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Fed lends $85 billion to rescue AIG
The Federal Reserve of New York on Tuesday night issued an emergency $85 billion loan to American International Group, stepping in to stave off the giant insurer’s bankruptcy amid fears its failure would further undermine fragile credit and stock markets.
The Fed acted hours after Wall Street lenders balked at bailing out AIG, whose woes worsened as big credit downgrades overnight Monday made it harder to raise more than $80 billion in funds it needs to meet commitments.
“The Board determined that, in current circumstances, a disorderly failure of AIG could add to already significant levels of financial market fragility and lead to substantially higher borrowing costs, reduced household wealth and materially weaker economic performance,” the Federal Reserve said.
The deal gives the government a 79.9 percent stake in AIG, the right to remove senior management and to veto payment of dividends to shareholders as ways to protect taxpayers.
The White House praised the action to “limit damage to the broader economy.”
With other troubled institutions such as Washington Mutual hanging in the balance, regulators feared that the failure of AIG on top of Lehman Brothers’ bankruptcy on Monday could produce cascading defaults and a freeze in credit markets that could push other debt-plagued institutions over the edge.
Hopes of a Fed rescue for AIG — only a day after Treasury Secretary Henry M. Paulson Jr. declared no more federal bailouts — helped lift the stock market, with U.S. stock indexes bucking the trend of stock drubbings in overseas markets to post modest gains.
Asian stock markets rebounded Wednesday morning from a dramatic sell-off as the rescue plan of AIG restored confidence in the global financial system for now.
Tokyo’s benchmark Nikkei-225 index rose more than 2 percent in the Wednesday morning session. On Tuesday, the Nikkei plunged nearly 5 percent to a more than three-year low after the collapse of Lehman.
While the Fed was moving Tuesday toward the unprecedented step of aiding an insurance company in what would be its first financial rescue since Bear Stearns in March, central bank leaders in Washington decided against cutting interest rates, citing their belief that the financial crisis can be contained on Wall Street without serious damage to the economy.
Last night’s move is bound to raise questions about the use of taxpayer money to bail out private firms.
Earlier Tuesday, the top Republican on the Senate Banking, Housing and Urban Affairs Committee said the Bush administration doesn’t appear to have a set policy for deciding when to support private-sector bailouts.
After talking at length with Mr. Paulson, Sen. Richard C. Shelby of Alabama said the administration is sending a “mixed message.”
He questioned Mr. Paulson about how the Treasury Department could help another firm after deciding over the weekend not to offer a lifeline to newly bankrupt Lehman Brothers.
“I was not satisfied with his answers,” Mr. Shelby said. “I said, ‘Mr. Secretary … you’re picking and choosing. You have to have a set policy.’”
About the Author
- Inconvenient truth: China, developing world now biggest source of greenhouse gases
- U.S. unemployment falls to five-year low of 7 percent; 203K jobs added
- Economic growth jumped to 3.6 percent in summer
- Spending on social welfare rose as economy tanked during recession
- Treasury aims to sell off GM stock by end of year
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By Donald Lambro
Growth spikes are little more than trend-free anomalies
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Let it snow