Fed bails out troubled AIG with $85 bn loan

                    DPA

                    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 industry.

      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 late Tuesday.

      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 mortgage market.

      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 warned.

      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 Times.

      Fed chief Ben Bernanke and Treasury Secretary Henry Paulson met with congressional leaders late Tuesday to explain the bailout, media reports said.

        Indo-Asian News Service

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