Reaction to $85B AIG loan: Relief, skepticism

— -- The federal government on Tuesday night waded deeper into the business of bailouts by taking effective control of struggling insurance giant AIG. Reactions included astonishment, approval, skepticism, and — in the case of the company itself — relief.

Clifford Gallant, managing director at investment bank Keefe Bruyette & Woods, called it "an extraordinary move."

"It was unimaginable just a week ago," he said.

Days after turning its back on investment bank Lehman Bros., which has filed for bankruptcy court protection, the government agreed to save insurer AIG with a line of credit from the Federal Reserve for up to $85 billion.

In its announcement, the independent Federal Reserve said it had the full support of President Bush's Treasury Department in making the loan.

The reach of AIG's business is so extensive that an AIG failure would jeopardize financial markets and the broader economy, the Fed said.

National City chief economist Richard DeKaser said the Fed was trying to do anything it could to come up with a private sector solution before intervening.

"It seemed like government bailouts were toxic 24 hours ago," he said. "Now they are OK. There are no rules."

AIG, in a statement, said the Fed loan will give it "the time necessary to conduct asset sales on an orderly basis. … Policyholders of AIG companies around the world can rest assured that AIG's commitments will continue to be honored."

Tokyo's Nikkei index rose 2.1% on the news. Stock futures indicated higher openings for the major U.S. indexes.

Moody's Economy.com economist Ryan Sweet in a note to clients Tuesday night called early market reaction "strongly positive." U.S. Treasury bond prices were down sharply, pushing yields higher in late trading, he said.

Fed Chairman Ben Bernanke and Treasury Secretary Henry Paulson briefed top lawmakers on the plan in a hastily called meeting Tuesday evening. Senate Banking Committee Chairman Christopher Dodd, D-Conn., said he didn't like the bailout plan. Bernanke and Paulson will testify to the committee, Dodd said.