Commodity rally tomorrow? Very possible if this is true. Gold starting to strengthen on this news. Comments?

red911

Federal takeover of AIG planned

Federal officials reportedly may take 80% stake in the nation's largest insurer in an $85 billion rescue plan to prevent financial chaos worldwide.

NEW YORK (CNNMoney.com) -- The federal government is reportedly on the verge of taking over crumbling insurer American International Group in an $85 billion deal that could leave the company in the Federal Reserve's hands.

According to published reports late Tuesday, officials decided they must act lest the nation's largest insurer file bankruptcy. Such a move would roil world markets since AIG (AIG, Fortune 500) has $1.1 trillion in assets and 74 million clients in 130 countries.

The plan calls for the Federal Reserve to take an 80% stake in AIG. The insurer's assets would be used to secure the loan, the New York Times reported.

The government had resisted getting involved, hoping to entice Wall Street to set up a $75 billion rescue fund for the firm. But by Tuesday night, it became clearer that the financial industry would not do so, according to reports.

Meanwhile, the company's options grew more limited as the day wore on. Its already-battered share price fell another 21% Tuesday with more than 1 billion shares trading hands, and plummeted another 46% in after-hours trading.

AIG did not immediately return calls for comment. The company issued a statement late Tuesday afternoon saying it "continues to pursue alternatives."

The statement also told policyholders that its general and life insurance businesses, as well as its retirement services division, were adequately capitalized and operating normally.

The company is scrambling to raise capital to stay afloat after being hit with credit rating agencies downgrades that is forcing it to come up with billions of dollars in additional collateral fast.

New York State officials, who regulate the insurance titan, urged the federal government to rescue AIG.

"I don't think this country, with all we've been through right now, where our economy is, can afford it," New York Gov. David Paterson told CNN.

The state attempted to help AIG on Monday by allowing it to tap into $20 billion in assets from its subsidiaries if the company could comes up with a comprehensive plan to get the much-needed capital, said a state Insurance Department spokesman.

"It has to be part of the solution to the problem," said spokesman David Neustadt.

Paterson said AIG could transfer $20 billion in assets from its subsidiaries to use as collateral for daily operations. In exchange, the parent company would give the subsidiaries less-liquid assets of the same value. He stressed the company is financially sound and that no taxpayer dollars are involved.

Also Tuesday, former Chief Executive Maurice "Hank" Greenberg said in a regulatory filing that he is monitoring the situation. Among the moves he is considering: purchasing AIG assets, lending to the company, investing more in it, seeking board seats, acquiring the company or offering advice to management.

The funding became ever more crucial as the insurer was hit Monday night by a series of credit rating downgrades. The cuts could prove deadly to AIG (AIG, Fortune 500) and force it to post more than $13 billion in additional collateral. Shares were down 35% in mid-day trading after falling more than 70% in early morning trading and losing 61% of their value the day before.

Late Monday night, Moody's Investors Service and Standard & Poor's Ratings Services each said they had lowered their ratings. A few hours earlier, Fitch Rating had also downgraded AIG, saying the company's ability to raise cash is "extremely limited" because of its plummeting stock price, widening yields on its debt, and difficult capital market conditions.

The downgrade could force AIG to post $13.3 billion of collateral, Fitch said in a statement, citing AIG's July 31 estimates. Also, the moves will make it more expensive for AIG to issue debt and harder for it to regain the confidence of investors.

Analysts urged the company to unveil its restructuring plan.

"Management needs to address investor concerns now before the market sell-off becomes a self-fulfilling prophecy," said Rob Haines, analyst at CreditSights.

If AIG were to fail, the global ripple effects would be unprecedented, said Robert Bolton, managing director at Mendon Capital Advisors Corp. AIG is a major player in the credit default swaps market, an insurance-like contracts that guarantee against a company defaulting on its debt. Also, it is a huge provider of life insurance, property and casualty insurance and annuities.

"If AIG fails and can't make good on its obligations, forget it," Bolton said. "It's as big a wave as you're going to see."

AIG has had a very tough year.

Rocked by the subprime crisis, the company has lost more than $18 billion in the past nine months and has seen its stock price fall more than 91% so far this year. It already raised $20 billion in fresh capital earlier this year.

Its troubles stem from its sales of credit default swaps and from its subprime mortgage-backed securities holdings.

AIG has written down the value of the credit default swaps by $14.7 billion, pretax, in the first two quarters of this year, and has had to write down the value of its mortgage-backed securities as the housing market soured.

The insurer could be forced to immediately come up with $18 billion to support its credit swap business if its ratings fall by as little as one notch, wrote John Hall, an analyst at Wachovia, on Monday.

This year's results have also included $12.2 billion in pretax writedowns, primarily because of "severe, rapid declines" in certain mortgage-backed securities and other investments.

The company brought in new management to try to turn the company around. In June, the company tossed out its chief executive, Martin Sullivan and named AIG chairman Robert Willumstad, who joined AIG in 2006 after serving as president and chief operating officer of Citigroup (C, Fortune 500), in his place.

First Published: September 16, 2008: 8:42 AM EDT