Fed -> AIG BIG HELP

Wall Street in Chaos

U.S. and global stocks fall in the wake of the failure of Lehman Brothers, the disappearance of Merrill Lynch as an independent company, and the shaky state of the American International Group, the U.S.'s largest insurance company.

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U.S. Seizes Control of AIG With $85 Billion Emergency Loan
 

By David S. Hilzenrath and Glenn Kessler

Washington Post Staff Writers
Wednesday, September 17, 2008; Page A01

Invoking extraordinary powers granted after the 1929 stock market crash, the government seized control of the insurance giant American International Group to preserve a crucial bulwark of the global financial system.

The move to lend the Wall Street giant up to $85 billion in exchange for nearly 80 percent of its stock effectively nationalizes one of the central institutions in the crisis that has swept through markets this month.

The government had sought to avoid federal intervention by lining up private companies to rescue AIG. But the effort failed when companies were unwilling to take on the massive financial risk, forcing the government's hand.

AIG found itself on the verge of bankruptcy because of mounting losses from investments tied to subprime home mortgages and also from the insurance it was providing to others who invested in mortgages.

When credit-rating agencies downgraded the company Monday, AIG suddenly faced a crunch to come up with $14.5 billion to meet its commitments. If the company failed, it could have set off cascading losses across the global financial system.

"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," the Fed said in a statement.

"It's heavy, heavy, heavy. It's much more than has been done except Fannie and Freddie," said Sen. Charles E. Schumer (D-N.Y.), who heads the Joint Economic Committee, referring to the mortgage finance giants Fannie Mae and Freddie Mac, which were taken over by the government earlier this month. "But when you look at the alternatives, none of them are better."