Fed to lend $85bn to AIG against 80% stake in co

Source: CNBC

American International Group will get an USD 85 billion loan from the federal government in exchange for 80% percent stake in itself.

The deal calls for the U.S. Federal Reserve to lend up to USD 85 billion to AIG for two years in exchange for that 80 percent equity stake. 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 percent.

This gives AIG a big incentive to embark on a massive asset sale program to pay back the loan quickly. The deal severely dilutes existing shares of the company. Index futures pointed to a higher market open on Wednesday after the news.

Former Allstate Corp CEO Edward Liddy will be named the new chief executive of AIG, replacing Robert B. Willumstad.

AIG had been racing against the clock to avoid bankruptcy filing on Wednesday, making efforts to work out a deal with the Federal Reserve to shore up its finances.

Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke met with the Senate and House leadership on Tuesday night to discuss how to assist AIG, sources said.

The Fed's financial aid for the troubled insurer marks a reversal of its decision on Monday to refuse a bridge loan to AIG.

The Fed met with the company's advisers throughout Tuesday and came to a better understanding of what was needed to help the company through its current crisis, people familiar with the negotiations told CNBC.

Tony Fratto, Deputy Press Secretary said, "The President supports the agreement announced this evening by the Federal Reserve.  These steps are taken in the interest of promoting stability in financial markets and limiting damage to the broader economy."

AIG's rescue was necessary, in contrast to Lehman Brothers, because the insurer has extensive ties to other firms and retail products, senior Fed staff said. AIG was deemed to be a very complicated firm with extensive links to many parts of the financial sector, including retail financial products, such as insurance and guaranteed annuities, officials added.

In addition, AIG has substantial business interests that would not have been protected by states, an official said.

Experts react  (Inputs from CNBC-TV18):

Nouriel Roubini, Chairman, RGE Monitor said, "It should've been properly regulated. Here you have an insurance company that takes premium from people who've bought insurance and instead of investing it in safe instruments like bonds, it starts investing in CDS (credit derivative swaps) and other toxic instruments. We are now in a situation where losses are being socialised and profits privatised.

Michael Sheldon, RDM Financial Group said, "It was probably the right action to bailout AIG. Bailout may not be the right word; bridge loan is the proper word. AIG's tentacles reach around the world; they touch all kinds of companies around the world."

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