这篇华尔街日报的报道像小说一样好看。
For three hours Tuesday evening, the board of American International Group Inc. wrestled with the government's offer: An billion loan in return for surrendering control of the insurance giant.
The directors were stunned by the 'onerous' proposal, as one called it. They were surprised by an order to replace Chief Executive Robert Willumstad and bristled at what they considered Washington's heavy-handed treatment. One director said he felt 'violated.'
It's not the government's role to buy private companies, said Martin Feldstein, an AIG director and former economic adviser to President Ronald Reagan. As the board debated taking its chances in bankruptcy protection -- a move that could have caused chaos in global financial markets -- Mr. Willumstad made the dilemma clear.
'We are faced with two bad choices,' he told the board, according to someone present at the meeting. 'File for bankruptcy tomorrow morning or take the Fed's deal tonight.' At 7:50 p.m., Mr. Willumstad placed a phone call and accepted the deal.
The following account -- based on interviews with Wall Street bankers and lawyers, AIG executives and government officials -- shows how the wave that engulfed Wall Street this weekend surged through the financial system and on Tuesday felled one of the country's largest insurance companies.
It's not yet clear where the devastation will end. These tumultuous days have resulted, thus far, with the U.S. government taking control of AIG as well as mortgage titans Fannie Mae and Freddie Mac -- deals performed with little due diligence. Two venerable Wall Street firms, Lehman Brothers Holdings Inc. and Merrill Lynch & Co., ceased to exist as independent entities.
As the AIG case demonstrates, the demise of even the biggest firms can come swiftly. The idea of a takeover hadn't been broached, by either party, until early this week. On Sunday, Treasury Secretary Henry Paulson told bankers considering financing for AIG that government officials 'don't have a clear sense of how big the problem is.'
On Tuesday, with no private financing forthcoming, federal officials decided that the risks of letting AIG declare bankruptcy would be more than fragile financial markets could stand. This latest bailout, however, has sparked an unusually loud backlash from Capitol Hill from lawmakers worried that the crisis is spinning out of control, raising questions about the scope of future federal action.
AIG is a mammoth insurance conglomerate with businesses in 130 countries and roots stretching back to 1919. Built over nearly four decades by former CEO Maurice R. 'Hank' Greenberg, AIG resembles few other companies. It sells annuities to teachers in West Virginia, liability insurance to the biggest American corporations, workers' compensation coverage to restaurants and policies covering cows in dusty Jhalawar, India.
In many ways, AIG was healthy. The rot stemmed largely from losses in a unit that sold a complex kind of derivative, called a credit-default swap, designed to protect investors against default in an array of assets, including subprime mortgages. The division's billion in losses forced AIG to put up billions more in collateral, straining its financial resources. Downgrades from ratings agencies and relentless pressure on the company's stock exacerbated its already weak position.
Mr. Willumstad took over as chief executive on June 15. Mr. Willumstad, who had been passed over for the top spot at Citigroup, assured the board he would 'have a game plan by Labor Day' to decide what businesses AIG should stay in.
The financial turmoil killed that timetable. In early September, Mr. Willumstad decided AIG had to raise capital fast after uncovering billions in subprime liabilities. 'The holes we'll have to fill are so big, we need to raise capital,' Mr. Willumstad told Jamie Dimon, CEO of J.P. Morgan Chase & Co., while engaging his firm for help. The two men knew each other from their time together at Citigroup.
Last week, AIG's crisis became supercharged. AIG tried sticking to its goal to unveil a turnaround plan on Sept. 25. But its shares fell 31% on Friday and Standard & Poor's warned that it could cut AIG's credit rating, making it even harder for the company to borrow.
Mr. Willumstad put in an urgent call to Timothy Geithner, president of the Federal Reserve Bank of New York, to warn him of the company's coming crunch. The CEO believed the company needed billion -- but came away discouraged. 'I don't really have Geithner's attention,' Mr. Willumstad told his colleagues. 'Lehman is coming apart, and that's his focus.'
Messrs. Paulson and Geithner that evening were in an austere conference room on the first floor of the New York Fed's headquarters having assembled a meeting of Wall Street's top executives. The crisis at Lehman, which like AIG had a desperate need for fresh capital but no clear way of securing it, was top of the agenda. But Mr. Paulson told the group there was more to discuss.
'Let's not just be focused on Lehman,' Mr. Paulson said, according to a person who was in the room. 'Let's look ahead.' AIG emerged as a common concern. No one from AIG was at the meeting, so Messrs. Paulson and Geithner called Mr. Willumstad and asked him to brief the group the next day.
At AIG, Mr. Willumstad was working through the night with bankers from J.P. Morgan and hedge fund Blackstone Group to determine how much money the company would need. By the next day, the amount of capital needed had doubled to billion because of its fast-deteriorating real-estate related securities.
The New York state superintendent of insurance, Eric Dinallo, told the firm he could waive certain rules to allow the parent company to access about billion from its subsidiaries. Mr. Willumstad rushed to tell the executives and bankers: 'We found billion!' He left thinking AIG now only needed another billion to avoid disaster.
Saturday Morning
Saturday morning, Mr. Willumstad was at AIG's headquarters when he bumped into another former colleague from Citigroup, Deryck Maughan, who was there bottom-fishing for private-equity firm Kohlberg Kravis Roberts. Others also stopped by including Allianz AG, the German insurance company, and J.C. Flowers, which was shuttling back and forth to Lehman. France's AXA SA was interested in buying a piece of AIG's life insurance company.
Later on Saturday, Mr. Willumstad walked the few blocks from AIG to the New York Fed. With Lehman executives in the building seeking a bailout, Mr. Paulson was disinclined to help until he knew more about the scope of AIG's problems.
Mr. Willumstad persisted: 'I'm proposing a transaction, not a bailout. If we just get the Fed's backing in exchange for collateral, I give you my word I'll sell every asset needed to pay you back.'
By Saturday night, however, the banking team was confident their money-raising plan could work, assuming AIG could reach agreement with the private-equity firms.
On Sunday morning, AIG's advisers made a worrying discovery. One of the insurer's regulated subsidiaries, its securities lending business, also needed an injection of about billion.
That day, J. C. Flowers made a proposal that would involve an investment of about billion contingent on a number of factors, including ensuring AIG's credit rating wouldn't fall below a certain level. KKR and TPG offered billion for 50% of the company. Both deals were contingent upon some sort of credit line being provided -- either by the Fed or Wall Street banks.
AIG executives wouldn't accept such conditions. But the point was moot. The private-equity firms did their calculations based on the presumption that AIG would need billion. By late Sunday, after Asian markets opened and the value of its assets came under further stress, it was becoming clear the company now needed more than billion.
Mr. Willumstad's outside advisers told Mr. Geithner that he size of AIG's hole was ' billion plus.' He added that he didn't know what the 'plus' was.
Two hours later, Mr. Geithner said the Fed would see what it could do, but made no commitments.
Mr. Willumstad left his office at 11 p.m. Lehman was about to file for bankruptcy after the government refused to step in.
Just as with Lehman, Messrs. Paulson and Geithner wanted a private sector solution for AIG. Mr. Paulson in particular was irked that Wall Street viewed him as a white knight for troubled firms. Mr. Paulson asked executives at Goldman Sachs Group Inc. and J.P. Morgan. to see if they could raise capital for AIG. He still wasn't sure of the magnitude of an AIG collapse.
At the same time, Mr. Paulson asked Treasury staffers to start thinking through what a government response might look like. Dan Jester, an advisor to Mr. Paulson and a former Goldman Sachs banker, began working through various scenarios of how the government might structure a capital injection.
On Monday, Mr. Willumstad informed Mr. Dinallo that AIG needed as much as billion to avoid failing. Mr. Dinallo replied that the state wouldn't act unless there was a plan in place to provide the rest of what AIG needed. 'I can't risk hurting the policyholders if your company goes bankrupt,' he said.
On Monday, AIG informed Mr. Dinallo that it needed as much as billion to avoid failing. Mr. Dinallo, the New York state insurance superintendent, replied he couldn't authorize the billion he'd promised to free up. 'I can't risk hurting the policyholders if your company goes bankrupt,' he said.
Representatives from J.P. Morgan and Goldman Sachs met all day Monday at the Fed's office in Lower Manhattan. Together with Morgan Stanley, they evaluated AIG's liquidity needs and, separately, the viability of a private-sector solution. Their updated conclusion: AIG needed about billion.
At 1:30 p.m. Mr. Paulson appeared at a White House press conference to answer questions about the collapse of Lehman. Asked if the government would not provide support for any flailing institutions, Mr. Paulson responded: 'Don't read it as 'no more.' Read it as that, you know, it's important, I think, for us to maintain the stability and orderliness of our financial system.'
As for AIG, Mr. Paulson said the government wasn't then working on a loan. 'What is going on right now in New York has got nothing to do with any bridge loan from the government. What's going on in New York is a private-sector effort again focused on dealing with an important issue that it's, I think, important that the financial system work on right now. And there's not more I can say than that.'
Mr. Geithner held a conference call with staffers from the Fed and Treasury. The call lasted until 2 a.m.
On it, the group discussed the systemic implications of an AIG bankruptcy and what would happen if the firm collapsed. The question at the outset was 'Can we let it go?'
Outside Mr. Geithner's office, the Morgan Stanley team worked until 4 a.m. on an intervention plan.
Driving Up the Cost
Lehman's collapse was already driving up the cost of short-term borrowing. Mr. Geithner and staffers fretted that a toppled AIG could throw a wrench in a wide range of markets, from ultra-safe money-market funds owned by individual investors to complex derivatives used by Wall Street banks and tools used to finance corporations. AIG's size and complexity meant that its tentacles were spread throughout the financial system, making it almost impossible to be certain about the impact of a collapse -- other than to know it was potentially catastrophic.
In the late afternoon on Monday , it became clear that Goldman and J.P. Morgan were not going to come to AIG's rescue. The insurer's assets were insufficient to secure a loan of the size it needed.
On Tuesday, AIG executives decided it was time to drain their revolving credit lines, the kind of last-ditch move companies typically make before filing for bankruptcy. Most of the banks balked, according to a person familiar with the matter. Citing recent downgrades of AIG's debt ratings, they said they wouldn't finance the loans without greater confidence that AIG wasn't on the verge of collapse.
The .85 billion was pocket change, but the rebuff added to the Fed's sense of urgency.
Mr. Willumstad knew he was almost out of time. He wasn't even watching AIG's stock price any more, which had dipped below a share.
At 1:30 p.m., the Fed said it would help, but needed approval from its board of governors, which was about to meet to decide interest rates. At 3:30 p.m. Mr. Paulson and Federal Reserve Chairman Ben Bernanke briefed President Bush. At 4 p.m., they held another call with Mr. Geithner to make sure they were all comfortable with what they were about to do.
The decision was happening so fast no one felt they'd had enough time to dig into AIG's finances or perform a thorough analysis of the impact of a collapse. But no one wanted to take the chance of not acting and causing a calamitous market response.
At 4 p.m., the proposal was hand-delivered to AIG. It was a draconian three-page term sheet, setting forth a steep interest rate and the right to own almost 80% of the company.
Mr. Willumstad was surprised but not shocked. An AIG adviser told the management team: 'Paulson is handling this the same way he did Fannie, Freddie and Bear Stearns -- if the government steps in, the shareholders will pay for it.'
Mr. Willumstad called a board meeting for 5 p.m. Ten minutes before the meeting was to start, he received a phone call from Messrs. Paulson and Geithner. Mr. Geithner precluded any negotiation by saying: 'This is the only proposal you're going to get.' Then he added, 'And there's one condition -- we'll replace you as CEO.' That directive was also relayed by Mr. Paulson.
Mr. Willumstad didn't flinch. Tuesday was his three-month anniversary as AIG's chief. He knew he hadn't caused AIG's mess and he knew that heads had to roll in these circumstances.
After the AIG board approved the offer, Messrs. Bernanke and Paulson attended a hastily-arranged meeting Tuesday night with top lawmakers, many of whom were stunned by the magnitude of the problem and the response.
Sen. Judd Gregg of New Hampshire, the ranking Republican on the Senate Banking Committee, walked into the meeting in a tuxedo with no tie. House Financial Services Committee Chairman Barney Frank, a Massachusetts Democrat, entered last with the front of his shirt untucked.
Seated at a large conference table, Mr. Bernanke 'spelled out what would happen if AIG failed' and that it would 'be felt across American and around the world,' recalled Illinois Sen. Dick Durbin, one of the attendees.
MONICA LANGLEY / DEBORAH SOLOMON / MATTHEW KARNITSCHNIG
