turmoil in the markets.

Critics have been harsher. They say that reckless lending practices by Wall Street firms during the housing boom are now coming home to roost.

Paulson said until the slump in U.S. housing prices levels off, "we're going to continue to have turmoil in the financial markets." He didn't sound hopeful about the slump ending anytime soon.

"I believe that there is a reasonable change that the biggest part of that housing correction can be behind us in a number of months," Paulson said, adding, "I'm not saying two or three months, but in months as opposed to years." He warned that there would be some "real rough spots along the road."

Paulson and other Treasury and Federal Reserve officials traveled to New York City over the weekend to huddle with Wall Street bankers in an effort to try to smooth those rough spots. The goal was to keep Merrill and Lehman afloat after the two institutions reported billions in losses related to mortgage-backed securities.

The plan had been to arrange some sort of shotgun wedding like the one they engineered for Bear Stearns earlier this year. In that case, the government provided some guarantees against losses, and JPMorgan Chase got Bear Stearns at a bargain-basement price.

The sessions over the weekend were only partly successful. Merrill agreed to sell itself to Bank of America for $50 billion so it could avoid bankruptcy, but Lehman was not so fortunate.

Both Barclays Bank and Bank of America flirted with the investment bank but in the end said that without some sort of guarantee that would shield them from additional losses, they were not willing to take the plunge. Without a white knight, Lehman was forced to file for bankruptcy on Monday. Lehman has some $60 billion in bad real estate debt.

"The situation and facts around Bear Stearns are very, very different," Paulson said when asked why the government wouldn't extend the same sort of guarantees against losses for Lehman as it had for Bear Stearns. "I never once considered putting taxpayer dollars on the line in the Lehman situation."

'At Some Point You Have To Say No'

Wall Street Journal economics editor David Wessel said Monday that the federal government didn't come to Lehman Brothers' aid because of the barrage of criticism it got for saving Bear Stearns, which put some $30 billion of taxpayer money at risk.

"It realized that at some point you have to say no or the entire financial system, every time there's a problem, is going to come to the Federal Reserve and the taxpayers and say 'we need your help here,' " Wessel told Renee Montagne.

So Paulson, Federal Reserve Chairman Ben Bernanke and New York Fed President Tim Geithner decided to draw a line in the sand, "and now we're going to find out if they did the right thing or not," Wessel said.

"If things start to get better now, it will be seen as the right decision. If they made a mistake and they should've put taxpayer money into this, they'll go down in history as the guys who made the biggest blunder since 1930."

To provide some sense of scale of the crisis: Merrill Lynch — one of the country's top issuers of mortgage-backed securities — reported it had lost more than $45 billion on its mortgage investments. That's about two times more than all of its profits in the two years before the subprime mortgage crisis. So far, financial institutions around the world have written off hundreds of billions of dollars in losses related to mortgage-backed securities.

Now all eyes are on AIG. The government announced Monday afternoon that it would not bail out the company or provide the guarantees it needed to stay afloat. It is pressuring a consortium of investment banks to do so, but it is unclear whether that will work.

Paterson announced that New York state would allow AIG to shift some $20 billion in assets to shore up its balance sheet. Investors didn't seem to think that would be enough. AIG's shares traded Monday for as low as $3.50 a share — a far cry from its 52-week high of $70.13 a share.

President Bush also tried to calm investors' jangled nerves during a news conference at the White House on Monday. He said he had been in close touch with Paulson throughout the weekend and added that he knew Americans were concerned about the financial markets. He said his administration was working to reduce further disruptions and any impact the credit crisis would have on the broader economy.

"In the short run, adjustments in the financial markets can be painful," the president said. "Both for the people concerned about their investments and the employees of the affected firms. In the long run, I am confident our capital markets are flexible and resilient and can deal with these adjustments."

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