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US govt saves AIG, Lehman 'booty' goes for a song

(China Daily/Agencies)
Updated: 2008-09-18 18:03

The global market yesterday gave a mixed response to the US government's move to rescue American International Group Inc (AIG) by injecting $85 billion of taxpayers' money.

Under the deal struck on Tuesday, the US government gets 79.9 percent stake in AIG, one of the world's largest insurers, and will have the right to remove senior management.

But while two US financial giants were thrown a lifeline this week, a third, Lehman Brothers, faces an untimely demise. A bank that a year ago had a market capitalization of more than $33 billion has been forced to unload its once-prized businesses for what passes as pocket change on Wall Street.

Earlier this week, the Bank of America agreed to buy Merrill Lynch for $50 billion.

The AIG deal could see chief executive Robert Willumstad being replaced by Edward Liddy, former head of insurer Allstate Corp, The Wall Street Journal said, citing a source. Willumstad has been at the helm of AIG since June.

This is the second time this month the US Federal Reserve Bank (Fed) has put taxpayers' money on the hook to rescue a private financial company, saying its failure would disrupt markets further and threaten the already fragile economy.

The Fed move is seen as part of a concerted push to help calm jittery markets and investors around the world.

The Fed decided to keep its key interest rate steady at 2 percent, too, but conceded stresses in the financial market have grown, and hinted that it was ready to lower rates if needed.

AIG responded to the Fed move, saying it would repay the money in full with proceeds from the sales of some of its assets.

Under the deal, the Fed will provide a two-year $85-billion emergency loan to AIG, which teetered on the edge of failure because of stresses caused by the collapse of the subprime mortgage market and the ensuing credit crunch.

The move is similar to the government's seizure of mortgage giants Fannie Mae and Freddie Mac on Sept 7, when the US Treasury said it was prepared to put up as much as $100 billion over time in each of the companies to keep them from going broke.

The decision to bail out AIG marked a reversal for the government from the weekend, when it refused to use taxpayers' money to help Lehman Brothers Holdings Inc. The investment firm, which filed for bankruptcy protection on Monday, collapsed under the weight of mounting losses related to its real estate holdings.

Barclays PLC, the third-largest British bank, took advantage of Lehman's bankruptcy reorganization on Tuesday to reach a deal for its North American investment banking and trading operations for just $250 million.

Barclays also picked up Lehman's New York headquarters and two data centers in New Jersey for $1.5 billion.

This marks a major coup for the UK bank, which agreed to buy the assets just days after walking away from a deal to purchase all of Lehman.

The US investment bank filed for bankruptcy protection on Monday after it was unable to find financing or fresh capital to shore up its balance sheet amid a continued downturn in the credit markets.

The deals have to be approved by the bankruptcy court.

After meeting with Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke late on Tuesday night, US Congressional leaders said they understood the need for the AIG bailout.

"The administration is approaching an unprecedented step, but unfortunately we are living in unprecedented times. Hearing of these plans, you have to stop to catch your breath. But upon reflection, the alternatives are much worse," said Democratic Senator Charles Schumer.

In a statement late on Tuesday, AIG's board of directors said the loan would protect all AIG policy holders, address concerns of rating agencies and buy the company time to sell off its assets.

"We expect that the proceeds of these sales would be sufficient to repay the loan in full and enable AIG's businesses to continue as substantial participants in their respective markets," the statement said. "In return for providing this essential support, American taxpayers will receive a substantial majority ownership interest in AIG."