U.S. Seizes Control of AIG With $85 Billion Emergency Loan

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Wall Street in Turmoil

Global stocks have experienced wild fluctuations this week in the wake of the U.S. government's seizure of insurance giant American International Group, the failure of Lehman Brothers, the disappearance of Merrill Lynch as an independent company and reports the U.S. government will set up a government entity to take on bad debts from financial institutions.

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The Fed, meanwhile, decided at a regularly scheduled policy meeting against cutting interest rates further, concluding that it was too soon to tell what effect the recent turmoil on Wall Street was having on the broader economy. The refusal to reduce rates was consistent with the Fed's belief that measures to improve the functioning of the financial system -- such as emergency loans to investment banks -- should remain separate from actions that affect the overall economy.

AIG's stock, which fell 61 percent Monday, plunged 75 percent more in early trading yesterday but ended the day down 21 percent, or $1.01 a share, to close at $3.75 on trading volume of more than 1.1 billion shares.

On Monday, Treasury Secretary Henry M. Paulson Jr. -- who had backed publicly funded bailouts of Bear Stearns, Fannie Mae and Freddie Mac -- said he was reluctant to continue to use public funds to prop up individual firms. He left open the possibility that taxpayer funds could still be used broadly to "maintain the stability and orderliness of our financial system."

But the clock ran out. At one point yesterday, J.P. Morgan Chase and Goldman Sachs agreed to consider arranging a $75 billion loan to AIG that would be syndicated, or sold in pieces to other parties, to help spread the risk. But the firms walked away from that proposal after it became clear they would not be able to raise such a large amount in time, especially in such a troubled market, according to a person familiar with the negotiations.

Paulson and Fed Chairman Ben S. Bernanke were on Capitol Hill last night, briefing congressional leaders on the government's plans. The deal gives the government broad powers to force the sale of assets, cancel dividend payments to shareholders and replace the chief executive. Former Allstate chief executive Edward Liddy will succeed Robert Willumstad as AIG's chief, according to a person familiar with the decision. The sources spoke on condition of anonymity because they were not authorized to speak publicly.

The company would be put up as collateral for the two-year loan. AIG's state-regulated insurance subsidiaries would continue operating as normal in the immediate future, though they may eventually be sold to pay the government loan. The deal puts taxpayer money at risk for AIG's troubled investments. But because the government can control the timing of asset sales, it may be able to profit from its intervention by holding out for better prices.

White House spokesman Tony Fratto said the president supports the deal. "These steps are taken in the interest of promoting stability in financial markets and limiting damage to the . . . economy," Fratto said.

House Speaker Nancy Pelosi (D-Calif.) expressed concern about the intervention and called for hearings to determine whether fraud or regulatory failures contributed to AIG's troubles.

"An $85 billion loan is a staggering sum and is just too enormous for the American people to bear the risk," she said in a statement last night.

The Fed is using the emergency authority it was granted during the Great Depression. By law, the Fed can lend money to any individual, partnership or corporation in unusual and exigent circumstances, when the borrower cannot access funds in other ways. The power had not been exercised until March, when the Fed used it to rescue Bear Stearns.

As federal officials scrambled on a rescue plan yesterday, AIG officials stressed that individuals holding ordinary insurance had little to worry about. In a statement, AIG said its "life insurance, general insurance and retirement services businesses, including its extensive Asian operations, continue to operate normally and remain adequately capitalized and fully capable of meeting their obligations to policyholders."

Sandy Praeger, president of the National Association of Insurance Commissioners, also issued a statement, saying, "If you have a policy with an AIG insurance company, they are solvent and have the capability to pay claims."