http://www.ft.com/cms/s/0/7e2b6428-851a-11dd-b148-0000779fd18c.html
Fed in $85bn AIG rescue deal
By FT Reporters
Published: September 17 2008 03:00 | Last updated: September 17 2008 03:00
The US Federal Reserve last night struck a deal to take control of AIG in return for an $85bn loan to stave off a collapse of the giant insurer that plays a crucial role in the global financial system.
Under the plan, the latest dramatic intervention by the US government to combat the global credit crisis, the authorities will receive equity giving them a 79.9 per cent stake in AIG. +In return, the insurer would receive a bridge loan of $85bn to keep it afloat until it could dispose of billions of dollars in assets.
The Fed said the loan was expected to be repaid by the proceeds of selling AIG operating companies. A senior Fed staffer said the most likely outcome was an orderly liquidation of AIG, though it was possible that the firm could survive as an ongoing business.
The existing management of the company will be replaced and new executives will be appointed.
The loan is at an interest rate of 850 basis points over three month Libor.
It will be secured on all AIG's assets, including those of its subsidiary companies.
The Fed said it was acting with the full support of the Treasury to prevent a disorderly liquidation of AIG's assets that would have threatened market stability.
President George W. Bush said the rescue was "to promote stability in the financial markets".
The emergency moves came after earlier plans for a private sector bail-out were dashed by a further 21 per cent slump in AIG's shares, reducing the market capitalisation of one of the biggest insurance companies in the world to just over $7.5bn (£4.2bn).
The AIG crisis fuelled another day of turmoil on global markets yesterday sparked by the weekend failure of Lehman Brothers and the rushed takeover of Merrill Lynch by Bank of America.
Analysts at RBC said the demise of AIG could result in more than $180bn of losses for financial institutions, with European banks particularly exposed.
Despite the turbulence, marked by brutal conditions in European money markets, the Federal Reserve kept interest rates unchanged at 2 per cent last night.
During a frantic day of emergency meetings at the New York Fed, the Treasury and the Fed reversed their reluctance to bail out another financial institution.
Equity markets rose on the news. The S&P 500 ended the day up 1.8 per cent after having initally fallen sharply. In London, the FTSE 100 dropped 3.4 per cent to close at its lowest level since June 2005.
AIGIn London, the overnight dollar borrowing rate briefly hit 10 per cent amid a desperate scramble for liquidity.
Financial stocks came under severe strain early with a slump in the shares of HBOS, the UK's largest mortgage lender, and a damaging credit rating downgrade for Washington Mutual, the troubled US bank. Central banks around the world fought surging demand for cash as banks hoarded reserves and refused to lend to each other, injecting about $230bn in overnight and two-day liquidity.
"There is still a lot of fear and turmoil in the financial markets," said David Viniar, chief financial officer of Goldman Sachs, after his firm reported the biggest drop in profits since its 1999 listing.
Meanwhile, amidst the chaos, Barclays agreed to buy most of the US broker dealer operations of Lehman, achieving a long-standing ambition to build a major US investment banking business.
Fed in $85bn AIG rescue deal
By FT Reporters
Published: September 17 2008 03:00 | Last updated: September 17 2008 03:00
The US Federal Reserve last night struck a deal to take control of AIG in return for an $85bn loan to stave off a collapse of the giant insurer that plays a crucial role in the global financial system.
Under the plan, the latest dramatic intervention by the US government to combat the global credit crisis, the authorities will receive equity giving them a 79.9 per cent stake in AIG. +In return, the insurer would receive a bridge loan of $85bn to keep it afloat until it could dispose of billions of dollars in assets.
The Fed said the loan was expected to be repaid by the proceeds of selling AIG operating companies. A senior Fed staffer said the most likely outcome was an orderly liquidation of AIG, though it was possible that the firm could survive as an ongoing business.
The existing management of the company will be replaced and new executives will be appointed.
The loan is at an interest rate of 850 basis points over three month Libor.
It will be secured on all AIG's assets, including those of its subsidiary companies.
The Fed said it was acting with the full support of the Treasury to prevent a disorderly liquidation of AIG's assets that would have threatened market stability.
President George W. Bush said the rescue was "to promote stability in the financial markets".
The emergency moves came after earlier plans for a private sector bail-out were dashed by a further 21 per cent slump in AIG's shares, reducing the market capitalisation of one of the biggest insurance companies in the world to just over $7.5bn (£4.2bn).
The AIG crisis fuelled another day of turmoil on global markets yesterday sparked by the weekend failure of Lehman Brothers and the rushed takeover of Merrill Lynch by Bank of America.
Analysts at RBC said the demise of AIG could result in more than $180bn of losses for financial institutions, with European banks particularly exposed.
Despite the turbulence, marked by brutal conditions in European money markets, the Federal Reserve kept interest rates unchanged at 2 per cent last night.
During a frantic day of emergency meetings at the New York Fed, the Treasury and the Fed reversed their reluctance to bail out another financial institution.
Equity markets rose on the news. The S&P 500 ended the day up 1.8 per cent after having initally fallen sharply. In London, the FTSE 100 dropped 3.4 per cent to close at its lowest level since June 2005.
AIGIn London, the overnight dollar borrowing rate briefly hit 10 per cent amid a desperate scramble for liquidity.
Financial stocks came under severe strain early with a slump in the shares of HBOS, the UK's largest mortgage lender, and a damaging credit rating downgrade for Washington Mutual, the troubled US bank. Central banks around the world fought surging demand for cash as banks hoarded reserves and refused to lend to each other, injecting about $230bn in overnight and two-day liquidity.
"There is still a lot of fear and turmoil in the financial markets," said David Viniar, chief financial officer of Goldman Sachs, after his firm reported the biggest drop in profits since its 1999 listing.
Meanwhile, amidst the chaos, Barclays agreed to buy most of the US broker dealer operations of Lehman, achieving a long-standing ambition to build a major US investment banking business.
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