U.S. government extends $85 billion lifeline to AIG

U.S. government extends $85 billion lifeline to AIG

Related News •   Insurance giant AIG fights for survival

   The Federal Reserve Tuesday night agreed to bailout AIG to prevent a collapse of the insurance giant that experts say could have sent ripples throughout the U.S. economy and the world.
   The U.S. central bank has extended AIG an emergency loan of $85 billion for two years in exchange for an 80 percent piece of the company. AIG will pay a hefty price of 11.39 percent interest for the taxpayer aid and has incentive to sell off assets or otherwise raise capital to repay the government.
   “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.
   Regulators calculated that the consequences of AIG’s failure would be worse than using taxpayer money to support the financial system. AIG, following a downgrade of its debt by credit rating agencies, faced a potential rash of investor calls to increase collateral for insurance issued for mortgage-backed securities. AIG did not have the capital on hand to meet all its obligations and faced bankruptcy without a cash infusion.
   Earlier in the week the Fed declined to rescue Lehman Brothers because the investment bank didn’t have the same reach as AIG, which has 70 million customers and supports much of the corporate world through property, casualty and financial insurance products.
   AIG companies such as Lexington Insurance offer specialized transportation, supply chain risk, and cargo liability insurance, among various products.
   AIG’s survival should keep insurance premiums stable because it maintains the supply of insurance coverage available in the marketplace, according to Michael Brown, senior vice president of Avalon Risk Management, an insurance broker specializing in products for transport and logistics companies.
   Avalon does most of its business with about eight to 10 carriers and has very little exposure to AIG. ' Eric Kulisch