The Bankwatch

Tracking the consumer evolution of financial services

US to take control of AIG

The official Federal Reserve announcement signalling that the US government is not prepared to let AIG fail.  This after letting Lehman Brothers fail, and pressuring Merrill Lynch into a sale to Barclays.

Federal Reserve Bank of New York to lend up to $85 billion to the American International Group (AIG)

The Board 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

More here at the FT

The loan is at a punitive interest rate of three-month Libor plus 850 basis points, giving AIG a strong incentive to repay it as soon as possible. It will be secured on all AIG’s assets, including those of its subsidiary companies.

The Fed said it was acting to prevent “a disorderly failure of AIG” which would “add to already significant levels of financial market fragility and lead to substantially higher borrowing costs, reduced household wealth and materially weaker economic performance”.

Amid increasingly desperate lobbying for government help, David Paterson, New York governor, had said the beleaguered insurer which lost billions of dollars on derivatives and mortgage-backed securities, had “a day” to solve its problems.

Earlier this week, Maurice R. ‘Hank’ Greenberg, who served as chairman and chief executive of American International Group from 1967 until 2005, wrote

A federal bridge loan is appropriate because it is in our national interest to save AIG. AIG operates in approximately 130 countries and has more than 100,000 employees. It provides credit protection to tens of thousands of financial institutions and other companies around the world. Its failure would pose systemic risk to the US and international financial systems.

How did AIG get to this point? Clearly, risk management controls disappeared or were weakened. In recent years, AIG grew for the sake of growth, without regard for profitability, and its financial products businesses spun out of control.

Written by Colin Henderson

September 16, 2008 at 23:16

Posted in subprime

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