U.S. authorities engineered an $85 billion rescue of insurance giant American International Group Inc (AIG.N), staving off bankruptcy and bringing a measure of calm to shell-shocked global markets. The bailout, made amid a cataclysmic week for the financial sector, marks a reversal of Washington's vow not to step in and calls for the U.S. Federal Reserve to lend up to $85 billion to AIG for two years in exchange for a 79.9 percent equity stake. It came just two days after U.S. authorities refused to rescue investment bank Lehman Brothers Holdings Inc (LEH.N) (LEH.P), forcing it into bankruptcy court despite pleas from Wall Street's chiefs.
AIG's lifeline bought time for investors to digest an unprecedented run of events that has altered the shape of Wall Street, but did little ease a funding squeeze caused by the turmoil. Asian stocks were mostly higher after Tuesday's dramatic selldown, with Tokyo's Nikkei index (.N225) up 1.2 percent and the MSCI Asia-Pacific ex-Japan stocks index up 0.9 percent. Oil rose more than $3 a barrel, and major European markets were expected to open as much as 2.1 percent higher. The Fed stepped in amid worries that a collapse of AIG could cause far-reaching damage to the global financial system, although some market players argued that the government's move brings just a short-term respite and could do long-term harm. Around the time the AIG deal was announced, British bank Barclays Plc (BARC.L) 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. U.S. 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 U.S. investment banks, Goldman Sachs Group Inc (GS.N) and Morgan Stanley (MS.N), also reported better-than-expected earnings.
The AIG deal overshadowed a Fed decision earlier on Tuesday to hold its benchmark interest rates steady despite market's counting on an economy-boosting cut in borrowing costs. Central banks in Japan, Australia and India pumped $33 billion into global money markets as the AIG bailout did little to ease the funding squeeze triggered by Wall Street's crisis. The rescue keeps AIG from surpassing Lehman as the largest U.S. corporate failure ever. It comes on the heels of a government bailout just over a week ago of mortgage finance companies Fannie Mae (FNM.N) and Freddie Mac (FRE.N), and six months after the Fed helped to finance the fire sale of failed investment bank Bear Stearns to JPMorgan Chase & Co (JPM.N). The move comes at a sensitive time given job losses and tax rates are key issues in the battle for the White House between U.S. Senators John McCain and Barack Obama. Both candidates struck populist tones in speeches on Tuesday, with Democratic candidate Obama accusing Republican rival McCain of being an opponent of regulation who turned a blind eye to market recklessness. McCain said Obama had taken big donations from mortgage giants Fannie Mae and Freddie Mac.
AIG will pay interest at a steep 8.5 percentage points above the three-month London Interbank Offered Rate, equal to about 11.4 percent. That gives AIG a big incentive to embark on a massive asset sale program to pay back the loan quickly. AIG's bailout brings to about $900 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. Senior Fed staff told Reuters that AIG's broader business ties and its retail products meant a rescue was necessary, unlike in Lehman's case. Critics said that the Fed may have wiped out what credibility it won resisting Lehman's rescue pleas and may have opened the door to countless other companies to come calling for help. [End of report]
I think everyone would agree with me that it has been a crazy week in the global financial market over the past few days or so. I mean, you got the Lehman Brothers filing for bankruptcy and AIG on the verge of demise as well, only to be rescued by the Feds. When I first heard the news about the Lehman Brothers, I was shocked, along with everyone else I believe but at the same time, the news shouldn't have come as much of a surprise because the signs were there and I guess it was only a matter of time before it went bankrupt. Some of you might be wondering why didn't the U.S. government went to the aid of the Lehman Brothers when they had asked for it, and instead went to rescue AIG instead. Well that is because, unlike Lehman Brothers, AIG is a much more bigger player in the market and the U.S. government just couldn't allow it to follow in the same direction as their Lehman Brothers counterpart, not especially in the current situation. You can just look at the impact that the news of the Lehman Brothers bankruptcy is having, I cant imagine what would happen if AIG went bankrupt as well. AIG, with 103,000 employees and more than $1.0 trillion of assets, is more than an insurance company, if it was unable to honor its obligations it could have set off a cascade of problems around the world.
AIG previously found a protector in the State of New York, which agreed to bend rules and allow AIG to borrow $20.0 billion from its operating subsidiaries. That could enable it to obtain some sort of credit facility or additional capital. It will be used to help maintain the company's credit rating. It may also be used as collateral. New York's governor gave AIG until Wednesday to secure an injection of capital or a credit facility. If it fails to do that, the agreement to let it borrow from its operating subsidiaries is off the table. The New York Fed had even asked Goldman Sachs and JPMorgan Chase & Co. to try to arrange a $70 billion private loan for AIG, but that didn't go anywhere. That is why the Fed had decided to come in and bail it out. This is not the first time that they had done such a thing this year. If you remember earlier this month, the Treasury had bailed out the former government agencies of Fannie Mae and Freddie Mac and back in March, they had participated in the March rescue of Bear Stearns. It was all a very important decisions to make but I think the AIG one is the most important yet. The U.S. government will of course get something from the deal as well, as the loan is expected to be repaid from the proceeds of the sale of the firm’s assets.
The Fed's move to bail out AIG will come as a relief to many Im sure but I dont think we have heard the end of the story yet. I think it will definitely help to stabilise the global financial market in the short term, but in the longer term, nobody can predict what will happen. The U.S. mortgage crisis has shown little sign that it would be over soon, and the longer it continue, I believe we will see more big names succumbing to the pressure. Many critics are saying that the move to rescue AIG may have opened the door to countless other companies to come calling for the government to help, but I really doubt that will happen. The U.S. government cant rescue every companies that are in trouble because I dont think they have enough resources to do that. The problem might have ease a little for now, but it will not end soon. Alan Greenspan has recently said that this is a once-in-a-lifetime, or once-in-a-century event and I have to agree with him. The worst part of the problem might not be over just yet.
*The report was taken from Reuters.
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