AIG rescued by Federal Reserve in $85bn bailout

by Gill Montia

Story link: AIG rescued by Federal Reserve in $85bn bailout

The US Federal Reserve has rescued American International Group (AIG) from the brink of collapse.

As it emerged that the failure of the insurer could cause damage to global financial markets and world economies, the Federal Reserve reviewed an earlier decision not to bail out the ailing group.

AIG had already been given regulatory permission to borrow $20 billion from its subsidiaries to keep it afloat and was in discussions with investment banks, Goldman Sachs and JPMorgan Chase, to raise $75 billion in loans.

However, during another dramatic day on Wall Street yesterday, the Federal Reserve was forced to act, stating that “a disorderly failure of AIG could add to already significant levels of financial market fragility”.

The US taxpayer will provide an $85 billion (£48 billion) loan to the group, in return for the government taking a 79.9% stake in the business.

The move aims to give AIG time to sell assets and plan its recovery but according to Reuters, interest on the loan will be steep at 8.5% above the three-month London Interbank Offered Rate.

AIG’s woes stem from the fact that it not only provides debt insurance for asset managers and hedge funds but also has invested in asset-backed securities that contain toxic debt.