Fed: A loan of $85bn to AIG

First Published:

17/09/2008 07:59:04

The US Federal Reserve will lend AIG $85 billion to stave off a collapse of the group. The foreign news agencies report that Fed has agreed with AIG to grant the loan against warrants, which – if exercised – will return (to it) a stake of 79.9 per cent and effective control of the company. Fed’s action came at the last minute to save AIG, which was allegedly on the verge of bankruptcy after its downgrading by the international credit rating firms and its inability to secure capital. After the downgrading, AIG would need an additional $14.5 billion to cover its loans and $4.5 billion more for additional payments. A possible bankruptcy of AIG, which has a presence in 130 countries including Cyprus, would be the biggest in history. Before the announcement of Fed’s loan, New York Times had reported that AIG allegedly filed for a bankruptcy collection. AIG employs 116 thousand persons. Fed’s action came after US government’s recent decision to save Freddie Mac and Fannie Mae a week ago and its denial to support Lehman Brothers, which went bankrupt. Meanwhile, the Fed allocated $75 million so that certain parts of Lehman Brothers continue their activities. The reports for the support of AIG led the US indices to a partial recovery. S&P 500 surged 1.75%, Dow closed 1.3% higher and Nasdaq put on 1.28%, regaining part of their historic losses on Monday. The positive results of Morgan Stanley contributed heavily to the positive climate. Positive news also emerged from the sale of Lehman Brother’s investment banking to Barclays against $2 billion. Yesterday, Fed decided to keep its rate on hold at 2% due to the risks for further slowdown of the economy and the acceleration of inflation. Many analysts hoped, however, thea Fed would cut its rate to boost markets. The latest developments in the US raise hopes for the partial recovery of the stock markets in Europe. Hopes are further boosted by the positive opening of the Asian markets. On Tuesday, most European indices were under strong pressure, reaching a 3-year low.

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