$107b rescue for AIG
* September 17, 2008 - 1:01PM
In a bid to save financial markets and the economy from further
turmoil, the US government agreed today to provide a $US85 billion
($107 billion) emergency loan to rescue the giant insurer AIG.
The Federal Reserve said in a statement it determined that a
disorderly failure of AIG could hurt the already delicate financial
markets and the economy.
It also could ''lead to substantially higher borrowing costs, reduced
household wealth and materially weaker economic performance'', the Fed
said.
''The president (George W Bush) supports the agreement announced this
evening by the Federal Reserve,'' said White House spokesman Tony
Fratto.
''These steps are taken in the interest of promoting stability in
financial markets and limiting damage to the broader economy.''
Treasury Secretary Henry Paulson said the administration 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 in
a statement.
The Fed said in return for the loan, the government will receive a
79.9% equity stake in AIG.
Earlier, Fed chairman Bernanke and Paulson met with Senate Banking
Committee Chairman Senator Christopher Dodd, Senate Majority Leader
Harry Reid and House Republican leader John Boehner to brief them on
the government's options.
''At the administration's request, I met this evening with Treasury
Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke.
They expressed the administration's views on the deepening economic
turmoil and shared with us their latest proposals regarding AIG,''
Reid told reporters.
''The Treasury and the Fed have promised to provide more details in
the near future, which I believe must address the broader, underlying
structural issues in the financial markets.''
Shares of the insurance company swung violently yesterday as rumours
of potential deals involving the government or private parties emerged
and were dashed. Its shares closed down 20% at the end of the day -
and another 45% after hours. Still, no deal emerged.
The problems at AIG stemmed from its insurance of mortgage-backed
securities and other risky debt against default. If AIG could not make
good on its promise to pay back soured debt, investors feared the
consequences would pose a greater threat to the US financial system
than this week's collapse of the investment bank Lehman Brothers.
The worries were triggered after Moody's Investor Service and Standard
and Poor's lowered AIG's credit ratings, forcing AIG to seek more
money for collateral against its insurance contracts. Without that
money, AIG would have defaulted on its obligations and the buyers of
its insurance - such as banks and other financial companies - would
have found themselves without protection against losses on the debt
they hold.
''It might not just bring down other financial institutions in the US.
It could bring down overseas financial institutions,'' said Timothy
Canova, a professor of international economic law at Chapman
University School of Law. ''If Lehman Brother's failure could help
trigger AIG's going down, who knows who AIG's failure could trigger
next.''
New York-based AIG operates insurance and financial services
businesses ranging from property, casualty, auto and life insurance to
annuity and investment services. Those traditional insurance
operations are considered healthy and the National Association of
Insurance Commissioners said ''they are solvent and have the
capability to pay claims''.
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