The White House demonstrated its willingness yesterday to bail out another financial institution only hours after the Bush Administration nationalised one of the world’s biggest insurers to prevent a global financial crisis.

Late on Tuesday, Henry Paulson, the US Treasury Secretary, used $85 billion (£47 billion) of federal money to seize control of AIG, the huge insurance group, in the first American nationalisation of a financial company since the 1930s.

Dana Perino, a White House spokesman, said yesterday: “We remain concerned about other companies and that’s why the Secretary of the Treasury continues to work with the team to see if we can stem any other losses.”

She added that “we have a very mixed picture” of the American economy and that these challenging times would take time to work out.

Her comments came as anxiety engulfed Wall Street. Even after Mr Paulson’s bailout of AIG, the rescue package failed to reassure traders, who began looking for the next possible victim.

Charles Schumer, a member of the Senate Finance Committee, said: “The Administration is approaching an unprecedented step, but unfortunately we are living in unprecedented times. Hearing of these plans, you have to stop to catch your breath. But upon reflection, the alternatives are much worse.”

The decision to nationalise AIG came after the Government had concluded that the consequences of allowing the insurer to fail would be catastrophic. While trying to secure a rescue package for Lehman Brothers, the investment bank, over the weekend, Mr Paulson was also attempting to persuade Wall Street to inject funds to prop up AIG.

However, once it became clear that the American financial community had little appetite for such a rescue deal, Mr Paulson, Ben Bernanke, the Chairman of the US Federal Reserve, and Timothy Geithner, president of the New York Federal Reserve, concluded that state assistance was required. It is understood that officials of the Federal Reserve worked throughout Monday night to draw up a nationalisation plan whereby tax-payer funds would be lent to AIG in return for a majority stake in the insurer.

President Bush was informed of the proposed deal on Tuesday morning during a meeting of the President’s Working Group on Financial Markets.

AIG tried to address the stock market’s concerns about its future — the stock had collapsed by 61 per cent on Tuesday alone. The insurer issued a statement after Wall Street closed, saying that its insurance and pension businesses remained “fully capable of meeting their obligations to policyholders”. It added that it was trying to increase short term liquidity in the parent company. At the same time, however, Mr Paulson telephoned Robert Willumstad, the chief executive of AIG, and dismissed him. Mr Willumstad is understood to have said: “If that’s what you want, I’ll do it.”

A few hours later, Mr Paulson was able to announce the terms of the AIG nationalisation. Under the deal, Washington loaned AIG $85 billion of state funds over a two-year period at an interest rate of 8.5 per cent above Libor, the rate that banks charge to lend to each other. In return, the Government has taken a 79.9 per cent stake in the insurer and assumed the right to dismiss the board. The line of funds is secured against AIG’s assets, including its lucrative insurance business. The two-year loan is designed so that AIG can begin to break itself up and raise new capital from the sale of some of its businesses without being forced to dispose of units in a distressed sale.

AIG said that it would repay the money in full with proceeds from asset sales. It will be up to the company to decide which assets it will sell and the timing of the transactions. The Government, however, retains a veto.

It is hoped that the protection afforded by the government bailout will enable AIG to recover sufficiently so that the US taxpayer can benefit from a profit on its new investment.

The Federal Reserve Bank said: “This loan will facilitate a process under which AIG will sell certain of its businesses in an orderly manner, with the least possible disruption to the overall economy.”

After dismissing Mr Willumstad — who joined AIG in 2006 and became chief executive in June — Mr Paulson replaced him with Edward Liddy, the former head of Allstate, the insurance company. Mr Liddy sits on the board of Goldman Sachs, the investment bank that Mr Paulson ran before his appointment to the Treasury in 2006.

It is understood that other members of the AIG board were unhappy that Mr Paulson had ousted Mr Willumstad, who had spent the past few months drawing up his own strategy for the company.

The case for a rescue deal for AIG was compelling. The US Treasury and the Federal Reserve were anxious that should AIG be allowed to fail, it would trigger massive losses for investors worldwide. AIG has $169 billion of outstanding debt in the form of AAA-rated bonds, held by pension funds around the globe. In addition, AIG has a substantial business selling credit default swaps — insurance-like contracts tied to the risk of a company defaulting on its debt obligations.

Many regulators fear that the collapse of such a significant player as AIG in the largely unregulated, $62 trillion market could cause chaos across financial centres.

As investors struggled to keep pace with developments on Wall Street, few would have summoned much sympathy for Hank Greenberg, the former chief executive of AIG, who was interviewed on American television yesterday morning. Mr Greenberg, who joined AIG in 1960 and transformed it from a mid-tier private insurer into the world’s biggest insurance group, was responsible for steering the company into business areas other than traditional insurance.

Such areas included selling insurance on sub-prime mortgage debt and taking a significant chunk of the credit default market, which is largely unregulated.

Mr Greenberg had considered trying to drum up enough support from other shareholders to try to buy AIG himself. He also wrote to Mr Willumstad to offer his advice. His offer was not taken up.

Yesterday, on television, Mr Greenberg said that he had lost “my entire net worth. Literally, my entire net worth.”

He added: “I worked 40 years building the greatest insurance company in history, one that everyone in the world envied who was in this industry. I’ll get by, but my heart goes out for the thousands and thousands of employees and their families who are shareholders, and not only in the United States, but worldwide. That is a tragedy.”

Keep on bailing

March US Government offers $29 billion of credit in the form of guarantees for the toxic mortgage-backed debt held on the books of Bear Stearns. The credit was made available as part of a deal where JPMorgan Chase acquired its smaller rival. US Federal Reserve also extends the availability of cheap financing to investment banks as well as commercial banks

May Washington returns $168 billion to American taxpayers in an attempt to stimulate the US economy

September 6 The US Government takes control of mortgage companies Fannie Mae and Freddie Mac. Promises to inject up to $100billion into each

September 16 Washington nationalises AIG. Lends the insurer $85 billion for two years, during which time it is expected to break itself up, raise new capital and pay back the American taxpayer

. . . and the banks Washington refused to bail out

July 11 IndyMac, the US mortgage bank, seized by regulators after a run on the bank left it short of funds. The bank filed for bankruptcy protection three weeks later

July 21 US financial regulators spend a week trying to secure a takeover of two collapsed banks, First National Bank of Nevada and First Heritage Bank in California. Between them, the mortgage lenders controlled assets of $3.6 billion

September 7 Silver State becomes eleventh US bank to collapse. The lender had $1.7 billion of deposits

September 14 Lehman Brothers files for bankruptcy protection. It controlled $600 billion of assets

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