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Insurer American International Group, Inc. faced possible collapse until the federal government decided to offer it an $85 billion lifeline Wednesday. After a look at the latest troubles on Wall Street, financial reporters detail the government bailout.
HENRY PAULSON, U.S. Treasury Secretary:
The streamlined and more effective…
On Monday, Treasury Secretary Henry Paulson made it clear the government had no interest in bailing out the insurance giant AIG.
Is the Federal Reserve giving AIG a bridge loan?
Well, let me say, the — what is going on right now in New York has got nothing to do with any bridge loan from the government. What's going on in New York is a private-sector effort, again, focused on dealing with an important issue.
But after that private-sector effort failed, last night the Federal Reserve, with the support of Treasury, extended an $85 billion bridge loan to the American International Group and took control of the company.
AIG is one of the world's largest insurers, employing more than 100,000 people in more than 100 countries. It insures everything from homes and cars to complicated securities transactions.
AIG's exposure to increasingly risky mortgage-backed securities, including insurance it had sold to back those securities, had caused a severe cash crunch for the company.
In a written statement issued last night, the Fed said it took the action because "a disorderly failure of AIG could add to already significant levels of financial market fragility and lead to substantially higher borrowing costs, reducing household wealth and materially weaker economic performance."
Under the terms of the deal, the government provides an $85 billion loan over two years so AIG can proceed with an orderly sell-off of parts of the company.
All of AIG's assets are being used as collateral. The government has taken a nearly 80 percent equity stake in the company. Top management is being replaced.
AIG shareholders will retain the remaining 20 percent of the company's equity stake, but the total value of AIG stock has declined 90 percent over the past year.
There was wary reaction on Capitol Hill. Speaker Nancy Pelosi blasted the $85 billion loan as "a staggering sum, too enormous for the American people to bear the risk." Majority Leader Harry Reid spoke this morning.
SEN. HARRY REID (D-NV), Senate Majority Leader: We are in new territory here. This is a new game, and we're going to have to figure out how to do it. I think you could ask — yes, you could ask Bernanke and you could ask Paulson. They don't know what to do, but they are trying to come up with ideas.
Alabama Senator Richard Shelby, the ranking Republican on the Banking Committee, said, "My basic worry is the taxpayer and where do we stop? This is uncharted water that we're running on right now. And what's going to be the next big house to fall? And will we say, 'Gosh, we've got to bail it out'?"
The reaction around the world, where markets suffered heavy losses, ran the gamut from cautious relief to anxiety about what lies ahead. On the trading floor in Hong Kong…
CASTOR PANG, Sun Hung Kai Financial:
It seems that the bailing of the AIG by the U.S. government will become a tranquilizer for the global markets.
DAVID BUIK, BGC Partners:
I think we need to be cognizant of the fact that the markets are going to remain extremely volatile. We're not out of the woods by any stretch of the imagination.
The day ended with Wall Street nervously watching the two remaining independent investment banks, Goldman Sachs and Morgan Stanley, as well as Washington Mutual, the nation's largest savings and loan.
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