The US Federal Reserve on Tuesday forged an extraordinary US$85 billion rescue of insurance giant American International Group Inc (AIG), offering a respite from two days of chaos in the US 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 on 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 Fed said on 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.
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 of venerable investment house Lehman Brothers.
AIG conducts business with almost every financial institution in the world and insures US$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 US$85 billion loan and in return will receive a 79.9 percent equity stake in the company.
It said an AIG failure could “lead to substantially higher borrowing costs, reduced household wealth and materially weaker economic performance.”
AIG stock swung wildly on Tuesday as the company’s fate hung in the balance. It was down as much as 60 percent, closed down 20 percent and then lost another 45 percent in after-hours trading.
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.
Stocks slumped immediately after the Fed announcement. The Dow initially dropped about 100 points, but rallied to finish 141 points up, and back above 11,000. That followed a drop of more than 500 points on Monday following the Lehman bankruptcy filing.
As AIG teetered, central bankers around the globe scrambled to revive credit markets. The Fed injected US$70 billion into the US financial system.
The European Central Bank pumped one-day financing of nearly US$100 billion into the 15-nation zone. The Bank of Japan added US$24 billion, and Britain’s central bank almost US$36 billion.
Cash left world markets on 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 on Tuesday it had agreed to acquire Lehman Brothers’ North American investment banking and capital markets businesses for US$250 million in cash, just two days after walking away from a deal to purchase all of Lehman’s.
Also See: Goldman, Morgan Stanley steadfast as rivals vanish, Asia markets mixed after US bails out insurer AIG AND Hundreds crowd offices of Taiwanese AIG subsidiary
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