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2ND LD: AIG to get up to $85 bil. loan from Fed as gov't takes control+
(Japan Economic Newswire Via Acquire Media NewsEdge) WASHINGTON, Sept. 17_(Kyodo) _ (EDS: ADDING INFO IN LAST 5 GRAFS)
The Federal Reserve said Tuesday it will lend up to $85 billion to American International Group Inc. to skirt bankruptcy, effectively putting one of the world's largest insurers under state control.
The move came after senior government leaders decided over the weekend not to rescue Lehman Brothers Holdings Inc. and Merrill Lynch & Co., forcing the former to file for bankruptcy protection and the latter to sell itself to Bank of America.
The central bank said in a statement that it judged "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 the decision was made with the "full support" of the Treasury Department and will establish a "liquidity facility to assist AIG in meeting its obligations as they come due."
The credit facility will have a 24-month term, with interest accruing on the outstanding balance at the three-month Libor rate plus 8.5 percentage points.
"The loan is expected to be repaid from the proceeds of the sale of the firm's assets," the Fed said. "The U.S. government will receive a 79.9 percent equity interest in AIG and has the right to veto the payment of dividends to common and preferred shareholders."
The central bank's decision came on a day when it held the benchmark lending rate unchanged at 2 percent despite the financial turmoil heightened by the Lehman Brothers-Merrill Lynch drama.
The Fed kept the target for the federal funds rate commercial banks charge each other for overnight loans intact at its policy-setting Federal Open Market Committee meeting.
The giant insurer operates in more than 130 countries with assets totaling some $1 trillion as of 2007. In Japan, its units include life insurers like Alico Japan and AIG Star Life Insurance Co., as well as nonlife insurers such as AIU Insurance Co. and American Home Assurance Co. known as American Home Direct.
It has been plagued with cash flow difficulties due to expanding losses amid the subprime mortgage crisis, booking more than $11 billion in losses on financial products linked to subprime mortgages in the April-June quarter.
On Sunday, the Fed was reluctant to meet AIG's request for a bridge loan and urged Goldman Sachs & Co. and other financial institutions to rescue the giant insurer.
While these institutions remained reluctant to undertake risky rescue measures Tuesday, its share price dropped to only $1.25 at one point from a level close to $60 at the beginning of this year. It was expected to file for bankruptcy protection as early as Wednesday following the collapse of Lehman Brothers.
Concerned that AIG's bankruptcy could trigger a serious global financial crisis, the Fed and the government made difficult decisions to rescue the insurer at the expense of public funds as an exception to economic principles, analysts said.
Copyright ? 2008 Kyodo News International, Inc.
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