The U.S. Federal Government is lending $85 billion to save struggling insurance giant AIG. Reuters reports that the Fed will receive a near 80% equity interest in AIG in return.
The Fed said under the two-year facility the U.S. government will receive a 79.9 percent equity interest in AIG and has the right to veto payment of dividends to common preferred shareholders in the deal, which has the full support of the Treasury Department.
"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 Fed said in a statement.
The Fed said the loan, secured by all assets of AIG and its primary non-regulated subsidiaries, was designed to assist the insurance giant in meeting its obligations as they come due.
There were concerns that if AIG had continued its downward spiral and filed bankruptcy that the repercussions may have ricocheted around the financial world. However, the deal raises questions about how much of a helping hand the Fed should be lending. The Reuters story does say that the AIG loan is expected to be repaid by proceeds from sales of AIG's assets. CNN/Money also has a story about the FED's loan to AIG.
Shares of AIG were still down 17% on the day. But the stock market ended up closing higher on the news of the deal. The DOW climbed +141.51 regaining some of yesterday's losses. The Fed also left insurance rates unchanged today. The Nikkei has also rebounded upon news of the Fed intervention to save AIG.
The U.S. Federal Government is lending $85 billion to save struggling insurance giant 