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Insurance giant on a knife edge US bid to rescue leading insurer
(40 minutes later)
The future of insurance giant AIG hangs in the balance as fears grow that it could be the next firm to fold in the wake of the credit crisis. Efforts are under way in the US to try to save AIG, the country's biggest insurance company, from bankruptcy.
The firm's stock fluctuated widely on Tuesday, shedding 70% on opening before rallying to close down 21%. A rescue package is reportedly being arranged by the central bank, involving an $85bn (£48bn) loan in return for a large public stake in the company.
The state of New York has enabled the firm to access a "multi-billion dollar" finance plan in the short term, but it needs further funds to remain intact. There has been no official conformation of the deal, but AIG said it was continuing its efforts to increase its short-term liquidity.
Analysts say the collapse of AIG would have a devastating impact on markets.Analysts say the collapse of AIG would have a devastating impact on markets.
Senior banking executives are reportedly holding negotiations at the US central bank, the Federal Reserve, in an attempt to arrange a rescue bid. The company has a trillion dollars in asserts and insures loans made by banks around the world.
On Monday the governor of New York, David Paterson, announced that the state had permitted the insurance firm to gain access to some $20bn (£11.1bn) by transferring assets in subsidiaries to the parent company. Correspondents say its demise would have a far greater impact than that of the US investment bank Lehman Brothers on Tuesday.
Big banks can no longer be under any illusion that they can make big, stupid financial bets and expect taxpayers to pick up the bill Robert Peston, BBC business editor Read Robert's blogBarclays eyes Lehman assetsCredit crunch jargon explainedBig banks can no longer be under any illusion that they can make big, stupid financial bets and expect taxpayers to pick up the bill Robert Peston, BBC business editor Read Robert's blogBarclays eyes Lehman assetsCredit crunch jargon explained
But on Tuesday, Mr Paterson said AIG now had one day to raise another $80bn (£45bn) to save itself from collapse. Treasury Secretary Henry Paulson and Ben Bernanke, the chairman of the central bank, the Federal Reserve, met senior members of Congress on Tuesday, reportedly to brief them on the bailout.
The plan appears to be for some form of private sector rescue, perhaps with backing from the Fed, says the BBC's economics correspondent Andrew Walker.The plan appears to be for some form of private sector rescue, perhaps with backing from the Fed, says the BBC's economics correspondent Andrew Walker.
US Treasury Secretary Henry Paulson refused to bail out Lehman Brothers, the fourth-largest investment bank in the US, at the weekend. It would call for the government to seize up to 80% of AIG and remove its management, similar to the way it took control of mortgage giants Fannie Mae and Freddie Mac.
But our correspondent says he may deal differently with AIG if he feels the damage caused by its collapse to the wider financial system would be too great. AIG's stock fluctuated widely on Tuesday, shedding 70% on opening before rallying to close down 21%.
Lehman filed for bankruptcy on Tuesday, sending shockwaves through global financial markets.
Rate unchangedRate unchanged
The Fed declined to comment on reports it was considering placing AIG into conservatorship, saying it did not have the legal authority to do so. Hopes of the company's rescue prompted a shares rally in early trading in Asia, with Japan's market up 1% shortly after it opened.
US Treasury Secretary Henry Paulson refused to bail out Lehman Brothers, the fourth-largest investment bank in the US.
But our correspondent says he may deal differently with AIG if he feels the damage caused by its collapse to the wider financial system would be too great.
The global financial community is reeling from Lehman's demiseThe global financial community is reeling from Lehman's demise
Credit ratings agencies, which assess the riskiness of debt, have downgraded AIG - making it more difficult for the firm, which has assets worth more than a trillion dollars, to borrow money. Lehman's bankruptcy sent shockwaves through global financial markets.
If the emergency talks were to fail, the collapse of AIG would be far worse than that of Lehman Brothers. Credit ratings agencies, which assess the riskiness of debt, have downgraded AIG - making it more difficult for the firm to borrow money.
Many banks and investment funds in the US and around the world would lose their insurance cover at a time when defaults on payments are likely to rise. The collapse of AIG would mean that many banks and investment funds in the US and around the world would lose their insurance cover at a time when defaults on payments are likely to rise.
Meanwhile, the Fed has left interest rates unchanged at 2%. The BBC's Matthew Price in New York said the bank had clearly decided an interest rate cut would not help to alleviate the short-term financial crisis.Meanwhile, the Fed has left interest rates unchanged at 2%. The BBC's Matthew Price in New York said the bank had clearly decided an interest rate cut would not help to alleviate the short-term financial crisis.
On Wall Street, the Dow Jones rallied on Tuesday, closing 141 points higher having on Monday suffered its worst day's trading since the September 2001 attacks on the US.On Wall Street, the Dow Jones rallied on Tuesday, closing 141 points higher having on Monday suffered its worst day's trading since the September 2001 attacks on the US.
But leading indices across Europe and Asia ended lower, with banking shares being the worst hit. Shares in Britain's biggest savings group, HBOS, initially dropped 35% before closing 22% down.But leading indices across Europe and Asia ended lower, with banking shares being the worst hit. Shares in Britain's biggest savings group, HBOS, initially dropped 35% before closing 22% down.
Central banks around the world responded by carrying out emergency measures to keep markets liquid. The Bank Of England and the Bank of Japan injected £20bn (25bn euros; $36bn) and 2.5 trillion yen ($24.1bn; £13bn) respectively into their money markets. Central banks around the world responded by carrying out emergency measures to keep markets liquid.
The extra funding came as the interest rates at which banks lend to each other rocketed - as they did at the start of the credit crunch. This is seen as a sign of falling confidence between the banks. The Bank Of England and the Bank of Japan injected £20bn (25bn euros; $36bn) and 2.5 trillion yen ($24.1bn; £13bn) respectively into their money markets.
The extra funding came as the interest rates at which banks lend to each other rocketed - as they did at the start of the credit crunch.
Are you affected by the issues covered in this story? Are you an employee of AIG, Lehman Brothers or another financial institution facing uncertainty? Would you be willing to be interviewed by a BBC journalist? Send us your experiences using the form below.Are you affected by the issues covered in this story? Are you an employee of AIG, Lehman Brothers or another financial institution facing uncertainty? Would you be willing to be interviewed by a BBC journalist? Send us your experiences using the form below.
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