Fed launches AIG rescue loan to avoid market catastrophe

The US Federal Reserve has announced an unprecedented rescue loan of up to USD 85 billion to save teetering insurance giant American International Group (AIG) from bankruptcy amid fears of a catastrophic effect on financial markets.

A central bank statement said the Federal Reserve Board made the decision "with the full support of the Treasury Department" under Section 13(3) of the Federal Reserve Act.

The US government will get an equity stake of 79.9 per cent of the insurance titan under the agreement.

"The secured loan has terms and conditions designed to protect the interests of the US government and taxpayers," the statement said.

 

The 24-month line of credit will carry an interest rate equivalent to the London interbank rate plus 850 basis points.

"The interests of taxpayers are protected by key terms of the loan. The loan is collateralised by all the assets of AIG, and of its primary non-regulated subsidiaries," the central bank said yesterday.

"These assets include the stock of substantially all of the regulated subsidiaries. The loan is expected to be repaid from the proceeds of the sale of the firm's assets."

The government will have the right to veto the payment of dividends to shareholders.

Treasury Secretary Henry Paulson said he approved the deal.

"These are challenging times for our financial markets," he said in a statement. "I support the steps taken by the Federal Reserve tonight to assist AIG in continuing to meet its obligations, mitigate broader disruptions and at the same time protect the taxpayers."