U.S. announces plans to lend up to $85B to AIG
— -- The Federal Reserve said Tuesday night it would lend up to $85 billion to flailing insurance giant American International Group, saying the move was necessary to protect the financial system.
The senior management of AIG will be tossed out, and the government will effectively be in control of the company.
The government will have a 79.9% equity interest in AIG and the right to veto the payment of dividends to common and preferred shareholders.
The Fed's decision, made with the Treasury Department's support, came just days after the Treasury and Fed refused to bail out investment bank Lehman Bros. The main difference between the two situations: AIG is so huge and its operations so intertwined in the financial system that the Fed feared an AIG failure could harm the broader economy.
"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.
Until Tuesday, the government had downplayed the possibility of another government bailout after its rescue of Fannie Mae and Freddie Mac and its engineering of Bear Stearns' sale to JPMorgan Chase in March. During a news conference Monday, Treasury Secretary Henry Paulson said, "What's going on in New York is a private sector effort."
Analysts said the move was necessary after an effort by JPMorgan Chase and Goldman Sachs to raise a fund for AIG failed. "If AIG had gone bankrupt and not been able to make payments," said Clifford Gallant, managing director at Keefe Bruyette & Woods, "the domino effect would have been devastating and unprecedented."
Related Stories
ABC News Live