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Fed Reverses Stance on AIG, Provides Rescue

New York (HedgeCo.Net) – Just one day after reaffirming their stance they would not rescue America International Group Inc., the Fed has agreed to lend the collapsing insurer $85 billion in exchange for a 79.9 percent majority stake.

The Fed justified the move, stating “a disorderly failure of AIG could add to already significant levels of market fragility.” The two-year loan will assist AIG in “meeting its obligations,” although the government has the right to halt dividends to common and preferred stockholders.  Parts of the company may also be broken off and sold to pay off the debt.

The move came after a whirlwind week of plunging share pricing and other Wall Street firms trying to stay afloat.  With the recent bankruptcy of Lehman Brothers and Bank of America’s purchase of Merrill Lynch hanging in the background, AIG looked to be another casualty of the credit crunch. 

The federal government had urged AIG to seek a private investor, not wanting to use taxpayer funds to support a bailout.  However, fears of larger worldwide market implications forced the Fed to retract on that belief while denying any aid to Lehman Brothers, who collapsed this week.

Fears of systematic risk and greater market turmoil have been the catalyst for many actions taken by the federal government as of late.  Just weeks ago, the Fed stepped in and took over Fannie Mae and Freddie Mac after it was clear the companies could not weather the mortgage crisis.  Earlier this year, the Fed helped to facilitate the purchase of Bear Stearns by JPMorgan by providing the needed financing. 

AIG has agreed to an interest rate that is 8.5 percentage points above the three-month London Interbank Offered Rate, putting it at about 11.4 percent. 

After helping AIG avoid surpassing Lehman as the largest bankruptcy ever filed, the U.S. government has now spent over $700 billion in efforts to stabilize the markets and reverse the damage caused by the housing crisis. 

Julie Scuderi
Senior Editor for HedgeCo.Net
Email: julie@hedgeco.net

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