The US government was on the brink of a deal to take control of the world's largest insurance company, AIG, in a last-ditch intervention to avert a potentially disastrous corporate collapse.
After a day of emergency talks, congressional leaders were briefed last night that the Federal Reserve had agreed in principle to lend $85bn to AIG in return for an 80% stake in the struggling company.
The arrangement was sure to prove contentious because it renders AIG's shares virtually worthless. The Bush administration is likely to face tough questions about why it is willing to rescue AIG while allowing Lehman Brothers to go bust.
AIG employs 106,000 people in 130 countries and sells 12m policies annually in Britain, including travel insurance and product protection under retailers' own brands such as Boots, Argos, Comet and Sainsbury's.
The firm, which is shirt sponsor of Manchester United FC has amassed huge liabilities by insuring financial investors against the risk of default on complex instruments including derivatives linked to subprime mortgages.
Policyholders, politicians and business leaders urged the Bush administration to find a way to keep AIG afloat, warning that bankruptcy would have a knock-on effect on customers around the globe.
Calling for decisive action, AIG's former chief executive Hank Greenberg, who ran the company from 1967 to 2005, warned that it would be a "dramatic mistake" to allow the company to go under. Describing AIG as a "national treasure", Greenberg said the company merely needed a bridging loan giving it time to sell some of its sprawling collection of insurance businesses in order to bolster its finances.
"Given some time, they could raise more funds and sell assets," Greenberg told CNBC television. "That would be in our national interests, let alone the interests of the 100,000 people who work at AIG." The billionaire 83-year-old insurance tycoon continued: "If you can't raise it any other way in the private sector, the Fed should make a loan. It's not a gift, not a bailout, because it's a solvent company."
New York's Democratic senator, Charles Schumer, said the AIG bailout approached the scope of the Fed's rescue of the mortgage companies Fannie Mae and Freddie Mac earlier this month. Barney Frank, chairman of the House financial services committee, told Bloomberg Television that the plan was likely to go ahead without special legislation.
The crisis was triggered on Monday evening when rating agencies including Standard & Poor's, Fitch and Moody's downgraded their view of AIG's credit worthiness. As well as undermining confidence in AIG's insurance policies, this move triggered contractual clauses requiring the company to come up with nearly $15bn in extra collateral to satisfy clients and trading partners.
There were signs that confidence in was AIG beginning to break down. In Singapore, hundreds of anxious investors besieged an AIG office seeking cash redemption of their policies.
In the US, brokers said they were getting calls from clients questioning whether they should cash in annuities and similar products.
The governor of AIG's home state of New York, David Paterson, has granted the company an exemption from insurance regulations to allow it to raid its subsidiaries' reserves for $20bn. He warned that a collapse of AIG would hurt businesses in every corner of the globe.
"This is a catastrophic problem waiting if we are unable to curtail it," said Paterson. "We're in a terrible situation if we let the world's largest industrial and commercial insurer go down."