Dash, Eric

Sorkin, Andrew Ross

Yale University

Yale University EliScholar – A Digital Platform for Scholarly Publishing at Yale YPFS Documents (Series 1) Browse by Media Type 9-17-2008 Throwing a Lifeline to a Troubled Giant Andrew Ross Sorkin Eric Dash Follow this and additional works at: https://elischolar.library.yale.edu/ypfs-documents Recommended Citation Sorkin, Andrew Ross and Dash, Eric, "Throwing a Lifeline to a Troubled Giant" (2008). YPFS Documents (Series 1). 9056. https://elischolar.library.yale.edu/ypfs-documents/9056 This Document is brought to you for free and open access by the Browse by Media Type at EliScholar – A Digital Platform for Scholarly Publishing at Yale. It has been accepted for inclusion in YPFS Documents (Series 1) by an authorized administrator of EliScholar – A Digital Platform for Scholarly Publishing at Yale. For more information, please contact elischolar@yale.edu. 12/10/2020 Throwing a Lifeline to a Troubled Giant - The New York Timeshttps://www.nytimes.com/2008/09/18/business/18insure.html 1/6By Eric Dash and Andrew Ross SorkinSept. 17, 2008The first call from the Treasury Secretary Henry M. Paulson Jr. came at 3:30 p.m. Tuesday, and themessage was innocuous, to avoid setting off alarms. And when he finally got through to the Senatemajority leader, Harry Reid of Nevada, Mr. Paulson simply said he wanted to brief Congressionalleaders “about recent developments on the economy.”In fact, Mr. Paulson  along with the Federal Reserve chairman, Ben S. Bernanke  would deliverstunning news that would reverberate throughout markets worldwide and leave top lawmakers“petrified,” in the words of a senior aide.A frenzied effort to prop up the American International Group, the ailing insurance giant, had failed.The Fed had decided it had no choice but to do the unthinkable: bail out A.I.G. with an $85 billionloan or risk a potential financial catastrophe of unknown proportions.Over the preceding five days, A.I.G., the world’s largest insurance company, had exhausted everyother option. The company had sought a lifeline from some of the nation’s largest banks, as well asfrom big private investment funds on Wall Street, but no one dared come to the rescue. As potentialsaviors pored over A.I.G.’s books, the holes they discovered kept growing  first from $20 billion, thento $40 billion, then to $80 billion, then even more. The sharpest minds on Wall Street could not fathomwhere the bottom was.Even more than the government’s decision to take control of the mortgage giants Fannie Mae andFreddie Mac, or its role in rescuing Bear Stearns, the decision was a watershed event.Some Congressional leaders who initially seemed to accept the decision at the meeting Tuesdayevening sharply questioned the move on Wednesday. They said the rescue put taxpayers’ money atrisk to save a private enterprise that should have been regulated more closely.Throwing a Lifeline to a Troubled Giant12/10/2020 Throwing a Lifeline to a Troubled Giant - The New York Timeshttps://www.nytimes.com/2008/09/18/business/18insure.html 2/6The debate in Washington over how and why the government bailed out A.I.G. could shape futuredecisions to intervene in troubled financial companies.With all the attention paid to beleaguered investment banks, few seemed to realize the risks thatA.I.G. posed. The company, whose businesses stretched from leasing aircraft to selling life insurancein rural India, had become dangerously entangled with the financial industry because of its web ofcomplex insurance contracts.A.I.G. began to unravel three weeks ago, when its chief executive, Robert B. Willumstad, learned thatMoody’s planned to lower the company’s credit ratings unless it raised billions of dollars in capital. Adowngrade would deal a potentially fatal blow to A.I.G.The news touched off a panic inside A.I.G.’s headquarters in lower Manhattan. Mr. Willumstadhuddled with senior executives and bankers from JPMorgan Chase, Citigroup and the BlackstoneGroup, hoping to save his company by raising capital and selling assets. After the Bushadministration took control of Fannie Mae and Freddie Mac, the financial markets seemed to calmdown.But then the Wall Street bank Lehman Brothers began to hurtle toward bankruptcy, and Mr.Willumstad realized that A.I.G. was running out of time. His company was only days away frominsolvency.A.I.G. beseeched insurance regulators in New York, led by Eric R. Dinallo, to borrow $20 billion fromsubsidiaries. Mr. Dinallo briefed Gov. David A. Paterson of New York last Friday. The answer wasclear.Ben S. Bernanke, left, the Fed chairman, at the Capitol offices of Harry Reid, the Senatemajority leader, on Tuesday. Brendan Hoffman for The New York Times12/10/2020 Throwing a Lifeline to a Troubled Giant - The New York Timeshttps://www.nytimes.com/2008/09/18/business/18insure.html 3/6“That’s what we should do,” the governor told Mr. Dinallo. “Do it.”In Washington, Mr. Paulson and Mr. Bernanke watched the events unfold on Wall Street withincreasing alarm. As Lehman Brothers teetered and panic threatened to engulf other Wall Streetbanks, Timothy F. Geithner, the president of the Federal Reserve Bank of New York, summoned theheads of major financial institutions to an emergency meeting at the New York Fed’s headquarterson Friday evening. Mr. Paulson flew by private jet from Washington to Teeterboro, N.J., and arrivedaround 5 p.m.At A.I.G., only blocks away, the panic was building. Mr. Willumstad called Fed officials that night toalert them that A.I.G. needed to raise $30 billion by Monday or it would face a calamitous ratingsdowngrade.Bankers worked until dawn, poring over A.I.G.’s books. But when Mr. Paulson arrived on Saturdaymorning, the bankers gave him startling news: A.I.G. in fact needed $40 billion.The 18th floor of A.I.G was aflutter at 9 a.m., as the company reached out to possible buyers to help itstay afloat.But then Mr. Willumstad delivered grim news to Mr. Paulson and Mr. Geithner: A.I.G. no longerthought it could raise the money it needed on its own.Big private equity funds descended on A.I.G.’s headquarters to consider investing in the company. Inone conference room, was Kohlberg Kravis Roberts, with Henry Kravis and George Roberts, thefirm’s founders, on speaker phone. Down the hall, J. C. Flowers, the financial services investor, wascombing through the company’s numbers. Other firms were also going through the books.Treasury Secretary Henry M. Paulson Jr. arriving at the Capitol. Brendan Hoffman for TheNew York Times12/10/2020 Throwing a Lifeline to a Troubled Giant - The New York Timeshttps://www.nytimes.com/2008/09/18/business/18insure.html 4/6But a bigger problem loomed. JPMorgan’s bankers discovered the shortfall at A.I.G. was not just $40billion, but might be closer to $65 billion, because so much of A.I.G.’s securities lending business wastied up in illiquid assets.Meanwhile, as concerns over Lehman and then Merrill Lynch boiled over, Mr. Paulson, from a suiteat the Waldorf-Astoria hotel, worked the phones until 1 a.m. By 9 the next morning, he was back atthe Fed.By Sunday, K.K.R. and the Texas Pacific Group made it clear they would not come to the rescue,worried that A.I.G. might be taken over by the government, wiping out their investments. GoldmanSachs also balked.Lawyers began drawing up papers for what would have seemed impossible only days before: abankruptcy of the world’s largest insurance company.But inside the Fed, everyone was consumed by the fates of Lehman and Merrill. When it came toA.I.G., the Fed and Treasury were in “a listen-only mode,” a person briefed on the talks said. Mr.Willumstad shuttled between A.I.G.’s headquarters and the Fed, pleading his case.But on Monday morning, after Lehman spiraled into bankruptcy and Merrill had thrown itself thearms of Bank of America, Mr. Paulson seemed to dismiss reports that the federal government wouldbail out A.I.G.Hours later, the Fed had taken over the discussions and asked JPMorgan and Goldman Sachs to helprescue A.I.G. by arranging $75 billion in loans. But banks said they could not. Time was running out.“We began to realize that Willumstad wasn’t calling the shots,” said one banker involved in the talks.“The banks kept calling A.I.G. to find out what was going on. The answer from top A.I.G. executiveswas, ʻWe don’t know. We just don’t know.’ ”Harry Reid, left, with Senator Charles E. Schumer, met with Mr. Bernanke and Mr.Paulson at the Capitol. Brendan Hoffman for The New York TimesRepresentative Barney Frank spoke with reporters. Brendan Hoffman for The New YorkTimes12/10/2020 Throwing a Lifeline to a Troubled Giant - The New York Timeshttps://www.nytimes.com/2008/09/18/business/18insure.html 5/6By Monday evening, A.I.G.’s credit ratings were cut. Within 72 hours, the amount of money A.I.G.need had grown from $20 billion to $85 billion. By one internal estimate, A.I.G. might need more than$100 billion.“The threat of bankruptcy was a real threat,” Mr. Dinallo said. The government began to fear that thecollapse of A.I.G. would lead to devastating losses across the financial industry.Mr. Paulson concluded only one option remained: the Fed had to step in. By 1:30 p.m. on Tuesday, theFed had taken charge. Mr. Paulson informed the president, while the Treasury began callingCongressional leaders, saying Mr. Paulson wanted to brief them on recent developments.The Fed, Mr. Paulson said, would bail out A.I.G. with an $85 billion loan.The meeting Tuesday on Capitol Hill, lasted for slightly less than an hour. It was organized by Mr.Reid of Nevada, and attended by leaders of both parties, including Senator Mitch McConnell ofKentucky, the Senate minority leader, and Representative John A. Boehner of Ohio, the Houseminority leader.The meeting, which had a somber tone from beginning to end, began with a presentation by Mr.Bernanke, who laid out the plan to rescue A.I.G., including a detailed description of its businessoperations, including its relatively solid insurance businesses and an overarching holding companythat effectively come to function as an immense and, ultimately, failing hedge fund.Among the points highlighted for lawmakers was that A.I.G. was one of the 10 most widely heldstocks in 401(k) retirement plans, and that its collapse could potentially cause an enormous run onmutual funds.Or as Mr. Schumer explained after the meeting: “If A.I.G. went down, it would affect Main Streetmore than Wall Street.”Among the questions that lawmakers posed was whether there was any way of knowing whetherthis would be the last major government intervention. Mr. Bernanke and Mr. Paulson said there wasnot, but that the economic situation would certainly get worse without government action to stabilizethe insurance giant.Representative Spencer Bachus spoke with reporters. Brendan Hoffman for The New YorkTimes12/10/2020 Throwing a Lifeline to a Troubled Giant - The New York Timeshttps://www.nytimes.com/2008/09/18/business/18insure.html 6/6Top lawmakers from both the House and Senate emerged from the meeting with Mr. Paulson and Mr.Bernanke looking grim but generally expressing support for the plan to rescue A.I.G.“It’s heavy, heavy, heavy,” said Senator Charles E. Schumer, Democrat of New York, the chairman ofthe Joint Economic Committee. “But I don’t think we have much choice.”Senator Christopher J. Dodd, Democrat of Connecticut and chairman of the Senate Banking, Housingand Urban Affairs Committee, said in an interview that he would use forthcoming Congressionalhearings to press Mr. Bernanke and Mr. Paulson to defend their decision to rescue A.I.G., and to prodthe administration to do more to address the problems in the housing market.Mr. Dodd said he twice pressed for assurances that the administration and the Fed had the legalauthority for the bailout of A.I.G. and Mr. Bernanke and Mr. Paulson said that they believed the Fedcould aid any company posing systemic risk to the economy. Mr. Dodd also said they offered no rosyassurances about how the entire effort would turn out.“There were no guarantees in the room that the $85 billion would be compensated for,” Mr. Doddsaid. “Nor is there any guarantee that this is the end of it. There may be other shoes to fall.”

Throwing a Lifeline to a Troubled Giant

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Throwing a Lifeline to a Troubled Giant

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