AIG Gets Up to $85 Billion Fed Loan
Sept. 16 (Bloomberg) -- The U.S. government agreed to lend as much as $85 billion to American International Group Inc. in exchange for a 79.9 percent stake to save the country's biggest insurer from collapse.
The Federal Reserve ``determined that, 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.
The agreement, supported by the Treasury Department, will keep New York-based AIG in business, averting a failure that could have threatened more financial companies and added to chaos in world markets. Losses industrywide could have totaled $180 billion if AIG collapsed, according to RBC Capital Markets. AIG needed the loan after its credit ratings were cut and shares plunged 79 percent since Sept. 11.
The two-year loan will ``assist AIG in meeting its obligations as they come due,'' the Fed said in its statement. The federal lifeline will allow AIG to sell assets in an orderly fashion rather than at distressed prices, said a person familiar with the agreement.
``The loan is expected to be repaid from the proceeds of the sale of the firm's assets,'' the Fed said. The U.S. government has the right to veto the payment of dividends to common and preferred shareholders.
AIG will replace management as part of the deal, said the person, who declined to be named because not all parts of the agreement were publicly disclosed.
Interest will accrue on the outstanding balance at the three-month London interbank offered rate plus 8.5 percentage points.
The Federal Reserve ``determined that, 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.
The agreement, supported by the Treasury Department, will keep New York-based AIG in business, averting a failure that could have threatened more financial companies and added to chaos in world markets. Losses industrywide could have totaled $180 billion if AIG collapsed, according to RBC Capital Markets. AIG needed the loan after its credit ratings were cut and shares plunged 79 percent since Sept. 11.
The two-year loan will ``assist AIG in meeting its obligations as they come due,'' the Fed said in its statement. The federal lifeline will allow AIG to sell assets in an orderly fashion rather than at distressed prices, said a person familiar with the agreement.
``The loan is expected to be repaid from the proceeds of the sale of the firm's assets,'' the Fed said. The U.S. government has the right to veto the payment of dividends to common and preferred shareholders.
AIG will replace management as part of the deal, said the person, who declined to be named because not all parts of the agreement were publicly disclosed.
Interest will accrue on the outstanding balance at the three-month London interbank offered rate plus 8.5 percentage points.
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