September 17, 2008 Finance General 0

Fed rescues AIG, Barclays buys Lehman U.S. unit – Yahoo! News
AIG will pay interest at a steep 8.5 percentage points above the three-month London Interbank Offered Rate, equal to about 11.4 percent. That gives AIG a big incentive to embark on a massive asset sale program to pay back the loan quickly.

AIG’s bailout brings to about $900 billion the total of U.S. rescue efforts to stabilize the financial system and housing market. Authorities may get much of that sum back provided asset prices don’t continue to slide.

“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.

Senior Fed staff told Reuters that AIG’s broader business ties and its retail products meant a rescue was necessary, unlike in Lehman’s case.

AIG faced a cash crunch after $18 billion of losses over three quarters, largely because of complex securities that are tied to mortgages, and which plunged in value as the nation’s housing crisis deepened.

Investors and credit rating agencies grew more doubtful that AIG could offset its losses with enough capital, which became prohibitively costly to raise as its share price plunged.