AIG rescued by Fed, Barclays buys Lehman U.S. unit
Written on September 17, 2008
Capping an extraordinary day in financial markets, authorities pieced together an emergency $85 billion rescue of insurance company American International Group Inc to stave off a bankruptcy that could have thrown world markets into deeper turmoil.
AIG’s rescue calls for the Federal Reserve to lend up to $85 billion to AIG for two years in exchange for a 79.9 percent equity stake. It comes just two days after U.S. authorities refused to bail out investment bank Lehman Brothers Holdings Inc, forcing it into bankruptcy court despite pleas from Wall Street’s chiefs.
AIG will pay interest at a steep 8.5 percentage points above the three-month London Interbank Offered Rate, making the current rate equal to about 11.4 percent. That gives AIG a big incentive to embark on a massive asset sale program to pay back the loan quickly.
“Thank God,” exclaimed Daniel Fuss, an influential bond manager who oversees more than $100 billion at Loomis, Sayles & Co in Boston. “AIG is interwoven with so many people and touches many companies around the world. This is a huge relief to many parts of the financial markets.”
Around the time the AIG deal was announced, British bank Barclays Plc gave Wall Street another boost: It agreed to buy several parts of Lehman, the Wall Street investment bank that went bankrupt on Monday, for $1.75 billion.
Initial news of the AIG package pushed up U.S cash advance now. stocks in after-hours trading, sent the dollar higher and boosted Japanese stocks. U.S. stocks earlier had clawed back from their largest one-day drop in seven years on speculation about the AIG and Lehman deals. The two largest U.S. investment banks, Goldman Sachs Group Inc and Morgan Stanley, also reported better-than-expected earnings.
The bailout keeps AIG from surpassing Lehman as the largest U.S. corporate failure ever. It comes on the heels of a government bailout just over a week ago of mortgage finance companies Fannie Mae and Freddie Mac, and six months after the Fed helped to finance the fire sale of failed investment bank Bear Stearns to JPMorgan Chase & Co.
AIG’s bailout brings to about $700 billion the total of U.S. rescue efforts to stabilize the financial system and housing market. Authorities may get much of that sum back provided asset prices don’t continue to slide.
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