bails out troubled AIG with $85 bn loan
Indo-Asian News Service
Washington, Sep 17 (DPA) The US central bank has agreed to
bail out the insurance giant American International Group
(AIG) with a $85-billion loan in an unprecedented move aimed
at propping up a company with worldwide tentacles in the finance
Fearing a possible second major Wall Street bankruptcy this
week, the Federal Reserve Board engineered an AIG rescue through
a two-year loan that gives the government a stake of 79.9
percent in the conglomerate.
The board determined that a "disorderly failure of AIG"
could add to financial market fragility, lead to "substantially
higher borrowing costs" and erode household wealth and
economic performance, the Federal Reserve said in a statement
The decision is the latest in a series of interventions by
the federal government to stave off collapses in the US finance
industry amidst a record rate of home foreclosures that has
decimated Wall Street's market for mortgage-backed securities.
Just two weeks ago, the Fed pledged to spend up to $200 billion
of taxpayer money to help rescue the government-chartered
mortgage giants Fannie Mae and Freddie Mac. Earlier this year,
it backed a $29-billion loan for the purchase of troubled
investment banking firm, Bear Stearns, by JP Morgan Chase.
European banks were particularly at risk from an AIG bankruptcy
by owning three-quarters of the $441 billion in unregulated
complex security instruments protected by AIG, the New York
Times reported. The securities are tied to the plunging subprime
A bankruptcy filing by AIG, a huge world player in insuring
risk for institutions, would have had an even greater impact
on the US and global finance system than Monday's $600-billion
bankruptcy by Lehman Brothers Holdings Inc, industry experts
The Federal Reserve said late Tuesday that it expected the
loan to be paid off from cash raised by the sale of AIG assets.
They include its consumer lender, American General Finance,
a stake in the reinsurer Transatlantic Holdings Inc and an
aircraft leasing unit International Lease Finance Corp.
As part of the deal, the government gains veto power over
dividend payments to common and preferred shareholders.
The Fed said the move was intended to "assist AIG in
meeting its obligations" and to help facilitate AIG's
liquidation of "its businesses in an orderly manner,
with the least possible disruption to the overall economy".
It said the interests of taxpayers were protected because
the loan was "collateralized by all the assets of AIG
and of its primary non-regulated subsidiaries".
The Federal Reserve stepped in after five days of hard talks
with leading Wall Street firms. It had hoped that companies
like JP Morgan Chase and Goldman Sachs would put together
a private $75-billion deal to float AIG, but the firms said
they could not raise the capital, according to the New York
Fed chief Ben Bernanke and Treasury Secretary Henry Paulson
met with congressional leaders late Tuesday to explain the
bailout, media reports said.
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