US Fed steps in with US$85bn to save AIG Government secures 80% stake in world’s largest insurer through the loan

NEW YORK – The Federal Reserve forged an extraordinary US$85 billion rescue of insurance giant American International Group (AIG), offering a respite from two days of chaos in the American financial system.

The move came hours after the Fed resisted a cut in interest rates to buoy Wall Street, which staged a slight rebound anyway from Monday’s biggest point drop in the Dow Jones industrials since the 2001 terrorist attacks. But the Federal Reserve helped allays fears of further financial turmoil with an US$85 billion emergency loan to shore up AIG, the huge US insurer reeling from billions of dollars in souring mortgage debt.The US Fed said Tuesday night that it was acting after determining that a disorderly failure of the company, whose financial dealings stretch around the world, could hurt the already delicate markets and the economy.Asian stock markets partly recovered yesterday after the US government announced the bailout plan for AIG.”It reinforces that policy makers in the US will do anything necessary to prevent a wholesale collapse of the financial system, no matter how much it costs,” said Daniel McCormack, a strategist for Macquarie Securities in Hong Kong.Investors had feared that a failure of AIG, the world’s largest insurer, would set off even more financial turmoil than the collapse the day before by venerable investment house Lehman Brothers.AIG, a company little known off Wall Street, does business with almost every financial institution in the world and insures $88 billion worth of assets including mortgages and corporate loans.Under the plan orchestrated by the Fed during a day of crisis talks, the US government will provide an emergency $85 billion loan and in return receive a 79.9 per cent equity stake in the company, similar to the way the government took control of faltering mortgage giants Fannie Mae and Freddie Mac.The Fed said that an AIG failure could “lead to substantially higher borrowing costs, reduced household wealth and materially weaker economic performance”.US Treasury Secretary Henry Paulson said the government was working closely with the Fed, the Securities and Exchange Commission and other government regulators to “enhance the stability and orderliness of our financial markets and minimise the disruption to our economy”.”I support the steps taken by the Federal Reserve tonight to assist AIG in continuing to meet its obligations, mitigate broader disruptions and at the same time protect taxpayers,” Paulson said.A collapse of AIG would force Wall Street to untangle the complex credit derivatives markets and send the market scrambling to figure out who owes what to whom – or even who owns what.”Regulators knew that if Lehman went down, the world wouldn’t end,” money manager Michael Lewitt wrote in The New York Times.”But Wall Street isn’t remotely prepared for the inestimable damage the financial system would suffer if AIG collapsed.”The Fed stepped in hours after it decided, in its first unanimous vote this year, to keep the closely watched federal funds rate unchanged at 2 percent.At the same time, however, the Fed noted that strains on the market have “increased significantly” and said it was ready to act if needed.As AIG teetered, central bankers around the globe scrambled to revive credit markets.The Fed injected $70 billion into the American financial system.The European Central Bank pumped one-day financing of nearly $100 billion into the 15-nation zone.The Bank of Japan added $24 billion, and Britain’s central bank almost $36 billion.Cash left world markets Monday like an outgoing tide.The interest rate banks charge each other for overnight loans soared as high as 6 percent _ far above the Fed’s target rate of 2 percent and a sign banks did not trust each other enough to make even 12-hour loans.Meanwhile, British bank Barclays PLC said Tuesday that it had agreed to acquire Lehman Brothers’ North American investment banking and capital markets businesses for $250 million in cash, just two days after walking away from a deal to purchase all of Lehman’s.The British bank will also purchase Lehman’s New York headquarters and its two data centres in New Jersey for $1.5 billion.The deals require approval from the bankruptcy court.Meanwhile, Lehman executives continue to negotiate a potential sale of its prized investment management division, which includes money manager Neuberger Berman.The division was once valued by as much as $10 billion by Wall Street analysts, but now could fetch much less considering Lehman’s bankruptcy proceedings.Lehman Brothers filed the largest bankruptcy in American history on Monday.Separately, Bank of America began to work out how it would digest its $40 billion acquisition of Merrill Lynch after its shotgun wedding with the brokerage on Sunday.Nampa-APBut the Federal Reserve helped allays fears of further financial turmoil with an US$85 billion emergency loan to shore up AIG, the huge US insurer reeling from billions of dollars in souring mortgage debt.The US Fed said Tuesday night that it was acting after determining that a disorderly failure of the company, whose financial dealings stretch around the world, could hurt the already delicate markets and the economy.Asian stock markets partly recovered yesterday after the US government announced the bailout plan for AIG.”It reinforces that policy makers in the US will do anything necessary to prevent a wholesale collapse of the financial system, no matter how much it costs,” said Daniel McCormack, a strategist for Macquarie Securities in Hong Kong.Investors had feared that a failure of AIG, the world’s largest insurer, would set off even more financial turmoil than the collapse the day before by venerable investment house Lehman Brothers.AIG, a company little known off Wall Street, does business with almost every financial institution in the world and insures $88 billion worth of assets including mortgages and corporate loans.Under the plan orchestrated by the Fed during a day of crisis talks, the US government will provide an emergency $85 billion loan and in return receive a 79.9 per cent equity stake in the company, similar to the way the government took control of faltering mortgage giants Fannie Mae and Freddie Mac.The Fed said that an AIG failure could “lead to substantially higher borrowing costs, reduced household wealth and materially weaker economic performance”.US Treasury Secretary Henry Paulson said the government was working closely with the Fed, the Securities and Exchange Commission and other government regulators to “enhance the stability and orderliness of our financial markets and minimise the disruption to our economy”.”I support the steps taken by the Federal Reserve tonight to assist AIG in continuing to meet its obligations, mitigate broader disruptions and at the same time protect taxpayers,” Paulson said.A collapse of AIG would force Wall Street to untangle the complex credit derivatives markets and send the market scrambling to figure out who owes what to whom – or even who owns what.”Regulators knew that if Lehman went down, the world wouldn’t end,” money manager Michael Lewitt wrote in The New York Times.”But Wall Street isn’t remotely prepared for the inestimable damage the financial system would suffer if AIG collapsed.”The Fed stepped in hours after it decided, in its first unanimous vote this year, to keep the closely watched federal funds rate unchanged at 2 percent.At the same time, however, the Fed noted that strains on the market have “increased significantly” and said it was ready to act if needed.As AIG teetered, central bankers around the globe scrambled to revive credit markets.The Fed injected $70 billion into the American financial system.The European Central Bank pumped one-day financing of nearly $100 billion into the 15-nation zone.The Bank of Japan added $24 billion, and Britain’s central bank almost $36 billion.Cash left world markets Monday like an outgoing tide.The interest rate banks charge each other for overnight loans soared as high as 6 percent _ far above the Fed’s target rate of 2 percent and a sign banks did not trust each other enough to make even 12-hour loans.Meanwhile, British bank Barclays PLC said Tuesday that it had agreed to acquire Lehman Brothers’ North American investment banking and capital markets businesses for $250 million in cash, just two days after walking away from a deal to purchase all of Lehman’s.The British bank will also purchase Lehman’s New York headquarters and its two data centres in New Jersey for $1.5 billion.The deals require approval from the bankruptcy court.Meanwhile, Lehman executives continue to negotiate a potential sale of its prized investment management division, which includes money manager Neuberger Berman.The division was once valued by as much as $10 billion by Wall Street analysts, but now could fetch much less considering Lehman’s bankruptcy proceedings.Lehman Brothers filed the largest bankruptcy in American history on Monday.Separately, Bank of America began to work out how it would digest its $40 billion acquisition of Merrill Lynch after its shotgun wedding with the brokerage on Sunday.Nampa-AP

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