US government takes control of AIG

The US Federal Reserve Board has agreed to lend struggling insurance company American International Group (AIG) up to $85 billion, in return for a 79.9% equity stake in the firm.

Under the terms of the deal, which were hammered out during crisis talks between the Federal Reserve, the US Treasury department, the New York State Insurance Department and AIG, the insurer will be able to draw up to $85 billion from the loan facility over a 24-month term, enabling it to meet its obligations as they fall due.

AIG will pay interest on the outstanding balance of three-month Libor plus 850 basis points.

The loan will be collateralised by all the assets of AIG and its subsidiaries – a move deigned to protect US taxpayers – and will be repaid from the proceeds of an orderly sale of the firm’s asses. Eric Dinallo, New York State Insurance superintendent, will chair an AIG taskforce created by the National Association of Insurance Commissioners, which will approve the sale of all AIG insurance assets. In return for making the loan facility available, the US government will receive a 79.9% equity stake in the company.

The deal comes just days after the US Treasury determined not to offer a rescue package for Lehman Brothers, a decision which saw the 158-year-old investment bank file for Chapter 11 bankruptcy protection in the early hours of Monday morning.

The US Treasury last week announced it was putting two government sponsored entities, Fannie Mae and Freddie Mac, into conservatorship – effectively, a nationalisation.

See also:

AIG secures £20 billion bridge loan, but still downgraded

Lehman Brothers files for bankruptcy protection

US authorities step in to rescue GSEs