US Announces $85 Billion AIG Bailout

The Federal Reserve, with the blessing of the Treasury Department, moved forward with an aggressive plan to rescue embattled insurer American International Group (NYSE: AIG). The Fed agreed to lend up to $85 billion to AIG, which gives the company the liquidity needed to avoid bankruptcy and move ahead with asset sales.

The AIG facility has a 24-month term and interest will accrue on the outstanding balance at a rate of three-month Libor plus 850 basis points. The loan is collateralized by all the assets of AIG, and of its primary non-regulated subsidiaries. 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 U.S. government will receive a 79.9 percent equity interest in AIG and has the right to veto the payment of dividends to common and preferred shareholders.

The government was at first strongly opposed to providing funding to AIG. Yesterday, Treasury Secretary Henry Paulson said that a private market solution to AIG's woes would be needed. But today talks about a private bailout of the insurer fell through, leaving the U.S. government again as the only option. This past weekend, the Fed refused to provided the needed funding to save Lehman Brothers (NYSE: LEH), leading to the investment bank's bankruptcy filing Monday. But some said a failure of AIG would be catastrophic to the global financial system. So, in order to save another calamity, the Fed was forced to act.

In a statement on the loan, the Fed said given the current market turmoil, "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."

Shares of AIG have been under extreme pressure, losing 70% of their value this week alone. Today volume in AIG eclipsed 1 billion shares.

The list of government assisted bailouts is growing daily, as the worst credit bubble in history plays out. In March there was Bear Stearns. Last week it was Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE). Today AIG. In addition, Lehman Brothers (NYSE: LEH) has filed bankruptcy on Monday and Merrill Lynch (NYSE: MER) was sold to Bank of America (NYSE: BAC) this weekend to avoid a collapse. The Fed is also said to have played a hand in the buyout of Countrywide by BofA.

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