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Daily Insurance Industry News
Tuesday 11th of December 2018
September 17, 2008

Federal Reserve rescues AIG with $85bn loan

by Gill Montia

Story link: Federal Reserve rescues AIG with $85bn loan

American International Group (AIG) has been rescued from the brink of collapse by the US Federal Reserve.

As investment bank, Lehman Brothers, began bankruptcy proceedings on Monday, it emerged that the biggest insurer in US had approached the central bank for a $40 billion loan.

The Fed redirected the group to Goldman Sachs and JPMorgan Chase to raise the urgently needed capital, which suddenly increased to $75 billion.

At the same time, Fitch and Standard and Poor’s cut the group’s long-term credit rating and the company was given regulatory permission to borrow $20 billion from its subsidiaries to keep it afloat.

As it became clear that the failure of the insurer could cause serious damage to global financial markets and world economies, the Federal Reserve stepped in pledging $85 billion of US taxpayers’ money in return for the government taking a 79.9% stake in the business.

The move should give AIG time to sell assets and plan its recovery but according to Reuters, interest on the loan will be steep at 8.5% above the three-month London Interbank Offered Rate.

The company has been hit hard during the credit crisis, with losses on its investment and also because it provides debt insurance for asset managers and hedge funds.

In the second-quarter of 2008, AIG posted a net loss of $5.36 billion. The result followed a $7.81 billion net loss in the first-quarter of the year, after writing down $13.1 billion in sub-prime and other investment losses.

Credit Suisse recently predicted that further mortgage writedowns could result in a $2.41 billion loss in the third quarter of the year.

In 2007, AIG had global revenues of $110 billion and employed 116,000 worldwide.

 

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