Fearing meltdown, Fed bails out AIG with $85-billion package

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New York, Mumbai, Sep 17: The US government took control of American International Group Inc (AIG) in an $85-billion bailout to prevent the bankruptcy of that nation’s biggest insurer and the worst financial collapse in history. The Federal Reserve will provide a two-year loan, take 79.9% of the New York-based company’s stock and replace its management because “a disorderly failure of AIG could add to already significant levels of financial market fragility”, according to a statement by the US central bank late on Tuesday.

The dollar fell against the yen as the Fed’s bailout of AIG failed to quell concern that credit losses will deepen. AIG unravelled as the worst housing crisis since the Great Depression led to more than $18 billion in losses over the past year. A meltdown could have cost the financial industry $180 billion, according to RBC Capital Markets, because AIG provided insurance on more than $441 billion of fixed-income investments held by the world’s biggest institutions, including $57.8 billion in securities tied to subprime mortgages.

The government is lending AIG the money at 8.5 percentage points above the three-month Libor, or a current rate of about 11.5%. Sources at Tata AIG, the US insurer’s joint venture in India, said the Fed’s move came as a relief, and would in fact help the firm find future capital requirements.

The agreement will give the company, which sells insurance in more than 130 countries, time to sell assets “on an orderly basis’’, AIG said in a statement. Former Allstate Corp CEO Edward Liddy, according to a person familiar with the plans, will replace CEO Robert Willumstad.

Meanwhile, two other titans of the global financial sector, Goldman Sachs Group Inc and Morgan Stanley, reported lower quarterly profits, but beat expectations on Tuesday. Morgan Stanley, which reported after the close of North American markets, trounced expectations partly on the back of strong equity trading results. Morgan’s earnings fell less than 3% even as the year-old credit crunch slowed deal activity and created one of the toughest trading environments in decades.