Fed Changes Its Tune On AIG, Moving Ahead With Massive Loan

According to reports from the Wall Street Journal, after initially resisting, the U.S government will go ahead with a plan to supply the funding needed to rescue embattled insurer American International Group (NYSE: AIG). An estimated $85 billion bridge loan could be provided to AIG, which gives the company the short-term liquidity needed to avoid bankruptcy.

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.

The details of the government's plans to save AIG are not yet finalized, but preliminary options involve providing AIG with a short-term bridge loan of $85 billion. The government would receive warrants in AIG representing the right to buy its stock. It is unclear how current AIG common shareholders will fare in the plan.

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

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