Page last updated at 11:23 GMT, Wednesday, 17 September 2008 12:23 UK

US government rescues insurer AIG

The global financial crisis

The US Federal Reserve has announced an $85bn (£48bn) rescue package for AIG, the country's biggest insurance company, to save it from bankruptcy.

AIG will get an $85bn loan, in return for an 80% public stake in the firm.

The rescue follows the collapse of US investment giant Lehman Brothers, which caused share prices to plummet across the world's financial markets.

Authorities are hoping the bail-out will avert the threat of a global financial meltdown.

The Fed's move is viewed by some as the most radical intervention in private business in its history and has helped fuel a tentative rally on global stock markets.

The past few days have seen dramatic events unfold in the financial world:

  • The UK's top mortgage lender HBOS is in merger talks with Lloyds TSB after a steep fall in HBOS shares
  • The Fed and the US Treasury say AIG's bailout will protect the interests of US taxpayers
  • US interest rates have been kept on hold despite widespread calls for a cut
  • Barclays says it is buying some of the core assets of US investment bank Lehman Brothers for $1.75bn (£1bn)

'Challenging times'

The Federal Reserve made its decision about AIG "with the full support of the Treasury Department", it said in a statement, adding that the secured loan included conditions designed to protect "the interests of the US government and taxpayers".

Chaos as people rush to cancel policies at AIG in Singapore

The US Treasury Secretary Henry Paulson refused to bail out America's fourth-largest investment bank Lehman Brothers after it filed for bankruptcy protection on Monday.

But he supported the rescue of AIG and said the move would protect taxpayers.

"These are challenging times for our financial markets," he said.

The rescue of AIG - which has a trillion dollars in assets and insures bank loans around the world - helped world stock markets rally.

Wednesday trading saw gains in Tokyo, Taiwan, Singapore and Seoul, though prices in Hong Kong, Shanghai and Australia fell.

European markets were higher, but trading was volatile.

The dollar also rose against major currencies.

AIG's 'tentacles'

Analysts said the demise of AIG - which has policy holders in more than 100 countries and insures deals and investments across the globe - would have had a far greater impact on financial markets than Lehman's collapse.


These are challenging times for our financial markets

US Treasury Secretary Henry Paulson

Were the company to fail, many banks and investment funds around the world would lose their insurance cover at a time when defaults on payments are likely to rise.

The Governor of New York, David Paterson, said AIG had so many business interests it would be hard to predict how widespread its bankruptcy would have been felt.

"Its tentacles go further in to the avenues of business, as in mortgages, as in credit, as in hedge funds, as in countless ways that affect consumers, that affect drivers, that affect homeowners, affect passengers," he said.

AIG had posted losses in each of the last nine months.

It was badly affected by the collapse of the US housing market, says the BBC's business reporter Rob Young, owing to the underwriting payments it was forced to make when customers defaulted on their loans.

Market slump

The AIG plan calls for the government to seize up to 80% of the company and remove its management, in a similar fashion to the way it took control of mortgage giants Fannie Mae and Freddie Mac which were crippled by the US housing crisis.

AIG - KEY FACTS
Employs 116,000 people in more than 100 countries
Employs more than 2,000 people in the UK
Founded in 1919 in Shanghai
Now based in New York
Sponsors Manchester United
Sells insurance policies through Argos and Boots
Source: AIG

The White House welcomed the package, saying the deal was made "in the interest of promoting stability in financial markets and limiting damage to the broader economy".

Meanwhile, the Fed has left interest rates unchanged at 2% despite calls for a cut. The BBC's Matthew Price in New York said the bank had decided an interest rate cut would not help to alleviate the short-term financial crisis.

On Wall Street, the Dow Jones rallied on Tuesday, closing 141 points higher having on Monday suffered its worst day's trading since the September 2001 attacks on the US.

Central banks around the world responded by carrying out emergency measures to keep markets liquid.

The extra funding came as the interest rates at which banks lend to each other rocketed - as they did at the start of the credit crunch.


MARKET DATA - 11:36 UK

FTSE 100
5429.64up
23.70 0.44%
Dax
5733.05up
19.54 0.34%
Cac 40
3784.02up
14.48 0.38%
Dow Jones
10403.79up
78.53 0.76%
Nasdaq
2273.57up
35.31 1.58%
BBC Global 30
5707.15up
20.65 0.36%
Data delayed by at least 15 minutes


RELATED INTERNET LINKS
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FROM OTHER NEWS SITES
Today Online Central banks launch global offensive against credit crisis - 44 mins ago
Hutchinson News Fed to use $85B loan to save ailing insurer - 1 hr ago
Straits Times Morgan Stanley in peril - 2 hrs ago
Miami HeraldAre more bailouts ahead? - 3 hrs ago
Irish News Lloyds TSB takes over HBOS - 3 hrs ago
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