Feds: AIG Rescue Needed Because of Broad Reach

The government rescue of insurer American International Group Inc was necessary, in contrast to Lehman Brothers, because the insurer has extensive ties to other firms and retail products, senior Fed staff said on Tuesday.

Financial markets were more prepared for Lehman’s collapse and the Securities and Exchange Commission had procedures in place to deal with a securities firm’s failure, the officials told reporters.

But AIG was deemed to be a very complicated firm with extensive links to many parts of the financial sector, including retail financial products, such as insurance and guaranteed annuities, they said.

In addition, it has substantial business interests that would not have been protected by states, an official said.

Senior management of AIG is expected to be replaced, and the company will be run by new management, the Fed staff said.

The liquidation of AIG’s assets is the most likely way the company could pay off the loan, but it could also pay off the loan through operations as well, an official said.

The government loan is the most senior obligation in the deal, the officials said. Management of the company will decide which assets will be sold off to repay the loan.

Fed staff denied that the deal represents a nationalization of the insurer. The government has provided liquidity to the company to allow it to fund its operations in an orderly fashion, they said. (Reporting by Mark Felsenthal; Editing by Carol Bishopric)