Capping an extraordinary day in financial markets, US authorities pieced together an emergency $85 billion rescue of insurance company American International Group Inc to stave off a bankruptcy that could have thrown world markets into deeper turmoil.
AIG's rescue calls for the US Federal Reserve to lend up to $85 billion to AIG for two years in exchange for a 79.9 per cent equity stake. It comes just two days after US authorities refused to bail out investment bank Lehman Brothers Holdings Inc, forcing it into bankruptcy court despite pleas from Wall Street's chiefs.
AIG will pay interest at a steep 8.5 percentage points above the three-month London Interbank Offered Rate, making the current rate equal to about 11.4 per cent. That gives AIG a big incentive to embark on a massive asset sale program to pay back the loan quickly.
Around the time the AIG deal was announced, Barclays gave Wall Street another boost: It agreed to buy several parts of Lehman, the Wall Street investment bank that went bankrupt on Monday, for $1.75 billion.
News of the AIG package pushed up US stocks in after-hours trading, while sending the dollar and oil higher, and boosting most Asian stock markets.
US stocks earlier had clawed back from their largest one-day drop in seven years on speculation about the AIG and Lehman deals. The two largest US investment banks, Goldman Sachs Group Inc and Morgan Stanley, also reported better-than-expected earnings.
The bailout keeps AIG from surpassing Lehman as the largest US corporate failure ever. It comes on the heels of a government bailout just over a week ago of mortgage finance companies Fannie Mae and Freddie Mac, and six months after the Fed helped to finance the fire sale of failed investment bank Bear Stearns to JPMorgan Chase & Co.
AIG's bailout brings to about $700 billion the total of U.S. rescue efforts to stabilize the financial system and housing market. Authorities may get much of that sum back provided asset prices don't continue to slide.
"In current circumstances, 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.
Senior Fed staff told Reuters news agency that AIG's broader business ties and its retail products meant a rescue was necessary, unlike Lehman.
President George W. Bush was briefed on the plan during a Tuesday afternoon meeting, which included Fed chairman Ben Bernanke, US Treasury Secretary Henry Paulson and US Securities and Exchange Commission Chairman Christopher Cox.
AIG's management would be replaced, including chief executive Robert Willumstad, who only held the reins for three months, a person briefed on the matter said. Edward Liddy, who was a former CEO at insurer Allstate Corp., will be named the new CEO, another source said.
AIG faced a cash crunch after $18 billion of losses over three quarters, largely because of complex securities that are tied to mortgages, and which plunged in value as the nation's housing crisis deepened.
Investors and credit rating agencies grew more doubtful that AIG could offset its losses with enough capital, which became prohibitively costly to raise as its share price plunged.
AIG's life insurance, property and casualty insurance and aircraft leasing operations are considered healthy. The insurer, founded in Shanghai 89 years ago, now employs about 116,000 people and operates in more than 100 countries.
Reuters