Federal Reserve rescues AIG

[TriWooOx]

Quote:The US government has seized control of the world's biggest insurance company, AIG, in an $85bn (£47bn) emergency rescue to avert a "disorderly" bankruptcy which threatened to wreak havoc with fragile financial markets.

After a marathon day of negotiations in New York, the Federal Reserve reluctantly agreed to lend taxpayers' money on a two-year basis in return for a 79.9% stake in AIG.

The highly unusual decision effectively nationalises AIG by transferring control to the central bank. In a sign of the level of alarm about the weakening financial system, the Bush administration set aside its usual orthodoxy of avoiding intervention in the free market.

In a statement released late last night, the Fed said it had concluded that 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".

AIG employs 106,000 people in 130 countries and sells 12m policies annually in Britain - including travel insurance and product protection under retailers' own brands such as Boots, Argos, Comet and Sainsbury's. It is shirt sponsor to Manchester United football club.

The treasury secretary, Henry Paulson, insisted that AIG's chief executive, Robert Willumstad, stepped down as a condition of the deal. He is to be replaced by Edward Liddy, a former boss of the insurance firm Allstate. AIG's board approved the rescue package at a late-night meeting.

Crippled by losses on policies insuring investors against default on exotic financial products, the firm had less than 48 hours to find sufficient cash to meet a rash of contractual obligations. It has been teetering on the brink of following Lehman Brothers into bankruptcy - a scenario which horrified financial experts who said the reverberations would be felt by policyholders, trading partners and investors around the globe.

President Bush was quick to lend his backing to the bailout. "The President supports the agreement announced this evening by the Federal Reserve," said a White House spokesman, Tony Fratto. "These steps are taken in the interest of promoting stability in financial markets and limiting damage to the broader economy."

The rescue comes a week after a decision to rescue two enormous mortgage companies, Fannie Mae and Freddie Mac. But there are likely to be questions about inconsistency in policy since no government aid was forthcoming to support Lehman Brothers when the Wall Street bank collapsed on Monday.

The Democratic chairman of the Senate banking committee, Christopher Dodd, asked: "Tell me why this situation deserves that kind of infusion of support, whereas Lehman Brothers did not."

The treasury secretary travelled to Washington last night to brief Congressional leaders. Leading Democrats lent their support, although they suggested that laissez-faire government policies had contributed to AIG's predicament.

Barney Frank, the influential chairman of the House financial services committee, told the New York Times: "This is one more affirmation that the lack of regulation has caused serious problems. That the private market screwed itself up and they need the government to come help them unscrew it."

The Fed, which engaged Morgan Stanley for advice, had shopped around unsuccessfully for a private-sector solution to AIG's problems. Leading banks such as Goldman Sachs and Morgan Stanley rebuffed appeals to provide funds, as did the world's richest man, Warren Buffett.

As rumours of a bailout leaked onto trading floors on Tuesday afternoon, a mood of relief swept the market and the Dow Jones industrial average closed up 141 points to 11,059 - clawing back some of the losses made on Monday when the market suffered its sharpest fall since September 2001. The Australian stockmarket, among the few global exchanges to be open when the bailout was confirmed, rose by 1.2%.

The terms of the bailout give sweeping powers to the Fed. The $85bn loan is collateralised by all of AIG's assets and the Fed can veto dividend payouts to the insurer's shareholders. AIG's shares, which had already collapsed by 93% since the beginning of the year, will be left with little value.

Experts said the interconnected nature of financial institutions was becoming increasingly clear - and was causing mounting alarm at the prospect of a major bankruptcy.

"It might not just bring down other financial institutions in the US. It could bring down overseas financial institutions," said Timothy Canova, a professor of international economic law at Chapman University School of Law. "If Lehman Brother's failure could help trigger AIG's going down, who knows who AIG's failure could trigger next."

http://www.guardian.co.uk/business/2008/se...ance.wallstreet

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BERLIN, Sept. 17 (UPI) -- Despite official statements of reassurance, Germany's economy will take a beating because of the U.S. financial crisis. A recession in Germany? A major German credit institution going bankrupt? All "doomsday scenarios," German Finance Minister Peer Steinbrueck said Tuesday in Parliament.

Germany's credit institutions have lent bankrupt U.S. investment bank Lehman Brothers (NYSE:LEH) only "manageable" amounts, and, unlike the United States, Britain and Spain, Germany is not suffering from a real estate crisis.

All that is true, but don't forget that Steinbrueck's job is to soothe a worried public. The finance market, after all, is more about psychology than outsiders may think.

And toward the end of his speech, even Steinbrueck couldn't avoid dropping the c-word.

The "current financial crisis," he said, "without doubt is the largest market risk for the German economy." However, its impact would be "limited," he added.

German Chancellor Angela Merkel blew the same horn, telling lawmakers Wednesday Germany could be "happy that other centers of power have complemented the American center of power in the past years -- in Latin America, in the united Europe -- so the international economy now rests on a much broader base than was the case in past decades."

Most German economic experts back the German government's cool-headed outlook.

"Despite all concerns -- panic reactions are out of place," Martin Wansleben, head of the German Chamber of Industry and Commerce, told Wednesday's Berliner Zeitung newspaper.

Axel A. Weber, the head of Germany's central bank, also promised that Germany's financial system could withstand the attacks coming from across the Atlantic.

"The German financial system is stable, and its resistance to adverse shocks has markedly improved in the past few years," he said in a statement.

Germany's DAX stock index on Tuesday nevertheless plummeted to just under 6,000 points, its lowest value in more than two years. On Wednesday it started to climb back above the 6,000 mark after news of Washington's bailout for insurance company AIG; that didn't help much, however. At the end of trading, the DAX closed at 5,860 points, with experts forecasting a further drop to possibly 5,400. In January the DAX towered at over 8,000 points.

As a result of the global financial crisis, all major German economic institutions have lowered their growth forecasts for 2008, with a few even warning of a coming recession that could hit Germany in 2009. Germany's banks also have been affected.

Commerzbank has lost 30 percent of its share value in two weeks, although its recent acquisition of Dresdner Bank has to be partly blamed for the drop.

German insurance giant Allianz also has seen its shares go down in value, and, according to German financial daily Handelsblatt, a depositors' guarantee fund managed by a range of German banks will be hit severely by Lehman Brothers' bankruptcy. As much as $8.5 billion could be lost, the sum with which a German Lehman Brothers daughter is involved in the fund, the newspaper said.

Export activities -- Germany's strongest economic asset -- slowed in July, with German business confidence in August declining to a three-year low.

Luxembourg Prime Minister Jean-Claude Juncker, who chairs the meetings of euro-area finance ministers, said Germany will escape a recession, but even the U.S. federal rescue of AIG and news that British financial services provider Barclays was buying parts of Lehman Brothers did not mean indefinite relief.

"The financial crisis that is still raging, that has not yet reached even a temporary end, is causing us the biggest headache," he told Germany's Deutschlandfunk radio.

A large headache is also doomed to plague Steinbrueck, the German finance minister.

On Wednesday it surfaced that KfW, a German government-owned development bank, had poured some $424 million down Lehman Brothers' ailing throat -- just before the final collapse.

Steinbrueck, who was hardly able to contain his anger, called that investment decision "more than astonishing and aggravating."

All major German parties have called for an investigation into the matter -- after all, taxpayers' money has been wasted.

KfW has said the financial injection for Lehman Brothers was a "technical mistake."

A pretty expensive one indeed.





source - upi