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On September 16, 2008, AIG’s share prices fell over 95% to just $1.25, a very stark contrast from the peviously 52-week high of $70.13. AIG lost over $13.2 billion in the first semester of that year. Similar to which Lehman Brothers had suffered a major decline in value and share price, investors began asking about the types of securities held by AIG and compared them to those held by Lehman. This led to the discovery that AIG had valued their Alt-A and sub-prime mortgage-backed securities at rates 1.7 to 2.0 times those Lehman had used for what Lehman officials called similar securities.

On September 14, 2008, in order to raise necessary capital for the company, AIG announced it was considering selling its aircraft leasing division, International Lease Finance Corporation. Morgan Stanley has been hired by The Federal Reserve to determine whether there are systemic risks to a failing AIG, and has asked private entities to supply short-term “bridge” loans to the company. In the meantime, New York regulators have approved AIG for $20 billion in borrowing from its subsidiaries.

During the market’s opening on September 16, AIG’s stock dropped 60 percent. Following was The Federal Reserve continued to meet that day with major Wall Street investment firms to broker a deal to create a $75 billion line of credit to the company. Rating agencies Moody’s and Standard and Poor’s, meanwhile, downgraded their ratings on AIG’s credit on concerns over continuing losses to mortgage-backed securities, forcing the company to deliver collateral of over $10 billion to certain creditors. The New York Times later reported that talks on Wall Street had broken down and AIG may file for bankruptcy protection on Wednesday, September 17. Founder of American International Group (AIG), Maurice (Hank) Greenberg, sent an impassioned letter trying to help any way possible, to AIG CEO Robert B. Willumstad and the Board of Directors before the bail-out by the US Federal Reserve Board.

Federal Reserve Bailout

On the evening of September 16, 2008, the Federal Reserve Bank’s Board of Governors announced that the Federal Reserve Bank of New York had been authorized to create a 24-month credit-liquidity facility from which AIG may draw up to $85 billion. The loan is collateralized by the assets of AIG, including its non-regulated subsidiaries and the stock of “substantially all” its regulated subsidiaries, and has an interest rate of 850 basis points over the three-month LIBOR (i.e., LIBOR plus 8.5%). In exchange for the credit facility, the U.S. government will receive warrants for a 79.9 percent equity stake in AIG, and has the right to suspend the payment of dividends to AIG common and preferred shareholders. The credit facility was created under the auspices of Section 13(3) of the Federal Reserve Act.

AIG’s board of directors announced approval of the loan transaction the same day. The announcement did not comment on the issuance of warrants that could amount to 79.9% of AIG’s equity.

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